Asuncion vs. Evangelista

In reciprocal obligations, the party who first fails to perform cannot demand performance from the other and is not entitled to damages caused by his own breach. The Court held that because Evangelista first refused to execute the deed of sale with assumption of mortgage and deliver the stock certificates, Asuncion was justified in suspending his loan payments. Furthermore, damages equivalent to the value of foreclosed properties cannot be awarded in an action for rescission, as such damages are only compatible with specific performance.

Eduardo Evangelista operated a piggery (Embassy Farms, Inc.) on his landholdings in Bulacan, which he heavily mortgaged to secure personal loans from Paluwagan ng Bayan Savings and Loan Association, PAIC Savings and Mortgage Bank, and Mercator Finance Corporation. When Evangelista defaulted and his aggregate debt ballooned to almost P6,000,000.00, he and Alexander Asuncion executed a Memorandum of Agreement (MOA) on August 2, 1984. Under the MOA, Evangelista would cede his land and shares to Asuncion, while Asuncion would pay a lump sum, finance the piggery's operations, and assume Evangelista's loan obligations upon restructuring.

• The Memorandum of Agreement: Executed on August 2, 1984, between Asuncion and Evangelista. Evangelista agreed to cede 19 parcels of land and his controlling shares in Embassy Farms, Inc. to Asuncion. In exchange, Asuncion agreed to pay Evangelista P1,500,000.00 in lump sums, provide operating expenses, and assume Evangelista's loan obligations with three financial institutions upon restructuring.
• Asuncion's Compliance: Asuncion paid the P1,000,000.00 initial sum and the P500,000.00 subsequent sum. He also provided operating expenses and paid P800,000.00 to the banks (PAIC, Paluwagan, Mercator) for loan restructuring, in addition to other fees and advances, totaling approximately P3,194,941.88 within a year.
• Evangelista's Breach: Despite Asuncion's payments, Evangelista refused to execute the deed of sale with assumption of mortgage over the landholdings. He also endorsed the stock certificates in blank but never delivered them to Asuncion. Evangelista justified his refusal by claiming Asuncion had not formally assumed his loan obligations.
• Foreclosure and Litigation: Because Evangelista refused to transfer the properties, Asuncion stopped paying the banks. The banks foreclosed Evangelista's mortgaged properties, including the piggery site. Asuncion filed a complaint for rescission with damages, while Evangelista counterclaimed for rescission and damages, blaming Asuncion for the foreclosure.

• Petitioner argued that the RTC decision did not become final and executory because the registry receipt for the mailing of the decision was undated, and his counsel had died, leaving him unaware of the decision.
• Petitioner maintained that the MOA constituted a joint venture agreement, not a contract of sale.
• Petitioner argued that Evangelista was the first to renege on his obligations by refusing to execute the deed of conveyance and deliver the stock certificates, which justified his cessation of loan payments.

• Respondent countered that the RTC decision had become final and executory because petitioner received the motion for execution and the corresponding order, thereby waiving the irregularity of the undated registry receipt.
• Respondent argued that the MOA was a contract of sale, not a joint venture, as it lacked mutual right of control.
• Respondent insisted that petitioner failed to comply with his obligation to assume the loan obligations, which justified his refusal to execute the deed of conveyance and entitled him to damages for the foreclosed properties and lost earnings.

• Procedural Issues:
  • Whether the RTC decision became final and executory despite the undated registry receipt and the death of petitioner's counsel.
• Substantive Issues:
  • Whether the MOA is a contract of sale or a joint venture agreement.
  • Whether petitioner or respondent first breached the MOA.
  • Whether the award of actual or compensatory damages, including the value of foreclosed lands and piggery earnings, is proper in an action for rescission.

• Procedural: The Court ruled that the RTC decision did not become final and executory. Because the registry receipt evidencing the mailing of the decision was undated, there was no way to reckon the reglementary period to appeal. The Court held that petitioner's receipt of the motion for execution did not constitute a waiver of his right to appeal, especially since he was a non-lawyer and the case warranted a liberal interpretation of the rules in the interest of justice.
• Substantive: The Court held that the MOA constituted reciprocal obligations, not a simple contract of sale or joint venture. The Court found that Evangelista was the first to breach the agreement by refusing to execute the deed of sale with assumption of mortgage and deliver the stock certificates. Evangelista's insistence that Asuncion execute a formal assumption of mortgage independent of the deed of sale was legally untenable, as a real mortgage follows the property whoever the possessor may be. Because Evangelista breached first, Asuncion was justified in stopping his loan payments. Consequently, the award of damages was struck down. Actual damages must be proved with certainty, and Evangelista's evidence of piggery earnings was self-serving and hearsay. Moreover, damages equivalent to the value of the foreclosed lands are incompatible with the remedy of rescission, which requires mutual restitution. Since the piggery closed and the lands were foreclosed, mutual restitution was impossible; thus, neither party could recover damages from the other.

• Reciprocal Obligations — Obligations which arise from the same cause, where each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. The Court applied this doctrine to hold that Evangelista's obligation to execute the deed of conveyance was dependent on Asuncion's assumption of the loans, and his failure to execute the deed constituted the first breach, justifying Asuncion's suspension of payments.
• Rescission and Damages — In case of rescission, only those damages compatible with the idea of rescission may be awarded; damages consistent only with specific performance cannot be granted. The Court applied this doctrine to strike down the award of damages for the value of the foreclosed lands, holding that such damages would be proper only in specific performance, not rescission, which destroys the obligation to pay the price.
• Real Mortgage Follows the Property — A recorded real estate mortgage is a lien inseparable from the property mortgaged and follows the property whoever the possessor may be. The Court applied this principle to reject Evangelista's claim that he would commit "economic suicide" by executing the deed of sale before Asuncion formally assumed the mortgage, noting that the mortgage would remain on the property regardless of ownership.

• "It is an elementary principle in civil law that a real mortgage subsists notwithstanding changes of ownership and all subsequent purchases of the property must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee."
• "In estimating the damages to be awarded in case of rescission, those elements of damages only can be admitted that are compatible with the idea of rescission; and of course in estimating the damages to be awarded in case the lessor elects for specific performance only those elements of damages can be admitted which are compatible with the conception of specific performance."
• "Mutual restitution is required in rescission, but this presupposes that both parties may be restored in their original situation."

• Rios and Reyes v. Jacinto, Palma y Hermanos, 49 Phil. 7 (1926) — Followed. The Court cited this case for the rule that damages compatible only with specific performance cannot be awarded in an action for rescission.
• Lufthansa German Airlines v. Court of Appeals, 243 SCRA 600 (1995) — Followed. The Court cited this case for the principle that actual or compensatory damages cannot be presumed but must be duly proved with reasonable degree of certainty.

• Article 1191, Civil Code — Governs the power to rescind obligations in case of non-compliance by one party in reciprocal obligations. The Court applied this article to justify the rescission of the MOA due to Evangelista's failure to comply with his obligations.
• Article 1385, Civil Code — Provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. The Court applied this article to explain the requirement of mutual restitution and the incompatibility of awarding the value of foreclosed lands in rescission.

Pardo and Ynares-Santiago, JJ., concur.