Development Bank of the Philippines vs. Court of Appeals

The annulment of a void contract of sale requires mutual restitution, but a loan obligation embodied in a mortgage contract remains valid and demandable as a personal obligation even when the mortgage securing it is invalidated, because the loan contract is entirely separate from the void sale. Actual or compensatory damages, moreover, cannot be awarded on the basis of a self-serving list uncorroborated by receipts or other competent proof.

The Development Bank of the Philippines (DBP) acquired a 55.5057-hectare parcel of unregistered land in Garchitorena, Camarines Sur through extrajudicial foreclosure of a mortgage executed by the previous owner, Pacifico Chica, who had defaulted on a ₱6,000.00 loan. After consolidating ownership, DBP sold the property to spouses Celebrada and Abner Mangubat, who subsequently applied for an industrial tree-planting loan from DBP secured by a mortgage over the same land. The Bureau of Forest Development certified that the property was classified as timberland and not subject to disposition, which became the central fact precipitating the dispute.

The subject property — Lot 1, PSU-142380, situated in Barrio Toytoy, Garchitorena, Camarines Sur, containing 55.5057 hectares — was originally owned by Presentacion Cordovez, who donated it to Luciano Sarmiento on February 4, 1937. On June 8, 1964, Sarmiento sold the land to Pacifico Chica. On April 27, 1965, Chica mortgaged the property to DBP to secure a ₱6,000.00 loan. Chica defaulted, and DBP caused the extrajudicial foreclosure of the mortgage. At the auction sale on September 9, 1970, DBP acquired the property as highest bidder and was issued a certificate of sale on September 17, 1970, which was entered in the Book of Unregistered Property on September 23, 1970. Chica failed to redeem, and DBP consolidated its ownership.

On October 14, 1980, respondent spouses Celebrada and Abner Mangubat offered to buy the property for ₱18,599.99. DBP made a counter-offer of ₱25,500.00, which the spouses accepted, with the agreement that payment within six months would be treated as cash payment. On July 20, 1981, DBP executed a deed of absolute sale in favor of the spouses, which contained a waiver of the seller's warranty against eviction.

Thereafter, the spouses applied for an industrial tree-planting loan with DBP. DBP required them to submit a certification from the Bureau of Forest Development that the land was alienable and disposable. On October 29, 1981, however, that office certified that the property was classified as timberland and not subject to disposition. Despite this certification, DBP approved the spouses' loan application in the sum of ₱140,000.00, on the understanding that DBP would work for the release of the land by the then Ministry of Natural Resources. To secure payment, the spouses executed a real estate mortgage over the land on March 17, 1982, registered in the Registry of Deeds pursuant to Act No. 3344.

The loan was released on a staggered basis. After the spouses had received ₱118,540.00, they requested release of the remaining balance, but DBP did not act on the request, ostensibly because the land had not yet been released by the Ministry of Natural Resources. On July 7, 1983, the spouses filed a complaint against DBP in the Regional Trial Court, Naga City, seeking annulment of the deed of absolute sale on the ground that the property was timberland and therefore inalienable public domain. They alleged that DBP had acted fraudulently and in bad faith by misrepresenting itself as absolute owner and by incorporating the waiver of warranty against eviction in the deed. DBP, in its answer, maintained that it was the absolute owner having purchased the property at a valid foreclosure sale, that there was no fraud, and that the spouses had full knowledge of the extent and nature of DBP's rights. DBP further argued that annulment would prejudice it, having already released ₱118,540.00, and sought a counterclaim for payment of that amount with 15% interest plus charges.

The trial court annulled the sale and ordered DBP to return the purchase price plus interest, reimburse taxes and survey expenses, and pay damages, attorney's fees, and costs. The Court of Appeals modified by deleting the awards for damages, attorney's fees, litigation expenses, and costs, but affirmed the annulment, the return of the purchase price, and the reimbursement of taxes and survey expenses. The appellate court found that neither party had acted in bad faith. DBP's motion for reconsideration was denied, prompting the present petition.

• Validity of Title and Absence of Fraud: DBP argued that it was the absolute owner of the land, having purchased it for value at a valid auction sale pursuant to extrajudicial foreclosure, and that there was neither malice nor fraud in the sale, the terms having been mutually agreed upon by the parties.
• Spouses' Knowledge of DBP's Rights: DBP maintained that even assuming a flaw in its title, the spouses had full knowledge of the extent and nature of DBP's rights, title, and interest over the land, precluding liability.
• Prejudice from Annulment: DBP contended that annulment and return of the purchase price would redound to the spouses' benefit while prejudicing DBP, which had already released ₱118,540.00 and would be left without security for the ₱140,000.00 loan; it sought immediate payment of ₱118,540.00 with 15% interest plus charges.
• Insufficiency of Evidence for Taxes and Survey: DBP argued that the spouses merely submitted a self-prepared "list of damages" without official receipts, that the list had not been properly identified or presented, and that there was no factual or legal basis for the award of ₱11,980.00 for taxes and relocation survey expenses.
• Loan Obligation Survives Annulment: DBP asserted that the spouses should be ordered to pay their loan obligation, the mortgage contract embodying the complete terms and conditions of the loan, and that adjudication by counterclaim was proper to avoid multiplicity of suits.

• Annulment of Sale: Respondent spouses argued that the deed of absolute sale should be annulled because the object thereof was timberland, an inalienable part of the public domain, rendering the contract void ab initio.
• Fraud and Bad Faith: The spouses alleged that DBP acted fraudulently and in bad faith by misrepresenting itself as the absolute owner of the land and by incorporating the waiver of warranty against eviction in the deed of sale.
• Void Waiver of Warranty: The spouses contended that the waiver of warranty against eviction in the deed of sale was void.

• Loan Obligation: Whether respondent spouses should be ordered to pay DBP their loan obligation amounting to ₱118,540.00 due under the mortgage contract executed between them.
• Reimbursement of Purchase Price: Whether DBP should reimburse respondent spouses the purchase price of the property.
• Reimbursement of Taxes and Survey Expenses: Whether DBP should reimburse respondent spouses ₱11,980.00 for taxes and expenses for the relocation survey.

• Loan Obligation: Yes. The loan contract is entirely separate from the void sale; the invalidity of the mortgage does not extinguish the principal obligation, which remains demandable as a personal action.
• Reimbursement of Purchase Price: Yes, affirmed. The annulment of the void sale had become final, and mutual restitution was required since neither party was in bad faith.
• Reimbursement of Taxes and Survey Expenses: No. The award was deleted, the supporting "list of damages" being self-serving and unsupported by receipts or other competent proof.

• Loan Obligation: The contract of loan is entirely different and discrete from the deed of sale. Annulment of the sale does not affect the existence and demandability of the loan. Under Article 1953 of the Civil Code, one who has received money as a loan is bound to pay the creditor an equal amount. The fact that the annulment of the sale also results in the invalidity of the mortgage does not affect the validity and efficacy of the principal obligation, for even an obligation unsupported by security may be enforced by ordinary action. Where a mortgage is not valid — as where executed by one who is not the owner of the property — the principal obligation is not thereby rendered null and void; what is lost is only the right to foreclose. The mortgage contract dated March 17, 1982 embodied not only the mortgage but the complete terms and conditions of the loan, rendering introduction of the promissory note unnecessary. Furthermore, respondent Celebrada Mangubat expressly acknowledged in open court that she and her husband were indebted to DBP in the amount of ₱118,000.00, more or less — an admission requiring no further proof under Section 2, Rule 129 of the Rules of Court. Adjudication of DBP's claim by counterclaim was favored, as it avoids circuitry of action, multiplicity of suits, and unwarranted consumption of judicial time.

• Reimbursement of Purchase Price: Neither party questioned the legality or correctness of the annulment of the deed of sale, so that decreed nullification had achieved finality. The Court of Appeals found no bad faith on the part of either party, and this finding remained uncontroverted. The rule applies that where both parties are without fault, restoration of what was given by each to the other is in order. The declaration of nullity of a contract void ab initio operates to restore things to the state and condition in which they were found before execution. American jurisprudence likewise supports the principle that where a purchaser recovers purchase money from a vendor who fails to deliver title, the purchaser is entitled to interest from the time of payment. Thus, the return by DBP of the purchase price plus interest was ineluctably called for.

• Reimbursement of Taxes and Survey Expenses: Although the "list of damages" was presented and marked as Exhibit P, and admitted by the trial court as part of testimonial evidence, it was prepared extrajudicially by the spouses themselves without any supporting receipts. The list is self-serving and should have been declared inadmissible as factum probans. Actual or compensatory damages cannot be presumed but must be duly proved with a reasonable degree of certainty. A court cannot rely on speculation, conjecture, or guesswork as to the fact and amount of damages, but must depend upon competent proof. If the proof is flimsy and unsubstantial, no damages will be awarded. The list of damages, standing alone, could not constitute sufficient legal basis for the award of ₱4,000.00 and ₱7,980.00 for land taxes and relocation survey expenses, respectively.

• Mutual Restitution Upon Annulment of Void Contract — The declaration of nullity of a contract void ab initio operates to restore things to the state and condition in which they were found before execution thereof. Where both parties are without fault, restoration of what was given by each to the other is consequently in order. Applied here: since neither DBP nor the spouses acted in bad faith, DBP was required to return the purchase price with interest, and the spouses were entitled to recover the money paid on a contract whose consideration had failed.

• Separability of Loan from Mortgage and Sale — A contract of loan is entirely different and discrete from the deed of sale entered into by the same parties. The annulment of the sale does not affect the existence and demandability of the loan. Even where the mortgage securing the loan is invalid — as where the mortgagor is not the owner of the property — the principal obligation is not thereby rendered null and void. What is lost is only the right to foreclose; the mortgage deed remains evidence of a personal obligation enforceable in an ordinary action. Applied here: the spouses' loan obligation of ₱118,540.00 survived the annulment of both the sale and the mortgage, and DBP was entitled to recover it.

• Proof of Actual or Compensatory Damages — Actual or compensatory damages cannot be presumed but must be duly proved with a reasonable degree of certainty. A court cannot rely on speculation, conjecture, or guesswork as to the fact and amount of damages, but must depend upon competent proof. If the proof is flimsy and unsubstantial, no damages will be awarded. A self-serving list prepared extrajudicially by a party without supporting receipts is insufficient. Applied here: the award of ₱11,980.00 for taxes and relocation survey expenses was deleted for lack of competent proof.

• Judicial Admissions Require No Proof — Admissions made by the parties in the pleadings or in the course of the trial or other proceedings do not require proof and cannot be contradicted unless previously shown to have been made through palpable mistake. Applied here: respondent Celebrada Mangubat's testimony acknowledging indebtedness to DBP of approximately ₱118,000.00 constituted a judicial admission sufficient to sustain DBP's claim.

• "The fact that the annulment of the sale will also result in the invalidity of the mortgage does not have an effect on the validity and efficacy of the principal obligation, for even an obligation that is unsupported by any security of the debtor may also be enforced by means of an ordinary action." — This passage articulates the ratio decidendi on the separability of the loan from the void sale and mortgage, establishing that the principal obligation survives the mortgage's invalidity.

• "A contract which the law denounces as void is necessarily no contract whatever, and the acts of the parties in an effort to create one can in no wise bring about a change of their legal status. The parties and the subject matter of the contract remain in all particulars just as they did before any act was performed in relation thereto." — This defines the legal effect of a void contract and the rationale for mutual restitution, drawing on established jurisprudence.

• "Actual or compensatory damages cannot be presumed, but must be duly proved, and so proved with a reasonable degree of certainty. A court cannot rely on speculation, conjecture or guesswork as to the fact and amount of damages, but must depend upon competent proof that they have been suffered and on evidence of the actual amount thereof." — This is the canonical formulation of the evidentiary standard for actual damages, frequently cited in subsequent jurisprudence.

• "The rules on counterclaim are designed to achieve the disposition of a whole controversy of the conflicting claims of interested parties at one time and in one action, provided all parties can be brought before the court and the matter decided without prejudicing the rights of any party." — This states the policy rationale favoring adjudication of counterclaims within the same action to avoid multiplicity of suits.

• Leather Manufacturers National Bank vs. Merchants National Bank, 128 US 26 — Cited for the principle that money paid upon a representation of title or authority, where none exists, may be recovered back even absent fraud, because there is no consideration for the payment. Followed as persuasive American authority supporting mutual restitution.

• Labrador vs. De los Santos, 66 Phil. 579 (1938) — Cited for the proposition that declaration of nullity of a void contract operates to restore things to the state and condition in which they were found before execution. Followed.

• Castro vs. Orpiano, 90 Phil. 491 (1951) — Cited alongside Labrador for the same principle of restitution upon nullity. Followed.

• Ching Sui Yong vs. Intermediate Appellate Court, G.R. No. 64398, November 6, 1990, 191 SCRA 187 — Cited for the rule that actual or compensatory damages cannot be presumed but must be duly proved with a reasonable degree of certainty, and that flimsy or unsubstantial proof warrants no award. Followed.

• Compañia General de Tabacos de Filipinas vs. Jeanjaquet, 12 Phil. 195 (1908) — Cited for the principle that where a mortgage is not valid, the mortgage deed remains evidence of a personal obligation enforceable in an ordinary action. Followed.

• Article 1953, Civil Code — Provides that one who has received money as a loan is bound to pay the creditor an equal amount of the same kind and quality. Applied to sustain the spouses' obligation to repay the ₱118,540.00 released to them, notwithstanding the annulment of the sale and the invalidity of the mortgage.

• Article 2085(2), Civil Code — Identifies as a requisite of a valid mortgage that the mortgagor be the absolute owner of the property mortgaged. Applied to explain why the mortgage was invalid: the spouses, having acquired no valid title to timberland, could not validly mortgage it.

• Articles 1345, 1352, and 1353, Civil Code — Relate to simulated or false consideration in contracts. Cited in support of the principle that where the consideration of a contract is simulated or false, the principal obligation guaranteed by the mortgage is not thereby rendered null and void.

• Section 2, Rule 129, Rules of Court — Provides that admissions made by a party in pleadings or during trial do not require proof and cannot be contradicted unless previously shown to have been made through palpable mistake. Applied to uphold the binding effect of respondent Celebrada Mangubat's judicial admission of indebtedness to DBP.

Narvasa, C.J., Puno, Mendoza, and Francisco, JJ., concurred.