Coca-Cola Bottlers Phils., Inc. vs. Spouses Efren and Lolita Soriano

A real estate mortgage is valid and binding between the parties even if the notarization is defective, such as when performed by a Clerk of Court acting beyond authority, provided the mortgagors admit signing the document; the defective notarization merely reduces the instrument to a private document subject to preponderance of evidence, and allegations of fraud based on assurances that the document would not be notarized constitute dolo incidente that does not avoid the contract.

Spouses Efren and Lolita Soriano engaged in the business of selling Coca-Cola products in Tuguegarao City, Cagayan. In 1999, petitioner Coca-Cola Bottlers Phils., Inc., through its representative Cipriano, required the spouses to provide security for the continuation of their distributorship. The spouses surrendered two certificates of title over their property and signed a document, allegedly assured by Cipriano that the document was a mere formality and would never be notarized.

• The Mortgage Transaction: In 1999, defendant Cipriano convinced plaintiffs-appellees (Spouses Soriano) to hand over two certificates of title (TCT No. T-86200 and TCT No. T-84673) as security for subsequent deliveries of Coca-Cola products. Cipriano assured plaintiffs it was only a formality and would never be notarized.
• Execution of the Document: Plaintiffs signed the document in Tuguegarao City, Cagayan, not in Ilagan, Isabela as stated therein. They alleged they never appeared before Atty. Reymundo Ilagan for notarization.
• Discovery and Foreclosure: Plaintiffs decided to stop selling due to advanced age and verbally demanded return of their titles. When the titles were not returned, they discovered the land had been mortgaged and foreclosed. They claimed they had no monetary obligations, having always paid for deliveries in cash.
• Notarization Defects: The mortgage deed was notarized by the Clerk of Court of RTC Ilagan. In the acknowledgment portion, only defendant Cipriano and defendant-appellant Coca-Cola appeared and acknowledged the deed before the Clerk of Court; plaintiffs did not. Only one witness signed the document instead of the required two under Section 112 of P.D. 1529.
• Registration: Despite the defects, the mortgage deed was registered and annotated on the back of the titles.

• Validity Despite Formal Defects: Defective notarization does not affect the validity of the mortgage between the parties. Section 112 of P.D. 1529 governs registrability, not validity. Non-registrability only means the mortgage does not bind third parties, but it remains valid between the parties.
• Admission of Execution: Respondents admitted in their complaint that they signed the document; this admission establishes the due execution and genuineness of the mortgage deed, negating any claim of forgery.
• Nature of Alleged Fraud: Even assuming respondents were assured the document would not be notarized, such representation amounts only to dolo incidente (incidental fraud), not the serious fraud (dolo causante) required to annul a contract. The execution of the REM and surrender of titles prove the contract's validity.

• Non-compliance with Formal Requirements: The REM deed failed to comply substantially with Section 112 of P.D. 1529, which requires the document to be signed in the presence of two witnesses and acknowledged by the mortgagors before a notary public. Only one witness signed, and plaintiffs never acknowledged the deed before the Clerk of Court.
• Invalid Notarization: The document was notarized by a Clerk of Court who lacks authority to notarize private documents unrelated to his official functions, rendering the notarization void.
• Fraud and Lack of Consent: Respondents were induced to sign through machinations and fraudulent assurances that the document was a mere formality and would not be notarized. They signed in Tuguegarao, not Isabela, and never intended to execute a mortgage.
• Absence of Debt: Respondents maintained they had no outstanding debt with petitioner, as they paid cash for all deliveries.

• Validity of Defectively Notarized REM: Whether a real estate mortgage deed, admittedly signed by the mortgagors but notarized without authority and lacking acknowledgment by the mortgagors, is valid between the parties.
• Effect of Defective Notarization: Whether defective notarization by a Clerk of Court acting beyond authority renders the mortgage void or merely reduces it to a private document.
• Fraud as Ground for Annulment: Whether fraud, allegedly consisting of assurances that the document would not be notarized, invalidates the mortgage.
• Validity of Foreclosure: Whether the extrajudicial foreclosure sale is valid notwithstanding the alleged defects in the mortgage deed.

• Validity of the Mortgage: The mortgage is valid and binding between the parties. Under Articles 2085 and 2125 of the Civil Code, registration is not essential to the validity of a mortgage between the parties; even an unregistered mortgage is binding between them. The defective notarization by a Clerk of Court (acting beyond authority as notary public ex officio) merely stripped the document of its public character, reducing it to a private document. Pursuant to Article 1358 of the Civil Code, the failure to observe the required public form does not render the transaction invalid, as the form is merely for convenience.
• Due Execution and Authenticity: As a private document, its due execution and authenticity must be proved by preponderance of evidence. Respondents admitted in their pleadings that they signed the document. Under the Rules of Court, an allegation that a document was procured by fraudulent representation constitutes an admission of the genuineness and due execution of the instrument. Thus, the burden of proving due execution was satisfied by respondents' own admissions.
• Fraud: Fraud to annul a contract must be serious (dolo causante) and consist of insidious words or machinations that induced the party to enter into a contract they otherwise would not have agreed to. The assurance that the document would not be notarized, even if proven, constitutes at most dolo incidente, which does not avoid the contract but may give rise to damages. The surrender of titles and execution of the deed belie the claim of serious fraud.
• Foreclosure Validity: The foreclosure proceedings are valid. Section 3 of Act No. 3135 requires only posting of notice in three public places and publication in a newspaper of general circulation for extrajudicial foreclosure; personal notice to the mortgagor is not required unless stipulated. The lower courts nullified the foreclosure only as a consequence of nullifying the mortgage; with the mortgage upheld, the foreclosure stands.

• Validity of Unregistered Mortgage Between Parties — Under Article 2125 of the Civil Code, if the instrument of mortgage is not recorded, the mortgage is nevertheless binding between the parties. Registration is not essential to validity as between the immediate parties.
• Effect of Defective Notarization by Clerk of Court — Notarization by a Clerk of Court of a private document unrelated to official functions is beyond authority. This defective notarization strips the document of its public character and reduces it to a private document, subject to the rules on proof of private documents under Section 20, Rule 132 of the Rules of Court (requiring proof of genuineness of signature or handwriting).
• Admission of Genuineness by Alleging Fraud — A party who alleges that a document was procured by fraudulent representation admits the genuineness and due execution of the document. To deny genuineness, the defendant must declare under oath that they did not sign the document or that it is otherwise false or fabricated.
• Dolo Causante vs. Dolo Incidente — Fraud (dolo causante) must be serious and must have been employed by one party to induce the other to enter into the contract. Dolo incidente (incidental fraud), such as a promise not to register a mortgage, does not avoid the contract but may give rise to a claim for damages.

• "Thus, as between the parties to a mortgage, the non-registration of a REM deed is immaterial to its validity."
• "Nonetheless, the defective notarization of the REM agreement merely strips it of its public character and reduces it to a private document."
• "Although Article 1358 of the New Civil Code requires that the form of a contract transmitting or extinguishing real rights over immovable property should be in a public document, the failure to observe such required form does not render the transaction invalid."
• "This means that the defendant must declare under oath that he did not sign the document or that it is otherwise false or fabricated. Neither does the statement of the answer to the effect that the instrument was procured by fraudulent representation raise any issue as to its genuineness or due execution. On the contrary such a plea is an admission both of the genuineness and due execution thereof..."
• "Arguably at most, FEBTC's act of registering the mortgage only amounted to dolo incidente which is not the kind of fraud that avoids a contract."

• Paradigm Development Corporation of the Philippines v. Bank of the Philippine Islands, G.R. No. 191174, June 7, 2017 — Controlling precedent establishing that an unregistered REM is valid and binding between the parties.
• Mobil Oil Philippines, Inc. v. Ruth R. Diocares, 140 Phil. 171 (1969) — Cited for legislative intent behind Article 2125 of the Civil Code.
• Spouses Cuyco v. Spouses Cuyco, 521 Phil. 796 (2006) — Distinguished; held that the pronouncements therein regarding formal requirements related to whether the subject realty was bound by additional loans, not the validity of the REM itself.
• Gloria and Teresita Tan Ocampo v. Land Bank of the Philippines, 609 Phil. 337 (2009) — Followed for the rule that admission of signing negates forgery and that fraud must be clearly established.
• Lamberto Songco v. George C. Sellner, G.R. No. L-11513, December 4, 1917 — Controlling precedent on how to deny genuineness and due execution of actionable documents.
• Rural Bank of Cabadbaran, Inc. v. Melecio-Yap, 740 Phil. 35 (2014) — Followed for the principle that defective notarization reduces a document to a private instrument.

• Article 2085, New Civil Code — States the essential requisites for contracts of pledge and mortgage (security for principal obligation, absolute ownership, free disposal).
• Article 2125, New Civil Code — Provides that recording is indispensable for valid constitution of mortgage against third persons, but if unrecorded, the mortgage is nevertheless binding between the parties.
• Article 1338, New Civil Code — Defines fraud as insidious words or machinations of one contracting party inducing the other to enter a contract.
• Article 1344, New Civil Code — Requires that fraud be serious and not employed by both parties to annul a contract.
• Article 1358, New Civil Code — Requires public document form for contracts transmitting real rights over immovable property, but failure to observe does not invalidate the transaction.
• Section 112, Presidential Decree No. 1529 (Property Registration Decree) — Prescribes formal requirements for registrability of voluntary instruments (signing before two witnesses, acknowledgment before notary public).
• Section 3, Act No. 3135 (Extrajudicial Foreclosure) — Requires posting of notice of sale in three public places and publication in a newspaper of general circulation.
• Section 20, Rule 132, Rules of Court — Governs proof of private documents (by witness to execution or evidence of genuineness of signature).

Leonardo-De Castro (Acting Chairperson) and Peralta, JJ.