G.R. No. 128669 - Vda. de Jayme vs. Court of Appeals

Case Summary (G.R. No. 128669)

Factual Background

The spouses Graciano and Mamerta Jayme owned Lot 2700, Mandaue, Cebu, 2,568 sq.m., covered by Transfer Certificate of Title No. 8290. On January 8, 1973 they leased one-half of Lot 2700 to Cebu Asiancars, Inc. for a term of twenty years. The lease contained a stipulation that improvements constructed by the lessee would become the property of the Jaymes upon termination or voluntary surrender of the leased premises. On January 8, 1973 the Jaymes and Asiancars entered into the written lease. In January 1974 the spouses executed a Special Power of Attorney in favor of George Neri. In October 1977 Asiancars obtained a P6,000,000 loan from MBTC and a Deed of Real Estate Mortgage (REM) dated November 21, 1977 was signed by the Jayme spouses, mortgaging the entire Lot 2700 to secure the loan. Prior to the REM, a loan of P300,000 from General Bank and Trust Company, secured by the lot, had been fully paid in August 1977. On November 7, 1977 certain officers of Asiancars, including George Neri, executed an Undertaking promising to compensate the Jaymes for any damage arising from the MBTC mortgage. Asiancars later executed a dacion en pago of the building on the leased premises to MBTC, the building being valued at P980,000 and applied as partial payment; the record also reflects a remaining balance figure of P2,942,449.66. MBTC extrajudicially foreclosed and conducted a public auction on February 4, 1981, at which MBTC was the highest bidder for P1,067,344.35; a certificate of sale was registered on February 23, 1981.

Trial Court Proceedings

After foreclosure and the death of Graciano Jayme, the Jaymes’ heirs instituted Civil Case No. CEB-21369 in January 1982, seeking annulment of the REM, damages, and preliminary injunctive relief. The RTC heard evidence and found the REM valid and binding. The trial court also declared valid the November 7, 1977 Undertaking, allowed the Jaymes to redeem Lot 2700 for P2,942,448.66 plus six percent interest within ninety days from finality, and held the signatories to the Undertaking jointly liable to reimburse the Jaymes for redemption. The RTC awarded P50,000 attorneys’ fees and costs against certain private respondents.

Court of Appeals Ruling

The Court of Appeals affirmed the RTC’s essential rulings but modified the relief. The CA declared the REM valid, upheld the foreclosure and foreclosure sale, and found the Jaymes’ right to redeem had expired on February 23, 1982. The CA ordered the Sheriff to issue a definite Deed of Sale in favor of MBTC, declared the dacion en pago valid and MBTC owner of the building, and awarded the Jaymes P92,083.33 for use of the land from December 18, 1981 to February 23, 1982 with six percent interest. The CA further ordered Asiancars and its officers to pay joint and several sums to the Jaymes: actual value of the lot P3,852,000; P400,000 moral damages; P150,000 exemplary damages; P100,000 attorneys’ fees; and costs.

Issues Presented on Petition

Petitioners raised multiple assignments of error before the Supreme Court. The principal issues distilled by the Court were: first, whether the REM was voidable for vitiated consent, fraud, or because the spouses intended only to act as guarantors and not as mortgagors; and second, whether the dacion en pago by Asiancars to MBTC was valid and whether MBTC acquired ownership of the building notwithstanding the lease provision that the building would vest in the Jaymes upon termination of the lease.

Petitioners’ Contentions

Petitioners contended that the REM was not a true mortgage but a covert deed of guaranty because the Jayme spouses were illiterate, signed in blank, and were deceived by George Neri and Asiancars into believing they were merely guarantors or accommodators. They argued that Arts. 2058, 2076 and 2077 of the Civil Code were violated and that consent was vitiated by fraud. Petitioners further argued that the dacion en pago was illegal and effected in bad faith, that the remaining indebtedness had been extinguished by the dacion en pago, and that the CA erred in not ordering MBTC to vacate the premises and pay rent following termination of the lease.

Respondents’ Positions

Respondents denied fraud and asserted that the Jaymes voluntarily and knowingly executed the REM with the assistance of counsel and consultation with literate children. MBTC maintained it acted in good faith, that it had no knowledge of any special provision in the lease transferring building ownership to the Jaymes upon lease termination, and that foreclosure and subsequent registration of the certificate of sale vested ownership in MBTC when the Jaymes failed to redeem within the statutory period.

Applicable Legal Standards

The Court recognized the presumption of regularity attaching to notarized instruments and required clear, convincing, and more than preponderant evidence to overcome that presumption, citing Bernardo v. Court of Appeals and Caoili v. Court of Appeals as authority. The Court applied the rule on Third Party Mortgage under Art. 2085(3) of the Civil Code, which permits a person not party to the principal obligation to mortgage his property to secure that obligation. The Court also applied the redemption provisions of R.A. 337, as amended, whereby the mortgagor of registered land had one year from registration of the certificate of sale to redeem the property.

Supreme Court’s Findings on Vitiated Consent and the REM

The Supreme Court found that the REM was valid and binding. The Court reasoned that the Jayme spouses executed the REM in the presence of two instrumental witnesses and a notary public, thereby invoking the presumption of regularity. That presumption had not been overcome because the evidence did not meet the required quantum to prove fraud or vitiation of consent. The Court emphasized that the spouses were assisted by their own counsel, Atty. Cirilo Sanchez, who had participated in their transactions and signed as an instrumental witness to the earlier Special Power of Attorney authorizing Neri to mortgage the property. The Court noted that the spouses consulted their literate children. Given assistance by counsel and consultation with family members, the Court held that the spouses, though illiterate, could not feign ignorance of the deed’s terms and could not now claim they intended merely to be guarantors. The Court applied the established doctrine that a third person who mortgages his property to secure another’s obligation renders his property directly and jointly liable for the obligation. Consequently, the Court affirmed the CA’s declaration of validity of the REM.

Supreme Court’s Findings on Foreclosure, Redemption, and MBTC Ownership

The Court held that MBTC properly foreclosed and that MBTC’s certificate of sale, registered February 23, 1981, commenced the mortgagor’s one-year redemption period under R.A. 337, as amended. The Court found that petitioners failed to redeem by February 23, 1982, and therefore MBTC became absolute owner of Lot 2700. The Court rejected petitioners’ plea to annul the foreclosure sale and deed of sale because the requisite proof of fraudulent inducement to sign the REM was lacking. The Court repeated the cautionary principle from Vales v. Villa that courts will not nullify every imprudent transaction of the weak or unwise absent the required evidence of fraud or legal infirmity.

Supreme Court’s Findings on Dacion en Pago and MBTC Good Faith

The Supreme Court found the dacion en pago executed by Asiancars in favor of MBTC valid. The Court explained that the building’s ownership was held by the lessee-mortgagor during the lease’s subsistence and that the lessee could validly alienate the building by dacion en pago. The Court defi

Case Syllabus (G.R. No. 128669)

Parties and Procedural Posture

Petitioners are Mamerta Vda. de Jayme and her children and/or heirs and Flora Jayme Ravanes, assisted by her husband Cesar Ravanes, who sued for annulment of contract and damages with prayer for preliminary injunction.
Respondents are the Hon. Court of Appeals, Sixteenth Division, Cebu, Cebu Asiancars, Inc., its officers including George Neri, and Metropolitan Bank and Trust Company (MBTC), among others.
The Regional Trial Court, Branch 15, Cebu City, rendered judgment declaring the Real Estate Mortgage valid and allowing redemption subject to conditions, and holding signatories to an Undertaking jointly liable.
The Court of Appeals affirmed the RTC with substantive modifications, declared MBTC owner of the building, and awarded substantive and exemplary damages and attorneys’ fees against private respondents.
The petition to this Court assails the CA decision and its denial of reconsideration and raises legal and factual errors in the CA and RTC rulings.

Key Factual Allegations

The spouses Graciano and Mamerta Jayme owned Lot 2700, TCT No. 8290, measuring 2,568 sq.m., and leased one-half to Cebu Asiancars, Inc. by a twenty-year lease dated January 8, 1973.
The lease authorized Asiancars to use the leased premises as collateral for loans, subject to a stipulation that any building constructed would vest in the Jaymes upon lease termination or voluntary surrender.
A Special Power of Attorney in favor of George Neri was executed January 26, 1974, and a Deed of Real Estate Mortgage (REM) by the Jaymes in favor of MBTC was executed November 21, 1977 to secure an allegedly P6,000,000 loan to Asiancars.
Asiancars conveyed the building to MBTC by dacion en pago on December 18, 1980, valued at P980,000 and applied as partial payment, leaving an alleged balance of P2,942,449.66.
MBTC extrajudicially foreclosed and purchased the mortgaged properties at public auction on February 4, 1981, and registered the certificate of sale on February 23, 1981.
Petitioners allege illiteracy and deceit, asserting that the Jaymes intended only to guaranty Asiancars’ loan and were misled into signing as mortgagors.

Contract Terms and Documents

The January 8, 1973 Contract of Lease expressly conditioned that any building on the leased premises would become the Jaymes’ property upon lease termination or voluntary surrender.
The November 21, 1977 Deed of Real Estate Mortgage was notarized and signed by the Jaymes and instrumental witnesses, and it purported to mortgage the entire Lot 2700 to secure the loan to Asiancars.
The November 7, 1977 Undertaking executed by Neri and Asiancars’ officers promised personal and corporate reimbursement to the Jaymes for damages arising from the MBTC mortgage.
The December 18, 1980 document of dacion en pago transferred ownership of the building from Asiancars to MBTC as partial satisfaction of indebtedness.
The REM and other instruments were presented in evidence and benefited from the presumption of regularity attendant to notarized documents.

Issues Presented

Whether the Deed of Real Estate Mortgage executed by the Jaymes should be annulled for vitiated consent and fraud.
Whether the dacion en pago by Asiancars in favor of MBTC was valid and binding despite the lease stipulation transferring building ownership to the Jaymes upon lease termination.
Whether the foreclosure and subsequent sale to MBTC were valid and whether petitioners retained the right to redeem.
Whether MBTC acquired rights as purchaser in good faith and the proper computation and award of rentals and damages.

Contentions of the Parties

Petitioners contended that the REM was a disguised deed of guaranty, that the Jaymes were illiterate and deceived, and that Arts. 2058, 2076 and 2077 of the Civil Code were violated.
Private respondents maintained that no fraud occurred, that the Jaymes voluntarily and knowingly signed the REM, and that MBTC was a bona fide purchaser and validly foreclosed.
MBTC ass