Genato vs. Bayhon

A deceased borrower's contractual obligation is transmissible to his heirs and subsists against his estate, even when the borrower dies pending appeal, provided the action is for recovery of money arising from contract; the heirs' liability is limited to the value of the inheritance received.

The case involves a loan transaction between petitioner William Ong Genato, the lender, and respondent Benjamin Bayhon, the borrower. On July 3, 1989, Bayhon obtained a PhP 1,000,000.00 loan from Genato, secured by a real estate mortgage over property covered by Transfer Certificate of Title (TCT) No. 38052. The property was owned in common by Bayhon and his co-heirs, as his wife Amparo Mercado had already died before either the mortgage or a subsequent dacion en pago was executed. Two civil cases arose from the dispute—one filed by the respondents seeking nullity of the dacion en pago, and another filed by the petitioner seeking specific performance of the same instrument—which were consolidated before the RTC.

On July 3, 1989, respondent Benjamin Bayhon obtained a loan of PhP 1,000,000.00 from petitioner William Ong Genato. The loan carried interest at 5% per month with an additional 3% penalty in case of nonpayment. To secure the loan, Bayhon executed a Deed of Real Estate Mortgage over a property covered by Transfer Certificate of Title (TCT) No. 38052. Bayhon alleged that the execution of the mortgage was conditioned upon Genato's personal assurance that the instrument would serve only as a private memorandum of indebtedness and would neither be notarized nor enforced according to its tenor.

On October 21, 1989, a dacion en pago covering the same lot was allegedly executed by Bayhon and his wife in favor of Genato. The instrument was inscribed and recorded with the Registry of Deeds of Quezon City. Bayhon, however, assailed the dacion en pago as a forgery, claiming that neither he nor his wife had executed it. His wife, Amparo Mercado, had in fact died three years before the purported execution of the instrument. Genato denied the claim regarding the wife's death and alleged that on the date the real estate mortgage was signed, Bayhon introduced a woman to him as his wife.

Two civil cases arose from the dispute. On October 18, 1990, Bayhon and his co-heirs filed Civil Case No. Q-90-7012 before the RTC, Quezon City, Branch 76, seeking the declaration of nullity of the dacion en pago. On December 20, 1990, Genato filed Civil Case No. Q-90-7551 before the RTC, Quezon City, Branch 79, for specific performance, praying that Bayhon be ordered to execute the final deed of sale and transfer possession of the lot subject of the dacion en pago. The two cases were consolidated and transferred to RTC, Quezon City, Branch 215.

The trial court found that Bayhon obtained the PhP 1,000,000.00 loan and that the parties had novated the agreement, deducing novation from subsequent payments made by Bayhon after the purported execution of the dacion en pago: PhP 27,870.00 on March 23, 1990, PhP 55,000.00 on March 26, 1990, and PhP 20,000.00 on November 16, 1990. The trial court likewise found that at the time of the execution of the real estate mortgage, Bayhon's wife was already dead, and that the property covered by TCT No. 38052 was owned in common by the respondents and not by Bayhon alone. It concluded that the lot could not have been validly mortgaged by Bayhon alone, and that the deed of mortgage was not enforceable and served only as evidence of the obligation. The trial court upheld Bayhon's liability and ordered payment of PhP 5,647,130.00, which included the principal, the stipulated 5% monthly interest, and the penalty, calculated from the date of demand until the date of judgment.

On appeal, the Court of Appeals reversed the trial court. It held that both the real estate mortgage and the dacion en pago were void, ruling that at the time of their execution on July 3, 1989 and October 21, 1989, respectively, Bayhon's wife was already dead and could not have participated in the execution of either document. The appellate court struck down both instruments as simulated or fictitious contracts under Article 1409 of the Civil Code. It further held that while the principal obligation was valid, the death of Bayhon on March 28, 2002, while the case was pending, extinguished it, and that the heirs could not be ordered to pay the debts left by the deceased.

• Liability for the Loan: Petitioner argued that Benjamin Bayhon is liable for the amount of PhP 5,647,130.00 in principal and interest as of October 3, 1997, with 5% monthly interest thereafter until full payment.
• Validity of the Mortgage and Dacion en Pago: Petitioner contended that the Court of Appeals erred in declaring the Real Estate Mortgage dated July 3, 1989 and the Dacion en Pago dated October 21, 1989 null and void.

• Forgery of the Dacion en Pago: Respondent Benjamin Bayhon alleged that the dacion en pago was a forgery and that neither he nor his wife, who had died three years earlier, had executed it.
• Conditional Nature of the Mortgage: Respondent maintained that the execution of the Deed of Real Estate Mortgage was conditioned upon the petitioner's personal assurance that the instrument would serve only as a private memorandum of indebtedness and would neither be notarized nor enforced according to its tenor.

• Validity of the Dacion en Pago and Real Estate Mortgage: Whether the dacion en pago dated October 21, 1989 and the real estate mortgage dated July 3, 1989 are valid or null and void.
• Transmissibility of the Obligation: Whether the loan obligation of Benjamin Bayhon subsists despite his death pending appeal, and whether his estate may be held liable therefor.
• Stipulated Interest Rate: Whether the stipulated interest of 5% per month, or 60% per annum, is enforceable.

• Validity of the Dacion en Pago and Real Estate Mortgage: No. Both instruments are void as simulated or fictitious contracts under Article 1409 of the Civil Code, because Bayhon's wife was already dead at the time of their purported execution and could not have participated therein.
• Transmissibility of the Obligation: Yes. The obligation subsists against the estate of the deceased Benjamin Bayhon. Under Article 1311 of the Civil Code, contractual rights and obligations are transmissible to the successors, and the heirs are liable only to the extent of the value of the inheritance received.
• Stipulated Interest Rate: No. The stipulated interest of 5% per month, or 60% per annum, is unconscionable and cannot be enforced. The rate is reduced to 12% per annum, calculated from the date of extrajudicial demand on October 3, 1989.

• Validity of the Dacion en Pago and Real Estate Mortgage: The evidence established that at the time the dacion en pago and real estate mortgage were allegedly signed by Bayhon's wife, she was already dead. This factual finding was deemed conclusive and not reversible. A contract where a deceased person is made to appear as a party is absolutely simulated or fictitious. Article 1409 of the Civil Code expressly declares absolutely simulated or fictitious contracts inexistent and void from the beginning. These contracts cannot be ratified, and the right to set up the defense of illegality cannot be waived. Accordingly, both instruments were struck down as void.

• Transmissibility of the Obligation: As a general rule, obligations derived from a contract are transmissible. Article 1311, paragraph 1 of the Civil Code provides that contracts take effect between the parties, their assigns and heirs, except where the rights and obligations are not transmissible by their nature, by stipulation, or by provision of law; the heir is not liable beyond the value of the property received from the decedent. Articles 774 and 776 of the Civil Code confirm that succession transmits property, rights, and obligations not extinguished by death. Relying on Estate of Hemady vs. Luzon Surety Co., Inc., the Court emphasized that heirs succeed not only to the rights of the deceased but also to his obligations, reflecting the progressive depersonalization of patrimonial rights and duties. While Bayhon could no longer be personally compelled to pay, the debt subsisted against his estate. No property or portion of the inheritance may be transmitted to the heirs unless the debt has first been satisfied. Rule 3, Section 20 of the Rules of Civil Procedure governs the procedure: when the action is for recovery of money arising from contract and the defendant dies before entry of final judgment, the action shall not be dismissed but shall continue until entry of final judgment, and a favorable judgment shall be enforced as a claim against the estate of the deceased.

• Stipulated Interest Rate: The interest rate of 5% per month, equivalent to 60% per annum, was found unconscionable and unenforceable. Applying the formula established in Eastern Shipping Lines vs. Court of Appeals, the rate was fixed at 12% per annum, calculated from October 3, 1989, the date of extrajudicial demand. After deducting partial payments of PhP 27,870.00, PhP 55,000.00, and PhP 20,000.00 from the PhP 1,000,000.00 principal, leaving a balance of PhP 897,130.00, and adding 12% per annum interest over 20 years amounting to PhP 2,153,552.00, the total obligation was computed at PhP 3,050,682.00.

• Transmissibility of Obligations — Under Article 1311 of the Civil Code, contractual rights and obligations are transmissible to the successors as a general rule, barring those rare cases where the obligation is strictly personal (contracted intuitu personae). The heir is not liable beyond the value of the property received from the decedent. The Court applied this doctrine by holding that although Benjamin Bayhon died pending appeal, his loan obligation subsisted against his estate, and the heirs' liability was limited to the extent of the inheritance received.

• Simulated or Fictitious Contracts — Article 1409 of the Civil Code declares absolutely simulated or fictitious contracts inexistent and void from the beginning. Such contracts cannot be ratified, and the right to set up the defense of illegality cannot be waived. The Court applied this doctrine to strike down both the dacion en pago and the real estate mortgage, because Bayhon's wife, who was made to appear as a co-signor, was already dead at the time of execution.

• Unconscionable Interest Rates — A stipulated interest rate of 5% per month, or 60% per annum, is unconscionable and cannot be enforced. The Court reduced the rate to 12% per annum, following the formula in Eastern Shipping Lines vs. Court of Appeals, calculated from the date of extrajudicial demand.

• Survival of Actions for Recovery of Money — Under Rule 3, Section 20 of the Rules of Civil Procedure, when the action is for recovery of money arising from contract and the defendant dies before entry of final judgment, the action shall not be dismissed but shall continue until entry of final judgment. A favorable judgment shall be enforced in the manner provided for prosecuting claims against the estate of a deceased person.

• "While he may no longer be compelled to pay the loan, the debt subsists against his estate. No property or portion of the inheritance may be transmitted to his heirs unless the debt has first been satisfied." — This passage articulates the ratio decidendi on the transmissibility of obligations: the death of the debtor does not extinguish the debt, which continues to burden the estate before any inheritance passes to heirs.

• "Under our law, therefore, the general rule is that a party's contractual rights and obligations are transmissible to the successors." — Quoted from Estate of Hemady vs. Luzon Surety Co., Inc., this formulation of the transmissibility principle reflects the progressive depersonalization of patrimonial rights and duties, and is frequently cited in subsequent jurisprudence on succession and obligations.

• "The following contracts are inexistent and void from the beginning: ... (2) Those which are absolutely simulated or fictitious." — This is the text of Article 1409(2) of the Civil Code as quoted in the decision, providing the statutory basis for nullifying the dacion en pago and real estate mortgage where a deceased person was made to appear as a party.

• Estate of Hemady vs. Luzon Surety Co., Inc., 100 Phil. 388 (1958) — Controlling precedent on the transmissibility of contractual obligations to heirs. The Court relied on this case to hold that heirs succeed not only to the rights of the deceased but also to his obligations, and that the general rule is that a party's contractual rights and obligations are transmissible to successors, barring strictly personal obligations.

• Eastern Shipping Lines vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Applied as the standard for computing the proper rate of interest in loan transactions. The Court used the 12% per annum formula from this case to replace the unconscionable 5% monthly stipulated interest.

• Imperial vs. Jaucian, G.R. No. 149004, April 14, 2004, 427 SCRA 517 — Cited for the proposition that a stipulated interest rate of 5% per month, or 60% per annum, is unconscionable and cannot be enforced.

• Article 1311, Civil Code — Provides that contracts take effect between the parties, their assigns and heirs, except where rights and obligations are not transmissible by their nature, stipulation, or provision of law; the heir is not liable beyond the value of the property received from the decedent. Applied to hold that Bayhon's loan obligation was transmissible to his estate despite his death pending appeal.

• Articles 774 and 776, Civil Code — Define succession as the transmission of property, rights, and obligations to the extent of the value of the inheritance, and provide that the inheritance includes all property, rights, and obligations not extinguished by death. Cited to confirm that heirs succeed to both rights and obligations of the decedent.

• Article 1409, Civil Code — Enumerates contracts that are inexistent and void from the beginning, including absolutely simulated or fictitious contracts. Applied to declare the dacion en pago and real estate mortgage void, because Bayhon's deceased wife was made to appear as a co-signor.

• Rule 3, Section 20, Rules of Civil Procedure — Governs the procedure when the action is for recovery of money arising from contract and the defendant dies before entry of final judgment, providing that the action shall not be dismissed but shall continue until entry of final judgment, with the favorable judgment enforced as a claim against the estate.

Antonio T. Carpio, Renato C. Corona, Teresita J. Leonardo-De Castro, and Lucas P. Bersamin concurred in the decision. No separate concurring opinions were noted.