G.R. No. 139523 - Spouses Cannu vs. Spouses Galang

Case Summary (G.R. No. 139523)

Factual Background

The respondents Sps. Gil and Fernandina Galang obtained a mortgage loan from Fortune Savings & Loan Association for P173,800.00 to purchase a house and lot covered by TCT No. T-8505. A real estate mortgage secured the loan. In early 1990 NHMFC purchased the mortgage loan. Respondent Fernandina Galang authorized her attorney-in-fact, Adelina R. Timbang, to sell the property. Petitioner Leticia Cannu agreed to purchase the property and to assume the mortgage and the equity or second mortgage due CERF Realty; the parties executed a Deed of Sale with Assumption of Mortgage dated 20 August 1990. Petitioners took possession and made partial payments to the Galangs totaling P75,000.00 and payments to NHMFC totaling P55,312.47, while petitioners alleged a payment to CERF Realty of P46,616.70 which the record did not substantiate.

Lower Court Proceedings and Decision

Petitioners filed a Complaint for Specific Performance and Damages on 24 June 1993 seeking declaration of ownership and reimbursement for sums respondents allegedly preterminated with NHMFC. Respondents Galang counterclaimed for rescission and damages. After trial, Branch 135, RTC of Makati dismissed petitioners’ complaint, found breach by petitioners for failing to pay the P45,000.00 balance of the purchase price, declared the Deed of Sale rescinded, ordered mutual restitution, awarded litigation expenses and attorneys’ fees to defendants, and denied moral and exemplary damages. The motion for reconsideration was denied.

Court of Appeals Decision

The Court of Appeals affirmed with modification and held that petitioners substantially breached their obligation by paying only P75,000.00 of the stated P250,000.00 purchase price and by failing to update monthly mortgage amortizations with NHMFC. The Court found that eight years had lapsed since the execution of the contract with only partial payments made and that petitioners’ tender of a managerial check after filing suit did not effect payment without consignation. The Court concluded that rescission was warranted and ordered the Galangs to return P135,000.00 in partial payments. The Court denied petitioners’ motion for reconsideration.

Petitioners’ Assignments of Error

Petitioners raised four principal assignments of error: that the Court of Appeals erred in holding their breach was substantial; that the Court erred in finding no substantial compliance with the obligation to pay the monthly amortization with NHMFC; that the Court failed to consider facts militating against rescission; and that the Court erred in not treating the action for rescission as subsidiary under Article 1383.

Supreme Court’s Review — Evidence on Consideration

The Supreme Court noted a misappreciation of evidence by the Court of Appeals in relying exclusively on the Deed of Sale stating a P250,000.00 consideration. The pleadings and answers in the record consistently showed the agreed consideration was P120,000.00 plus assumption of the mortgage and the equity to CERF Realty. Because the parties, in their pleadings, put in issue the true consideration, the Court admitted evidence aliunde to resolve the discrepancy under the exception to the parol evidence rule and rejected petitioners’ self-serving computation of a breakdown of P250,000.00 absent corroborating evidence.

Supreme Court on Substantial Breach and Rescission under Article 1191

The Supreme Court applied Article 1191 and reiterated that rescission or resolution for breach requires a substantial breach that defeats the object of the parties. The Court found petitioners’ failure to pay the remaining P45,000.00 to the Galangs to be substantial. The Court observed that even if the correct purchase price were P250,000.00, the outstanding P45,000.00 represented eighteen percent and, under the circumstances, constituted a substantial breach, particularly given the lapse of time and the absence of payments for eighteen months before the Galang paid off the mortgage with NHMFC. The Court held that petitioners’ prolonged noncompliance and the insufficiency of their intermittent payments justified rescission.

Supreme Court on Failure to Assume Mortgage and NHMFC Approval

The Supreme Court found that petitioners did not meet the formal requirements to be acknowledged by NHMFC as assignees and successors-in-interest, and that petitioners were not diligent in paying monthly amortizations to NHMFC. The Court observed that petitioners made only six payments in three years and that those payments did not cover arrearages, interest, and penalties. The lack of formal assumption and updated payments constituted further breach supporting rescission.

Supreme Court on Demand, Waiver, and Prejudice

The Supreme Court held there was sufficient evidence that respondents demanded strict compliance and that they did not waive the right to rescind by accepting installment payments through their attorney-in-fact as accommodation. The Court found that respondents made repeated follow-ups and that upon failure of petitioners to pay, respondents declared their intention to rescind and ultimately paid off the mortgage to protect their rights. The Court rejected petitioners’ contention that respondents had not shown prejudice, finding that respondents suffered the consequences of petitioners’ failure to perform and were entitled to restitution.

Supreme Court on Subsidiary Nature of Rescission and Article 1383

The Supreme Court rejected petitioners’ reliance on Article 1383 concerning the subsidiary nature of rescission, explaining that Article 1191 governs rescission for breach of reciprocal obligations and that rescission under Article 1191 is a principal right not subordinated as in rescission for lesion enumerated in Article 1381 and regulated by Article 1383. The Court quoted authority distinguishing rescission under Article 1191 from rescission under Article 1381 and concluded that the reciprocity between the parties was violated, thus justifying rescission under Article 1191.

Supreme Court on Unilateral Rescission and Judicial Relief

The Supreme Court addressed petitioners’ argument that respondents acted unilaterally in rescinding by paying the mortgage and should have sought judicial declaration first. The Court acknowledged precedent in Tan v. Court of Appeals that, absent a contractual stipulation allowing extrajudicial r

Case Syllabus (G.R. No. 139523)

Parties and Procedural Posture

Spouses Felipe and Leticia Cannu filed a Complaint for Specific Performance and Damages in Civil Case No. 93-2069 before Branch 135, Regional Trial Court, Makati City.
Spouses Gil and Fernandina Galang and National Home Mortgage Finance Corporation (NHMFC) were named as respondents in the trial court.
The RTC dismissed the complaint, granted rescission by counterclaim, and awarded certain costs and attorney's fees against the Cannus, and denied their motion for reconsideration.
The Court of Appeals affirmed the RTC decision with modification in a decision dated 30 September 1998 and denied the Cannus' motion for reconsideration in a Resolution dated 22 July 1999.
The Cannus sought review by petition for certiorari before the Supreme Court contesting the Court of Appeals' rulings.

Key Factual Allegations

Spouses Galang obtained a mortgage loan from Fortune Savings & Loan for P173,800.00 on a 150-square-meter house and lot covered by TCT No. T-8505.
NHMFC purchased the mortgage loan from Fortune Savings & Loan in early 1990 for P173,800.00.
Fernandina Galang authorized her attorney-in-fact, Adelina R. Timbang, to sell the subject property.
Petitioner Leticia Cannu agreed to buy the property and to assume the balance of the mortgage and the equity or second mortgage with CERF Realty, with the parties evidencing payments totaling P75,000.00 to the Galangs and P55,312.47 to NHMFC.
A Deed of Sale with Assumption of Mortgage dated 20 August 1990 recited a consideration of P250,000.00 and assumption of mortgage, but the pleadings and parties' averments consistently reflected a true consideration of P120,000.00 plus mortgage assumption.
Formal assumption of the mortgage by the Cannus was not approved by NHMFC for failure to submit required documents.
On 21 May 1993, due to the Cannus' failure to complete payments and update amortizations, Fernandina Galang paid NHMFC P233,957.64 to extinguish the mortgage, and NHMFC then withheld release of the TCT pending resolution.

Contract and Transactional Evidence

The written Deed of Sale with Assumption of Mortgage recited P250,000.00 but the pleadings and testimony put the true agreement at P120,000.00 plus mortgage and second-mortgage obligations.
The Court admitted evidence aliunde to reconcile the inconsistency between the deed and the parties' actual agreement under the exception to the parol evidence rule.
Documented payments to the Galangs totaled P75,000.00 as evidenced by receipts dated July 19, 1990, March 13, 1991, April 6, 1991, and November 28, 1991.
Documented payments to NHMFC totaled P55,312.47 as evidenced by multiple receipts between July 9, 1990 and April 27, 1993.
Petitioners tendered a Manager's Check dated January 24, 1994 in the amount of P278,957.00, which was not treated as payment because there was no consignation.

Trial Court Findings

The RTC found that plaintiffs admitted failure to pay the balance of P45,000.00 due to the Galangs and that such failure constituted a breach of contract.
The RTC determined that NHMFC had not acknowledged the Cannus as assignees because the formal requirements for assumption were not complied with.
The RTC dismissed the Cannus' complaint for lack of merit, declared the Deed of Sale rescinded by counterclaim, and ordered mutual restitution, including return of partial payments and reinstatement of possession to the Galangs.
The RTC ordered the Cannus to pay litigation expenses of P10,000.00 each to defendants jointly and severally and attorneys' fees of P20,000.00 jointly and severally, and imposed costs of suit.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC with modification by holding that the Cannus' breaches were substantial and justified rescission.
The Court of Appeals emphasized that plaintiffs had paid only P75,000.00 out of the alleged P250,000.00 purchase price and had made sparse amortization payments to NHMFC.
The Court of Appeals ruled that the tender of the Manager's Check without consignation did not extinguish the obligation.
The Court of Appeals ordered the Galangs to return partial payments in the amount of P135,000.00 and made no pronouncement as to costs.

Issues Presented

Whether the breach of petitioners was substantial so as to justify rescission under Article 1191.
Whether petitioners substantially complied with their obligation to pay monthly amortizations to NHMFC.
Whether the Court of Appeals failed to consider ot