Case Summary (G.R. No. 227421)
Facts and Original Transactions
On July 6, 1921, V. Concepcion e Hijos, Inc., and Venancio Concepcion executed a promissory note in favor of the Bank of the Philippine Islands for the amount of ₱342,372.64, payable on demand. To secure payment, they deposited 700 shares of Philippine National Bank stock as collateral and mortgaged a parcel of land with improvements in Manila along R. Hidalgo Street covering 5,680 square meters.
Default and Foreclosure Proceedings
Upon Concepcion's failure to pay the note, the Bank initiated foreclosure proceedings on February 3, 1922. Shortly thereafter, Henry W. Elser began negotiations to take over the mortgaged property and assume the mortgage debt, conditional upon the release of the Concepcions from liability.
Correspondence and Negotiations Between Elser and the Bank
Elser’s letter dated March 23, 1922, set forth his proposal to assume the obligation of the Concepcions, detailing a payment plan and reduction of the mortgage over three years. The bank did not respond directly to this letter and maintained its demand for the Concepcions’ liability, insisting on confession of judgment in foreclosure, which the Concepcions refused.
Elser’s letter of April 21, 1922, requesting a written confirmation from the Bank that it would bid on the property at foreclosure for ₱342,000 and sell the property to him for that amount, implied an understanding different from his earlier proposal. The bank did not provide a direct reply but engaged in informal discussions suggesting some acceptance of the proposition.
Deed of Sale and Assumption of Debt
On May 5, 1922, Elser entered into a formal deed of sale with V. Concepcion e Hijos, Inc. and Venancio Concepcion, in which the latter sold and transferred to Elser the mortgaged property and pledged shares, with Elser assuming their entire mortgage obligation. This deed outlined Elser’s subrogation to the mortgage debt with the obligation to release the Concepcions from liability.
Bank’s Reaction and Procedural Developments
The Bank never gave formal consent to the deed or the substitution of Elser as debtor but included Elser as a defendant in the foreclosure suit. The Concepcions sought Elser’s substitution as defendant on grounds of the Bank’s implied consent, which was partly recognized by the trial court.
The Bank filed successive amended complaints and faced demurrers primarily for failure to show the Bank's consent to Elser’s substitution and the contractual relationship with Elser. The court sustained several demurrers, and Elser filed cross-complaints alleging unsoundness of mind and fraudulent inducement related to the assumption of debt.
Death of Henry W. Elser and Substitution of Representative
Elser died in June 1923, and the court allowed his estate’s administrator, Rosenstock, to be substituted as defendant, rejecting the estate’s contention that the action abated upon Elser’s death. Rosenstock maintained defenses including the absence of valid assumption and alleged unsoundness of mind.
Trial Court’s Ruling and Appeals
After trial, the court absolved Elser’s estate from liability and held the Concepcions accountable for payment of ₱342,372.64 with interest and foreclosed the mortgage. Both the Bank and the Concepcions filed exceptions and a joint appeal ensued.
Legal Issues: Contractual Liability and Stipulation pour Autrui
The core issue focused on whether the Bank could hold Elser liable under the deed of assumption as a third party in a stipulation pour autrui (stipulation for the benefit of a third person). The Court reaffirmed that for such stipulation to be valid, the contracting parties must intend to benefit the third party and it must be accepted by the latter. Here, the Court held the contract between the Concepcions and Elser was not intended as a benefit to the Bank; both parties acted to further their own interests.
Moreover, the assumed subrogation operated as a novation, releasing the original debtors if accepted by the creditor, which did not happen here. Thus, no contractual relationship giving rise to liability of Elser or his estate to the Bank was shown.
Philippine Law on Assumption of Mortgage Debt
The Court rejected the American doctrine that a purchaser merely assuming mortgage payments becomes personally liable as debtor. Citing prior Philippine jurisprudence, it emphasized that under Philippine law per the Civil Code and Mortgage Law, an obligation against the purchaser arises only after demand and default of the original debtor and only to the extent of security provided by the property. The statutory framework contemplates no personal liability simply by assumption unless novation is agreed and accepted.
Effect of Elser’s Death and Procedure against His Estate
The Court ruled the foreclosure action against Elser did not abate by reaso
...continue readingCase Syllabus (G.R. No. 227421)
Facts of the Case
- On July 6, 1921, the defendants V. Concepcion e Hijos, Inc. and Venancio Concepcion executed a promissory note payable on demand to the plaintiff, The Bank of the Philippine Islands, for the sum of P342,372.64.
- As security, the defendants pledged 700 shares of the Philippine National Bank as collateral and gave a mortgage on 5,680 square meters of land with improvements on R. Hidalgo Street, Manila.
- The defendants defaulted on payment, prompting the plaintiff to initiate foreclosure proceedings on February 3, 1922.
- Subsequently, Henry W. Elser negotiated with the Concepcions, agreeing to take over the mortgaged property and assume the mortgage debt on condition that the Concepcions be released from liability.
- Elser communicated this arrangement to the bank on March 23, 1922, offering to pay a minimum of P5,000 monthly on the principal with interest every six months, and proposing staged mortgage reductions over three years.
- The bank did not respond affirmatively to Elser’s initial proposal and insisted that the Concepcions confess judgment in foreclosure, which the defendants refused unless the bank bid in the property for the full judgment amount.
- Elser’s further letter on April 21, 1922, requested written confirmation from the bank of an agreement to sell the property to him for the full foreclosure amount, which the bank did not formally provide.
- Negotiations ensued, but no conclusive agreement with the bank was reached.
The Deed of Purchase and Sale (May 5, 1922)
- Elser entered into a bilateral deed of sale with V. Concepcion e Hijos, Inc. and Venancio Concepcion evidencing the transfer of the mortgaged property and stock to Elser.
- The deed expressed that Elser would subrogate himself to the obligations of the Concepcions towards the bank and secure the release of the Concepcions from the debt.
- The purchase price was stated as one peso, acknowledging the true consideration being the subrogation assumption of the mortgage obligation amounting to P342,372.64 with interest at 9% per annum.
- The deed was signed and notarized, with witnesses.
Subsequent Proceedings and Legal Actions
- The bank did not formally approve the subrogation agreement but petitioned the court on June 15, 1922, to include Elser as a defendant based on the obligations he purportedly assumed.
- The Concepcions sought Elser’s substitution as defendant, alleging plaintiff's acceptance of the substitution.
- The trial court added Elser as defendant but refused substitution.
- The bank filed amended complaints alleging joint and several liability of the Concepcions and Elser for foreclosure.
- Elser demurred repeatedly on grounds that the amended complaints failed to show plaintiff's consent to substitution or a contractual relationship binding him.
- These demurrers were sustained multiple times by the trial court.
- The bank’s attempts to establish Elser’s liability without clear contractual consent from the bank were unsuccessful.
Elser’s Cross-Complaint and Mental Capacity Allegations
- Elser’s guardian filed a cross-complaint alleging that Elser was of unsound mind when he assumed the obligations.
- The cross-complaint alleged Elser was induced by false representations from the Concepcions that the bank had agreed to the subrogation under certain payment terms which the bank ne