Assignment #7 therefore, the one contemplated in Act No.

4122 and accordingly the mortgagee is not bound

by the prohibition therein contained as to its right to the recovery of the unpaid balance.
Actions for Breach of Contract of Sale (Articles 1484-1486, 1594-1599, New Civil Code)
The suggestion that the cash payment made in this case should be considered as an installment
Cases: in order to bring the contract sued upon under the operation of the law, is completely
untenable. A cash payment cannot be considered a payment by installment, and even if it can
be so considered, still the law does not apply, for it requires non-payment of two or more
1. Levi Hermanos, Inc. vs. Gervacio, 69 Phil 52 installments in order that its provisions may be invoked. Here only one is unpaid.

FACTS: 2. Zayas vs. Luneta Motor Company, 117 SCRA 726

On March 15, 1937, plaintiff Levy Hermanos, Inc., sold to defendant Lazaro Blas Gervacio, a
Packard car. Defendant after making the initial payment executed a promissory note for the
balance of P2, 400.00, payable on or June 15, 1937, with interest at 12 percent per annum, and FACTS:
to secure the payment of the note, he mortgaged the car to the plaintiff. This is a petition for review by certiorari filed by Eutropio Zayas, Jr. to secure a reversal of the
the respondent court’s orders which remanded Civil Case No. 74381 for further proceedings
instead of affirming the City Court’s order of dismissal. The petitioner Eutropio Zayas, Jr.
Defendant failed to pay the note at its maturity; wherefore, plaintiff foreclosed the mortgage purchased on installment basis a motor vehicle described as One (1) Unit Ford Thames
and the car was sold at public auction; at which plaintiff was the highest bidder for P 800.00. Freighter with PUJ Body, Engine No. 400E-127738 and Chassis No. 400E-127738 from Mr.
The present auction is for the collection of the balance of P 1, 600.00 and interest. Roque Escaño Enterprises in Cagayan de Oro City, dealer of respondent Luneta Motor
Company.
Defendant admitted the allegations of the complaint, and with this admission, the parties
submitted the case for decision. The lower court applied the provisions of Act. No. 4122, The motor vehicle was delivered to the petitioner who (1) paid the initial payment in the
inserted as Article 1454-A of the Civil Code, and rendered judgment in favor of the defendant. amount of P1,006.82; and (2) executed a promissory note in the amount of P7,920.00, the
Plaintiff appealed. balance of the total selling price in favor of respondent Luneta Motor Company. The
promissory note stated the amounts and dates of payment of twenty-six installments covering
ISSUE: the P7, 920.00 debts. Simultaneously with the execution of the promissory note and to secure
Whether or not Article 1454-A of the Civil Code is applicable in the contract of sale entered its payment, the petitioner executed a chattel mortgage on the subject motor vehicle in favor of
into by the parties. the respondent. After paying a total amount of P3, 148.03, the petitioner was unable to pay
further monthly installments prompting the respondent Luneta Motor Company to extra-
RULING: judicially foreclose the chattel mortgage. The motor vehicle was sold at public auction with
Supreme Court ruled in the negative. Article 1452-A of the Civil Code reads as follows: the respondent Luneta Motor Company who was the highest bidder in the amount of
P5,000.00 realized from the foreclose of the chattel mortgage which could not cover the total
amount of the promissory note executed by the petitioner in favor of the respondent, the latter
“In a contract for the sale of personal property payable in installments, failure to pay two or filed Civil Case No. 165263 with the City Court of Manila for the recovery of the balance of
more installments shall confer upon the vendor the right to cancel the sale or foreclose the P1, 551.74 plus interest.
mortgage if one has been given on the property, without reimbursement to the purchaser of the
installments already paid, if there be an agreement to this effect.
The City Court of Manila dismiss the case on the ground that the defendant is no longer liable
for the deficiency judgment in as much as the chattel mortgage has been foreclosed, with the
plaintiff as the highest bidder thereof, citing the case of Ruperto G. Crus vs. Filipinas
Investment, decided on May 27, 1968, G.R. No. L-24772 in connection with Article 1484 of
“However, if the vendor has chosen to foreclose the mortgage he shall have no further action the Civil Code, and finding the same well taken. Luneta Motor Company filed an “Urgent
against the purchaser for the recovery of any unpaid balance owing by the same, and any Motion for Reconsideration” reiterating its stand that Article 1484 of the New Civil Code on
agreement to the contrary shall be null and void.” sale of personal property by installment was not applicable and the contract involving the
parties was a mere case of an ordinary loan secured by a mortgage.

The court denied the motion of reconsideration for lack of merit, hence, Luneta Motor
Company appealed the case to the Court of First Instance of Manila, where the latter is of the
In the instant case, the contract, while a sale of personal property, is not however, one in
impression that the case at bar may not be decided merely as the City Court had done , on the
installments, but on straight term, in which the balance after payment of the initial sum, should
question of law since the presentation of evidence is necessary to adjudicate the questions
be paid in its totality at the time specified in the promissory note. The transaction is not,
involved.
 As its judgment called for much more, the Southern Motors subsequently asked and obtained,
an alias writ of execution, pursuant thereto, the Provincial sheriff levied attachment on
ISSUE: Tajanlangits’ rights and interests in crtain real properties with a view to another sale on
Whether or not a deficiency amount after the motor vehicle, subject of the chattel mortgage, execution.
has been sold at the public auction still be recovered by respondent company.
To prevent such sale, the Tajan,langits’ instituted this action in the Iloilo Court of First
RULING: Instance for the purpose among others, of annulling the alias writ of execution and all
No. Article 1484 of the New Civil Code provides; proceedings subsequent thereto.

Article 1484. In a contract of sale of personal property, the price of which is payable in Their two main theories:
installments, the vendor may exercise any of the following remedies:
(1) They had returned the machineries and farm implements to the Southern Motors Inc., the
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the latter accepted them, and had thereby settled their accounts, for that reason, said spouses did
vendee’s failure to pay cover two or more installments. In this case, he shall have no further not contest the action in Civil Case No. 2942; and
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void. (2) as the Southern Motors Inc,. had repossessed the machineries purchased on installment and
(mortgaged) the buyers where thereby relieved from further responsibility, in view of the
In the instant case, respondent Luneta Motor Company maintains that the contract between the Recto Law, now Article 1484 of the New Civil Code.
company and the petitioner was only an ordinary loan removed from the coverage of Article
1484 of the New Civil Code on the ground that the role of Luneta Motor Company was only to ISSUE:
finance the purchase price of the motor vehicle and it has distinct and different identity of the Whether or not the appellants validly invoke paragraph 3 of Article 1484 of the Civil Code.
Escaño Enterprises, Cagayan de Oro from which the petitioner Eutoprio Zayas, Jr. purchased
the subject vehicle. The respondent’s arguments have no merit. Escaño Enterprises, a dealer of RULING:
respondent Luneta Motor Company, was merely a collecting-agent as far as the purchase of The court ruled in the negative.
the subject motor vehicle was concerned. The principal and agent relationship is clear. The
established rule is to the effect that the foreclosure and actual sale of a mortgaged chattel bars
further recovery by the vendor of any balance on the purchaser’s outstanding obligation not so Art. 1484. In a contract of sale of personal property the price of which is payable in
satisfied by the sale. Wherefore, the instant petition is hereby granted. installments, the vendor may exercise of the following remedies:

3. Tajanlangit vs. Southern Motors, Inc. 101 Phil 606 (3) Foreclose the Chattel Mortgage on the thing sold, if one has been constituted, should the
vendee’s failure to pay cover two or more installments. In this case he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
FACTS: contrary shall be void.
In April, 1953, Amador Tajanlangit and his wife Angeles, residents of Iloilo, bought from
Southern Motors, Inc.of Iloilo two tractors and a thresher. In payment for the same, they
executed the Promissory Note whereby they undertook to satisfy the total purchase price of Appellants invoke the last paragraph. But there has been no foreclosure of the Chattel
P24, 755.75 in several installments (with interest) payable on stated dates from May 18, 1953 Mortgage nor a foreclosure sale. Therefore the prohibition against further collection dos not
to December 10, 1955. The note stipulated that if default be made in the payment of interest or apply. It is true that there was a Chattel Mortgage on the goods sold. But the Southern Motors
of any installment, then the total principal sum still unpaid with interest shall at once become elected to due on the note exclusively, i.e. to exact fulfillment of the obligation to pay. It had a
demandable, etc. right to select among the three remedies established in Article 1484. In choosing to sue on the
note, it was not thereby limited to the proceeds of the sale, on execution, of the mortgaged
good.
The spouses failed to meet any installment. Wherefore, they were sued, in the above Civil,
Case No., 2942, for the amount of the Promissory Note. The spouses defaulted, and the court,
after listening to the Southern Motor’s evidence, entered judgment for it in the total, sum of 4. Cruz vs. Filipinas Investment & Finance Corp., 23 SCRA 791
P24, 755.75 together with interest at 12 percent, plus 10 percent of the total attorney’s fees and
cost of collection. FACTS:
Petitioner Ruperto Cruz purchased on installments one (1) unit of Isuzu Diesel bus from Far
Carrying out the order of execution, the sheriff levied on the same machineries and farm East Motors. Petitioner issued a promissory note as evidence of his indebtedness to Far East
implements which had been bought by the spouses; and later sold them at public auction to the Motors. To secure such promissory note, chattel mortgage was instituted on the said vehicle.
highest bidder which turned out to be the Southern Motors itself for the total sum of P10,000. Since no down payment was made by Cruz, an additional security was required by Far East
Motors. The additional security was given by plaintiff Felicidad de Reyes over her land which rentals for the remaining term, and obtain possession of the equipment (cumulative remedies).
at the time was mortgaged to DBP. Later, Far East Motors assigned all its rights and interests Giraffe defaulted after a year. PCI sent a letter to Giraffe demanding payment of the rentals for
to the Deed of Chattel Mortgage and Deed of Real Estate Mortgage to respondent, with due the remaining term of the lease OR surrender of the subject equipment. Giraffe did not heed
notice of assignment to the petitioners. Subsequently, petitioner defaulted on the promissory the demand.
note so respondent foreclosed the chattel mortgage on the bus. However, the proceeds from
the chattel mortgage were insufficient to discharge fully the indebtedness. Preparatory to Thus, PCI filed a complaint against Giraffe, praying for the issuance of a writ of replevin for
extra-judicially foreclosing the real estate mortgage on Reyes’ land, defendant paid DBP her the recovery of the leased property, and in addition, to pay the balance of the rental obligation
unpaid balance. Petitioner Reyes sent a letter demanding cancellation of her real estate (P8M).
mortgage, but defendant did not heed so the former instituted a suit against the latter for
cancellation of said real estate mortgage. RTC sustained petitioner and declared that the
extrajudicial foreclosure of the chattel mortgage on the bus barred further action against the Giraffe sought for the dismissal of the case arguing that the subject transaction fall within the
additional security put up by Reyes. It ruled that there is no controversy involving as it does a coverage of Art. 1484 (Recto Law), being in actuality, a lease with an option to buy. And that
sale of personal property on installments, the pertinent legal provision in this case is Article PCI’s recovery of the possession of the subject property was tantamount to a foreclosure
1484 of the Civil Code. thereof which bars recovery of the balance. The RTC ruled in favor of Giraffe and dismissed
the complaint. The SC affirmed.
ISSUE:
Whether or not the action referred in Art. 1484 is confined only to those actions where there is ISSUE:
a judicial suit or proceeding in court. W/N Were the Lease Agreement, Lease Schedules and the Disclosure Statements that embody
the financial leasing arrangement between the parties covered by and subject to the
consequences of Articles 1484 and 1485 of the New Civil Code (Recto Law)?
HELD:
No, the “action” referred to in Art. 1484 is not limited to judicial suits or proceedings. The
word ‘action’ is without a definite or exclusive meaning. It has invariably been defined as: “… HELD:
the legal demand of one’s right, or rights; …the lawful demand of one’s right in a court of YES. There is nothing in R.A. No. 8556 (Financing Company Act) which defines the rights
justice; …the legal and formal demand of one’s rights from another person or party, made and and obligations, as between each other, of the financial lessor and the lessee.
insisted on in a court of justice; …a claim made before a tribunal; …an assertion in a court of
justice of a right given by law; …a demand or legal proceeding in a court of justice to secure Also, the demand letter sent by PCI to Giraffe was fashioned in the alternative, i.e. payment of
one’s rights; …the prosecution of some demand in a court of justice; …the means by which the full amount of the unpaid balance for the entire lease period or the surrender of the
men litigate with each other; …the means that the law has provided to put the cause of action financed asset. In other words, should Giraffe opted to pay the balance stated, it need not
into effect;…” Considering the purpose for which the prohibition contained in Article 1484, return the subject equipment. Likewise, if Giraffe opted not the exercise its option of acquiring
the word “action” used therein may be construed as referring to any judicial or extrajudicial the equipment by returning them, then it need not pay the outstanding balance. The legal
proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the import is that the transaction at hand is a lease in name only. The so-called monthly rentals are
supposed unsatisfied balance of the purchasing price form the purchaser or his privy. in truth monthly amortizations of the price of the equipment. The absence of a “purchase
Certainly, an extrajudicial foreclosure of a real estate mortgage is one such proceeding. option” in the lease agreement, does not negate the fact that the true nature of the transaction is
really a lease with an option to buy.
5. PCI Leasing and Finance, Inc. vs. Giraffe-X Creative Imaging, Inc., 527 SCRA 405,
G.R. No. 142618 July 12, 2007 Given the above, the Recto Law should apply. And PCI in choosing to deprive Giraffe of the
possession of the equipment waived its right to bring an action to recover unpaid rentals, under
RULE SYNOPSIS par. 3 of Art. 1484. Petition denied. Decision affirmed.

Sales of personal property purporting to be leases (lease with option to buy or finance lease) 6. Ridad vs. Filipinas Investments, 120 SCRA 246
are covered by the Recto Law. Where in case of default, the lessee is given the option to
either: a) pay the rent for the full lease term without the obligation of surrendering the subject FACTS:
property, or b) surrender the same, the lease is said to be one with an option to purchase. Plaintiffs purchased from Supreme Sales and Development Corporation (Supreme) 2 brand
new Ford Consul Sedans, for P26,887 payable in 24 monthly installments. To secure payment
Case Summary thereof, plaintiffs executed a promissory note covering the purchase price and a deed of chattel
mortgage on the two vehicles purchased and also on another car (Chevrolet) and plaintiff’s
franchise or certificate of public convenience granted by the defunct Public Service
PCI Leasing and Finance, Inc. (PCI) and Giraffe-X Creative Imaging, Inc. entered into a lease Commission for the operation of a taxi fleet. With the conformity of plaintiffs, the vendor
agreement whereby the former leased to the latter several equipment for 36 months. The Supreme assigned its rights, title and interest to the promissory note and chattel mortgage to
agreement provided, among others, that in case of Giraffe’s default, PCI may recover the the defendant Filipinas Investment and Finance Corporation. Plaintiffs failed to pay their
monthly installments. Filipinas foreclosed the chattel mortgage extra-judicially. During the Eight Hundred Fifty Six (P122,856.00) to be payable without need or notice or demand, in
public auction, of which the plaintiffs were not notified, the 2 Ford Consul cars were bought installments of the amounts following and the dates hereinafter set forth, to wit: P10,238.00
by defendant Filipinas, who was as the highest bidder. During another public auction, the rest monthly for (twelve) 12 months due and payable on the 7th day of each month starting
of the properties (including the taxi franchise) subject of the chattel mortgage were sold, and January, 1985, provided that at late payment charge of 3% per month shall be added on each
bought by defendant Filipinas also. Filipinas subsequently sold the taxi franchise to defendant unpaid installment from due date until fully paid. It likewise agreed that upon such default,
Jose D. Sebastian, who filed with the Public Service Commission an application for approval attorney’s fees are availed of, an additional sum, equal to twenty five percent (25%) of the
of said sale. Plaintiffs then filed an action for annulment of contract before the CFI, against total sum due thereon, which shall not be less than Five Hundred Pesos, shall be paid to the
Filipinas, Sebastian, and Sheriff San Agustin. CFI ruling: The chattel mortgage was null and holder hereof for attorney’s plus an additional sum equivalent to 25% of the total sum which
void in so far as the taxi franchise and the used Chevrolet car were concerned, and the sale at likewise shall not be less than Five Hundred Pesos for liquidated damages, aside from
public auction of the taxicab franchise was to be of no legal effect. The Certificate of Sale expenses of collection and legal costs provided for in the rules of court.
issued by the Sheriff of Manila in favor of Filipinas concerning the taxi franchise was
cancelled and set aside. The assignment made by Filipinas in favor of Jose Sebastian was also To secure the promissory note, the defendant executed a chattel mortgage on “One (1) Brand
declared void and of no legal effect. The CA certified the defendants’ appeal to the SC. New 1984 Isuzu, KCD 20 Crew Cab (Conv.) Serial No. KCD20DOF 207685k, Key No. 5509.
The rights of Pangasinan Auto Mart, Inc. was later assigned to Filinvest Credit Corporation on
ISSUE: Is the chattel mortgage and its subsequent sale valid? December 10, 1984, with notice to the defendants. On March 21, 1985, Filinvest Credit
Corporation assigned all its rights, interests and title over the Promissory Note and the Chattel
RULING: Mortage to the plaintiff.
NO Ratio: 1) Article 1484 of the Civil Code is applicable. Under this article, the vendor of
personal property the purchase price of which is payable in installments, has the right, should The Promissory Note stipulates that the installment of P10, 238.00 monthly should be paid on
the vendee default in the payment of two or more of the agreed installments, to exact the 7th day of each month starting January 1985, but the defendants failed to comply with
fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the their obligation. Because the defendants did not pay their monthly installments, Filinvest
mortgage on the purchased personal property, if one was constituted. The vendor can only demanded from the defendants the payment of their installments due in January 29, 1985 by
choose one option. 2) If the vendor avails himself of the right to foreclose the mortgage, the telegram. After the accounts were assigned to the plaintiff, the plaintiff attempted to collect by
law prohibits him from further bringing an action against the vendee for the purpose of sending a demand letter to the defendants for them to pay their entire obligations which as of
recovering whatever balance of the debt secured is not satisfied by the foreclosure sale. 3) March 12, 1985, totaled P185, 257.80. The appellate court upheld the court a quo in the award
Purpose of the law is to prevent mortgagees from seizing the mortgaged property, buying it at of liquidated damages and attorney’s fees in favor of private respondent, hence, petitioners
foreclosure sale for a low price and the bringing suit against the mortgagor for a deficiency seek a modification of the decision of the appellate court invoking bthe provisions of Article
judgment. a. Without the law, the mortgagor-buyer would find himself without the property 1484 of the New Civil Code.
and still owing practically the full amount of his original debt. 4) In this case, defendant
Filipinas chose to foreclose the mortgage upon default of plaintiffs, and bought the vehicles at ISSUE:
the public auction as the highest bidder. Whether liquidated damages and attorney’s fees apply in cases involving contract of sale
covered by Promissory Note and Chattel Mortgage.
Filipinas is deemed to have renounced any and all rights which it might otherwise have under
the promissory note and the chattel mortgage as well as the payment of the unpaid balance. 5) RULING: The court modified the appealed decision by deleting therefrom the award for
The lower court rightly declared the nullity of the chattel mortgage in so far as the taxi liquidated damages; in all other respects, the judgment of the appellate court is upheld. Article
franchise and the Chevrolet were concerned, under the authority of the ruling in the case of 1484 of the Civil Code provides:
Levy Hermanos, Inc. v Pacific Commercial Co., et al. 6) The vendor’s right to foreclose is
limited only on the thing sold. 7) The vendor of personal property sold on installment is
precluded, after foreclosing the chattel mortgage on the thing sold, from having a recourse Art. 1484. In a contract of sale of personal property the price of which is payable in
against the additional security put up by a third party to guarantee the purchaser’s performance installments, the vendor may exercise any of the following remedies:
of his obligation. (Cruz v Filipinos Investment & Finance Corporation) a. Otherwise, if the
vendee could still be compelled to pay the balance of the purchase price, the vendee will be 1.) Exact fulfillment of the obligation, should the vendee failed to pay;
made to bear the payment of the balance despite the earlier foreclosure. Judgment appealed
from is affirmed. 2.) Cancel the sale, should the vendee’s failure to pay covered two or more
installments;
7. Borbon II vs. Servicewide Specialist, Inc., 258 SCRA 634, 1996
3.) Foreclose the Chattel Mortgage or the thing sold, if one has been constituted,
FACTS: should the vendee’s failure to pay cover two or more installments.
Petitioners Daniel L. Borbon and Francisco Borbon signed a promissory note in favor of
Pangasinan Auto Mart, Inc. or order in the amount of One Hundred Twenty Two Thousand
In this case, he shall have no further action against the purchaser to recover any unpaid contracting party must be in substantial breach of the terms and conditions of their contract.
balance of the price. Any agreement to the contrary shall be void. Substantial breach of a contract, unlike slight and casual breaches thereof, is a fundamental
breach that defeats the object of the parties in entering into an agreement.
In Macondary & Co. vs. Eustaquio, we have said that the phrase “any unpaid balance” can
only mean the deficiency judgment to which the mortgagee maybe entitled to when the 9. Heirs of Macalalad vs. Rural Bank of Pola, Inc. G.R. No. 200899, June 20, 2018
proceeds from the auction sale are insufficient to cover the “full amount of the secured
obligations which… include the interest on the principal, attorney’s fees, expenses of FACTS:
collection, and the costs”. Leopoldo owned a parcel of land located at Oriental Mindoro. After his death, it was allegedly
made to appear that he sold the subject lot to the spouses Remigio and Josephine Pimentel in
In sum, we have observed that the, legislative intent is not to merely limit the proscription of whose names a new TCT was issued. Thereafter, the Spouses Pimentel obtained a loan from
any further action to the” unpaid balance of the principal” but, as so later ruled in Luneta herein respondent Rural Bank of Pola, Inc. and gave the subject parcel of land as collateral for
Motor Co., vs. Salvador, to all, other claims that may be likewise called in the accompanying the said loan. Spouses Pimentel failed to pay their loan leading respondent bank to foreclose
Promissory Note against the buyer, mortgagor or his guarantor, including costs and attorney’s the mortgage over the subject property where it emerged as the highest bidder; consequently,
fees. Private respondent bewails the instant petition in that petitioners have failed to respondent bank obtained ownership of the disputed lot. Paz contended that respondent bank
specifically raise the issue on liquidated damages and attorney’s fees stipulated in the be made to suffer the ill effects of its negligent acts and for acting in bad faith where it
actionable documents. In several cases, we have ruled that as long as the questioned items bear disregard its duty to investigate the validity of the title of the Spouses Pimentel and without
relevance and close relation to those specifically raised, the interest of justice would dictate verifying the location of the lot, accepted the same as collateral for the Spouses Pimentel’s
that they too, must be considered. loan. Hence, Petitioners’ predecessor-in-interest brought this action with the RTC of Calapan
City to cancel the TCT issued in the name of the respondent bank.
Given the circumstances, we must strike down the award for liquidated damages made by the
court a quo but we uphold the grant of attorney’s fees stipulated in the actionable documents. ISSUE:
Whether or not respondent bank is a purchaser in bad faith.
8. Nolasco  vs. Cuerpo, G.R. No. 210215, December 9, 2015
RULING:
FACTS: No. Nemo dat quod non habet. Stated differently, no one can transfer a right to another greater
Petitioners and respondents entered into a Contract to Sell over a 165,775-square meter parcel than what he himself has. Applying this principle to the instant case, granting that the deed of
of land. TheContract provides that“petitioners shall transfer the title over the subject land from sale in favor of the Spouses Pimentel was forged, they could not have acquired ownership as
a certain Edilberta N. Santos to petitioners' names, and, should they fail to do so, respondents well as legal title over the same. Hence, they cannot give the subject property as collateral in
may cause the said transfer and charge the costs incurred against the monthly amortizations”as the mortgage contract they entered into with the respondent bank.
one of the conditions. However, respondents sent petitioners a letter seeking to rescind the
subject contract on the ground of financial difficulties in complying with the same. They also However, there is an exception to the rule that a forged deed cannot be the root of a valid title
sought the return of the amount they had paid to petitioners. As their letter went unheeded, – that is when an innocent purchaser for value intervenes. Indeed, a forged deed can legally be
respondents filed the instant complaint for rescission before the RTC. RTC ruled in favor of the root of a valid title when an innocent purchaser for value intervenes. A purchaser in good
the Respondents, rescinding the Contract by arguing that Petitioners breached it by violating faith and for value is one who buys the property of another without notice that some other
the aforementioned condition. CA affirmed. Hence, the Petition. person has a right to or interest in such property and pays a full and fair price for the same, at
the time of such purchase, or before he has notice of the claims or interest of some other
ISSUE: person in the property. Under Section 32 of Presidential Decree (P.D.) 1529, the definition of
WON, the Petitioner substantially breached the Contract warranting its rescission an innocent purchaser for value has been expanded to include an innocent lessee, mortgagee,
or other encumbrancer for value.
HELD:
No. In reciprocal obligations, either party may rescind the contract upon the other party's In the present case, even assuming that the deed of sale between Leopoldo and the Spouses
substantial breach of the obligation/s he had assumed thereunder (Art. 1191). A plain reading Pimentel was indeed forged, the same may, nonetheless, give rise to a valid title in favor of
of paragraph 7 of the subject contract reveals that RTC and CA erred in concluding that such respondent bank if it is shown that the latter is a mortgagee in good faith. Such good faith will
failure constituted a substantial breach that would entitle respondents to rescind the subject entitle respondent bank to protection such that its mortgage contract with the Spouses
contract.It cannot be said that petitioners' failure to undertake their obligation under paragraph Pimentel, as well as respondent bank’s consequent purchase of the subject lot, may no longer
7defeats the object of the parties in entering into the subject contract, considering that the be cancelled.
same paragraph provides respondents contractual recourse in the event of petitioners' non-
performance of the aforesaid obligation, that is, to cause such transfer themselves in behalf It is, likewise, settled that every person dealing with registered land may safely rely on the
and at the expense of petitioners. For a contracting party to be entitled to rescission, the other correctness of the certificate of title issued therefor and the law will in no way oblige him to
go beyond the certificate to determine the condition of the property. Where there is nothing in
the certificate of title to indicate any cloud or vice in the ownership of the property, or any
encumbrance thereon, the purchaser is not required to explore further than what the Torrens
Title upon its face indicates in quest for any hidden defects or inchoate right that may
subsequently defeat his right thereto. However, this rule shall not apply when the party has
actual knowledge of facts and circumstances that would impel a reasonably cautious person to
make such inquiry or when the purchaser has knowledge of a defect or the lack of title in his
vendor or of sufficient facts to induce a reasonably prudent person to inquire into the status of
the title of the property in litigation.

Moreover, in the present case, respondent is not an ordinary mortgagee; it is a mortgagee-

bank. As such, unlike private individuals, it is expected to exercise greater care and prudence
in its dealings, including those involving registered lands. where the mortgagee is a bank, it
cannot rely merely on the certificate of title offered by the mortgagor in ascertaining the status
of mortgaged properties. Since its business is impressed with public interest, the mortgagee-
bank is duty-bound to be more cautious even in dealing with registered lands. Indeed, the rule
that a person dealing with registered lands can rely solely on the certificate of title does not
apply to banks. Thus, before approving a loan application, it is a standard operating practice
for these institutions to conduct an ocular inspection of the property offered for mortgage and
to verify the genuineness of the title to determine the real owners thereof. The apparent
purpose of an ocular inspection is to protect the “true owner” of the property as well as
innocent third parties with a right, interest or claim thereon from a usurper who may have
acquired a fraudulent certificate of title thereto. Respondent bank indeed sent a representative
to inspect the subject lot; and, if such representative indeed found another person in possession
of the said property, who lays claim over the same, the representative would have indicated
the same in his report because it is the respondent bank which would be at a disadvantage and
even ultimately lose if the presence of an adverse possessor was not reported. Nonetheless,
there is nothing in the representative’s Report of Inspection and Credit Investigation which
indicates such presence. Thus, respondent bank is justified in believing that the title of the
Spouses Pimentel is neither invalid nor defective.

10. Mendoza vs. Spouses Palugod, G. R. No. 220517, June 20, 2018