Vitug vs. Abuda

A contract executed in violation of a restriction annotated on the owner's title is not void ab initio but merely voidable at the option of the person in whose favor the restriction was made; absent any action by that person, the contract remains binding between the parties who executed it, and the mortgagor who voluntarily executed the contract and availed of its benefits may not invoke such irregularity to escape his contractual obligations. Corollarily, iniquitous or unconscionable interest rates are illegal and void for being against public morals, and courts may equitably reduce them.

Evangeline A. Abuda was the lender; Florante Vitug, together with his wife Narcisa, was the borrower. The security was a parcel of land in the Tondo Foreshore area, along R-10, Block A-50-3, Del Pan to Kagitingan Streets, Tondo, Manila, which Vitug held under a conditional Contract to Sell with the National Housing Authority and which was later covered by Transfer Certificate of Title No. 234246 in his name. That title carried an annotation, inscribed on June 25, 1997, restricting the vendee from selling, encumbering, mortgaging, leasing, sub-letting, or otherwise disposing of the lot or right therein without the vendor's written consent — a restriction that formed part of the contract between the NHA and Vitug. The regulatory backdrop includes the suspension of the implementation of the Usury Law ceiling on interest rates effective January 1, 1983, which left parties free to stipulate interest rates subject to the limits of Article 1306 of the Civil Code.

On March 17, 1997, Evangeline A. Abuda extended a loan of P250,000.00 to spouses Florante and Narcisa Vitug. As security, Florante mortgaged to Abuda a parcel of land in the Tondo Foreshore area, along R-10, Block A-50-3, Del Pan to Kagitingan Streets, Tondo, Manila. The property was then the subject of a conditional Contract to Sell between the National Housing Authority and Florante, and the mortgage deed recited that Florante, with his wife's full consent, mortgaged the property for P250,000.00, payable within six months with ten percent (10%) agreed interest per month, and that upon consummation and completion of the NHA sale, the title award would be received by the mortgagee by virtue of a Special Power of Attorney executed in her favor.

On November 17, 1997, the parties executed a "restructured" mortgage contract over the same property to secure P600,000.00, representing the original P250,000.00 loan, additional loans, and subsequent credit accommodations given by Abuda to Vitug, with interest of five percent (5%) per month. By then, the property was covered by Transfer Certificate of Title No. 234246 under Vitug's name, which carried an annotated restriction, Entry No. 4519/V-013/T-234246, providing that the vendee shall not sell, encumber, mortgage, lease, sub-let, or in any manner alter or dispose of the lot or right therein, in whole or in part, without obtaining the written consent of the vendor. The November 17, 1997 contract was signed before a notary public by Vitug, his wife Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and Emily Vitug.

On November 25, 1997, NHA General Manager Mariano M. Pineda issued a Permit to Mortgage in favor of Vitug, granting his request dated November 20, 1997 for permission to mortgage Commercial Lot 5, Block 1, Super Block 3, Area I, Tondo Foreshore Estate Management Project covered by TCT No. 234246, subject to three conditions: (a) the mortgage contract must provide that in the event of foreclosure, the NHA shall be notified of the date, time, and place of the auction sale so that it can participate in the foreclosure sale; (b) the mortgage contract must be submitted to the NHA for verification and final approval; and (c) the permit shall be good only for ninety (90) days from date of receipt. The November 17, 1997 mortgage contract itself contained references to these conditions, stating that in case of foreclosure the NHA shall be duly notified of the matter, and that the contract shall be submitted to the NHA for verification and final approval in accordance with the NHA permit to mortgage the property.

Spouses Vitug failed to pay their loans despite Abuda's demands. On November 21, 2003, Abuda filed a Complaint for Foreclosure of Property before the Regional Trial Court of Manila. In his Answer and Pre-trial Brief, Vitug raised the lack of the NHA's written consent to the mortgage and the property's alleged exemption from execution as a family home, invoking the Memorandum of Encumbrances annotated on his title and praying that the mortgage be declared void. The trial court and the Court of Appeals found no evidence that Vitug was defrauded, and held that his consent to the November 17, 1997 mortgage was not vitiated, he having voluntarily signed it in the presence of a notary public, his wife, and other witnesses. Both lower courts likewise found that the P600,000.00 under the restructured contract represented the initial P250,000.00 loan and the subsequent loan amounts actually released to Vitug, and that Vitug had failed to raise a legitimate and lawful ground to bar Abuda from asserting her right under the law.

• Free Disposal and NHA Consent: Petitioner argued that not all the requisites of a valid mortgage are present, since a mortgagor must have free disposal of the mortgaged property; the existence of a restriction clause in his title meant that he did not have free disposal of it, as the clause did not allow him to mortgage the property without the NHA's approval, and since the NHA never gave its consent, the mortgage contract between him and respondent is invalid.
• Non-Compliance with the Permit's Conditions: Petitioner insisted that the Permit to Mortgage cannot be treated as consent by the NHA because of respondent's failure to comply with its conditions — there was neither written consent nor approval by the NHA of the mortgage contracts, and the mortgage contract was not submitted to the NHA for verification and final approval.
• Family Home Exemption: Petitioner contended that the property was constituted as a family home before its mortgage and should therefore be exempt from execution, forced sale, or attachment under Article 155 of the Family Code.
• Fraud and Vitiated Consent: On appeal to the Court of Appeals, Vitug contended that the real estate mortgage contract he and Abuda entered into was void on the grounds of fraud and lack of consent under Articles 1318, 1319, and 1332 of the Civil Code, alleging that he was only tricked into signing the mortgage contract, whose terms he did not really understand, such that his consent was vitiated.

• Scope of the Issue: Respondent argued that the only issue in this case should be the validity of the real estate mortgage executed by petitioner in her favor, since petitioner raised other issues, such as the alleged lack of written consent by the National Housing Authority and the property's exemption from execution, only in his Motion for Reconsideration before the Court of Appeals.
• Permit to Mortgage as Consent: Respondent argued that the National Housing Authority issued a Permit to Mortgage the property, which was formally offered in evidence before the Regional Trial Court as Exhibit "E"; that the NHA even accepted respondent's personal checks to settle petitioner's mortgage obligations to the NHA; and that the NHA would have already foreclosed petitioner's property if not for the loan that respondent extended to petitioner.

• Propriety of Raising the NHA Consent and Family Home Issues: Whether petitioner Florante Vitug may raise in this Petition issues regarding the National Housing Authority's alleged lack of consent to the mortgage, as well as the exemption of his property from execution.
• Effect of the Restriction Clause on the Mortgage's Validity: Whether the restriction clause in petitioner's title rendered invalid the real estate mortgage he and respondent Evangeline Abuda executed.
• Family Home Exemption: Whether petitioner's property is a family home that is free from execution, forced sale, or attachment under the Family Code.

• Propriety of Raising the NHA Consent and Family Home Issues: Yes. Although due process dictates that arguments not raised in the trial court may not be considered by the reviewing court, the records show that petitioner mentioned these issues as early as in his Answer to respondent's Complaint and in his Pre-trial Brief, and the trial court acknowledged them.
• Effect of the Restriction Clause on the Mortgage's Validity: No. All the elements of a valid mortgage contract under Article 2085 of the Civil Code were present, and contracts entered into in violation of restrictions on a property owner's rights are not always void ab initio but merely voidable at the option of the person in whose favor the restrictions were made — here, the National Housing Authority.
• Family Home Exemption: No. Article 155 of the Family Code expressly excepts from the family home's exemption from execution, forced sale, or attachment those debts secured by mortgages on the premises before or after the constitution of the family home.
• Unconscionable Interest Rates: Yes. The Court of Appeals correctly found the stipulated rates of 5% to 10% per month unconscionable; the rate was further reduced to 6% per annum from July 1, 2013 until full satisfaction in accordance with Nacar vs. Gallery Frames.

• Propriety of Raising the NHA Consent and Family Home Issues: Due process dictates that arguments not raised in the trial court may not be considered by the reviewing court. The records, however, showed that petitioner had mentioned the lack of the NHA's consent and the property's alleged exemption from execution as early as in his Answer to respondent's Complaint and in his Pre-trial Brief, and the trial court had acknowledged these issues, although it found that his defenses based on these grounds could not be given credence. The Court therefore held that petitioner may raise these issues in his Petition, reserving for separate determination whether the arguments, seasonably raised, were valid.

• Effect of the Restriction Clause on the Mortgage's Validity: For a mortgage contract to be valid, Article 2085 of the Civil Code requires that it be constituted to secure the fulfillment of a principal obligation; that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; and that the persons constituting the pledge or mortgage have free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. Petitioner, who held under his name a transfer certificate of title to the property, mortgaged it to respondent to secure the payment of his P600,000.00 loan. His claims that he borrowed only P250,000.00 and was made to sign another mortgage contract whose terms he did not agree to were already found by the trial court and the Court of Appeals to be unsupported by evidence; his consent to the November 17, 1997 mortgage was not vitiated, as he voluntarily signed it in the presence of a notary public, his wife, and other witnesses. The P600,000.00 represented the initial loan of P250,000.00 and the subsequent loan amounts found to have been actually released to him. As a general rule, findings of fact of the lower court and of the Court of Appeals are not reviewable and are binding upon the Court, and petitioner failed to show any ground to review the finding that he mortgaged his property in consideration of a loan amounting to P600,000.00. Petitioner's undisputed title to and ownership of the property was sufficient to give him free disposal of it; as owner, he had the right to enjoy all attributes of ownership, including jus disponendi, or the right to encumber, alienate, or dispose of his property "without other limitations than those established by law" under Article 428 of the Civil Code. The NHA restrictions were provisions in a contract it executed with petitioner, binding him to certain conditions before transferring or encumbering the property, but these restrictions did not divest him of his ownership rights; they were mere burdens or limitations on his jus disponendi, and when annotated on the title, served as notice to the whole world that the NHA had claims over the property which it may enforce against others. Contracts entered into in violation of restrictions on a property owner's rights do not always have the effect of making them void ab initio. As clarified in Municipality of Camiling vs. Lopez, void acts declared in Article 4 of the Old Civil Code refer to those made in violation of law, but not all such acts are void from the beginning; void acts may be those that are ipso facto void and those which are merely voidable. There, the lease contract was not treated as ipso facto void despite the lack of the provincial governor's approval, because aside from that lack, the contract had no badge of illegality and could have been ratified; it was merely voidable at the option of the party granted the right to invoke its invalidity. The same doctrine was repeated in Sarmiento vs. Salud, where the Court did not declare void the mortgage and foreclosure sale of a property subject to a 25-year prohibition against resale, but instead recognized the People's Homesite and Housing Corporation's right to cause the annulment of the contract, since the condition was made in its favor. Thus, contracts that contain provisions in favor of one party may be void ab initio or voidable: contracts that lack consideration, those that are against public order or public policy, and those attended by illegality or immorality are void ab initio, while contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all the elements of a valid contract are merely voidable by the person in whose favor the conditions or limitations are made. The mortgage contract here contained all the elements of a valid contract of mortgage, and the trial court and the Court of Appeals found no irregularity in its execution; there was no showing that it was attended by fraud, illegality, immorality, force or intimidation, and lack of consideration. At most, the restrictions made the contract voidable by the person in whose favor they were made — the NHA — and petitioner had no actionable right or cause of action based on those restrictions. Having the right to assail the validity of the mortgage contract based on violation of the restrictions, the NHA may seek its annulment; without any action from the NHA, the rights and obligations, including the right to foreclose the property in case of non-payment of the secured loan, remained enforceable between the parties who executed the mortgage contract. The voidable nature of such contracts implies that the person in whose favor the restrictions were made has two options: it may waive its rights accruing from the restrictions, in which case the duly executed subsequent contract remains valid, or it may assail the subsequent contract based on the breach of restrictions imposed in its favor. In Sarmiento, the Court recognized that the right to waive follows from the right to invoke any violation of conditions under the contract, and that only the person with the right to invoke the violation has the cause of action for annulment; the validity or invalidity of the contract is dependent on whether that person will invoke the right. There, there was effectively a waiver on the part of the PHHC when it did not assail the validity of the mortgage. Here, there was no showing that the NHA assailed the validity of the mortgage contract on the ground of violation of the restrictions on petitioner's title; the validity of the mortgage based on the restrictions was not an issue between the parties, and petitioner had no cause of action against respondent based on those restrictions. In any case, there was at least substantial compliance with the consent requirement given the NHA's issuance of a Permit to Mortgage, and the November 17, 1997 mortgage contract contained references to the conditions imposed by the NHA. Assuming there was non-compliance with the conditions set forth in the Permit, petitioner could not blame respondent: the restrictions were part of the contract between the NHA and petitioner, and it was petitioner, not respondent, who had the obligation to notify and obtain the NHA's consent within the prescribed period before sale or encumbrance of the property. Petitioner could not invoke his own mistake to assail the validity of a contract he voluntarily entered into.

• Family Home Exemption: Even though petitioner's property had been constituted as a family home, it was not exempt from execution. Article 155 of the Family Code explicitly provides that the family home shall be exempt from execution, forced sale, or attachment except, among others, for debts secured by mortgages on the premises before or after such constitution. Since petitioner's property was voluntarily used by him as security for a loan he obtained from respondent, it may be subject to execution and attachment.

• Unconscionable Interest Rates: Even if the mortgage contract were illegal or wrongful, neither of the parties may assail the contract's validity as against the other because they were equally at fault, under the principle of in pari delicto as embodied in Articles 1411 and 1412 of the Civil Code. Under this principle, courts shall not aid parties in their illegal acts; the court shall leave them as they are. It is an equitable principle that bars parties from enforcing their illegal acts, assailing the validity of their acts, or using its invalidity as a defense. In Batarra vs. Marcos, a person could not enforce a promise to marry based on the consideration of "carnal connection," and neither party could recover because the acts were common to both. In Bough vs. Cantiveros, the Court refused to enforce in favor of the guilty parties a contract of sale that was not only simulated but also executed to defeat any attempt by a husband to recover properties from his wife. In Liguez vs. Court of Appeals, while the principle of in pari delicto was found inapplicable given the claimant's minority, the Court had occasion to say that the parties were barred "from pleading the illegality of the bargain either as a cause of action or as a defense." In Villegas vs. Rural Bank of Tanjay, Inc., the petitioners were not entitled to relief because they did not come to court with clean hands, having readily participated in a ploy to circumvent the Rural Banks Act. The principle admits exceptions: it does not apply when the result of its application is clearly against statutory law, morals, good customs, and public policy, as in Philippine Banking Corporation vs. Lui She, where the Court refused to apply in pari delicto because doing so would have validated a 50-year lease with option to buy executed by a Filipino and a Chinese citizen and defeated the policy to conserve land in favor of Filipinos. Petitioner here did not come to the Court with clean hands: he was aware of the restrictions in his title when he executed the loan and mortgage contracts with respondent, voluntarily executed the contracts despite this knowledge, and availed himself of the benefits of the loan and mortgage contract. He could not now assail the validity of the mortgage contract to escape the obligations incurred because of it. He also failed to show that upholding the validity of the mortgage contract would be contrary to law, morals, good customs, and public policy; his contract with the NHA was not a law prohibiting the transfer or encumbrance of his property, did not render subsequent transactions a violation of morals, good customs, and public policy, and violation of its terms did not render subsequent transactions void ab initio — it merely provided the NHA with a cause of action to annul subsequent transactions involving the property. On the interest rates, the Court of Appeals correctly found that the rates of 5% or 10% per month imposed on petitioner's loan were unconscionable. Parties are free to stipulate interest rates in their loan contracts in view of the suspension of the implementation of the Usury Law ceiling on interest effective January 1, 1983, but this freedom is granted under the assumption of a perfectly competitive market for loans, equal footing during bargaining, and equal control over the interest rate. The premise is not always true, and there are instances when the state must step in to correct market imperfections resulting from unequal bargaining positions. Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and welfare. In stipulating interest rates, parties must ensure that the rates are neither iniquitous nor unconscionable; iniquitous or unconscionable interest rates are illegal and, therefore, void for being against public morals. The lifting of the ceiling on interest rates may not be read as granting lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. Voluntariness of stipulations on interest rates is not sufficient to make the interest rates valid. In Castro vs. Tan, the Court held that the imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust, tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man, with no support in law, in principles of justice, or in the human conscience. Thus, even if the parties voluntarily agree to an interest rate, courts are given the discretionary power to equitably reduce it if it is later found to be iniquitous or unconscionable, approximating what the prevailing market rate would have been had the parties had equal bargaining power. An interest rate is not inherently conscionable or unconscionable; rates become unconscionable in light of the context in which they were imposed or applied. In Medel vs. Court of Appeals, the stipulated interest of 5.5% or 66% per annum was unconscionable and contrary to morals, was declared void, and was reduced to 1% per month or 12% per annum; the Court likewise ruled in Ruiz vs. Court of Appeals, Castro vs. Tan, Menchavez vs. Bermudez, and Svendsen vs. People that interest rates of 3%, 5%, and 10% per month were unconscionable, justifying reduction to 12% per annum. On the other hand, in Toledo vs. Hyden, despite rulings that interest rates of 3% and 5% per month are unconscionable, the Court found the interest rate of 6% to 7% per month not unconscionable, noting that the borrower was not in dire need of money when she obtained the loan, implying that the rates were agreed upon on equal footing, and that it was the borrower who was guilty of inequitable acts, having benefited from the loans for years before questioning the rate. Under the circumstances of this case, the Court found no reason to uphold the stipulated interest rates of 5% to 10% per month: petitioner obtained the loan out of extreme necessity, the property would have been earlier foreclosed by the NHA if not for the loan, it would be unjust to impose a heavier burden upon petitioner who would already be losing his and his family's home, and respondent would not be unjustly deprived if the interest rate is reduced since she still has the right to foreclose the property. The Court affirmed the Court of Appeals' reduction of the interest rate to 1% per month or 12% per annum, but modified the rates in accordance with the guidelines set forth in Nacar vs. Gallery Frames, under which the rate of legal interest, when the judgment awarding a sum of money becomes final and executory, shall be 6% per annum from such finality until satisfaction, this interim period being deemed equivalent to a forbearance of credit. Accordingly, the interest rate for petitioner's loan was further reduced to 6% per annum from July 1, 2013 until full satisfaction.

• Voidable vs. Void ab initio Contracts in Violation of Annotated Restrictions — Contracts entered into in violation of restrictions on a property owner's rights do not always have the effect of making them void ab initio. Contracts that lack consideration, those that are against public order or public policy, and those attended by illegality or immorality are void ab initio; contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all the elements of a valid contract are merely voidable by the person in whose favor the conditions or limitations are made. The Court applied this doctrine to hold that the NHA restriction did not render the Vitug–Abuda mortgage void, but at most made it voidable at the option of the NHA, which never assailed it; absent such action, the mortgage remained binding between the parties.

• Jus Disponendi and Annotated Restrictions — Under Article 428 of the Civil Code, the owner has the right to enjoy and dispose of a thing without other limitations than those established by law. Annotated restrictions imposed by a vendor such as the NHA do not divest the owner of ownership rights; they are mere burdens or limitations on his jus disponendi, and when annotated on the title, serve as notice to the whole world that the NHA has claims over the property which it may enforce against others. Petitioner's undisputed title and ownership were sufficient to give him free disposal of the property for purposes of Article 2085.

• Two Options of the Beneficiary of a Restriction — The voidable nature of contracts entered into in violation of restrictions or conditions implies that the person in whose favor the restrictions were made has two options: (1) waive its rights accruing from such restrictions, in which case the duly executed subsequent contract remains valid; or (2) assail the subsequent contract based on the breach of restrictions imposed in its favor. Only the person with the right to invoke the violation has the cause of action for annulment, and the validity or invalidity of the contract depends on whether that person will invoke the right.

• In Pari Delicto — Embodied in Articles 1411 and 1412 of the Civil Code, the principle provides that when the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract or demand the performance of the other's undertaking. Courts shall not aid parties in their illegal acts and shall leave them as they are; the principle bars parties from enforcing their illegal acts, assailing the validity of their acts, or using its invalidity as a defense. It admits exceptions and does not apply when the result of its application is clearly against statutory law, morals, good customs, and public policy. Applied here, petitioner, who was aware of the restrictions when he executed the contracts and who availed himself of the loan's benefits, did not come to court with clean hands and could not assail the mortgage to escape his obligations.

• Unconscionable Interest Rates — Iniquitous or unconscionable interest rates are illegal and, therefore, void for being against public morals. Although parties are free to stipulate interest rates following the suspension of the Usury Law ceiling effective January 1, 1983, that freedom assumes equal bargaining positions and a competitive loan market; Article 1306 of the Civil Code limits the freedom to contract to promote public morals, safety, and welfare. Voluntariness of the stipulation is not sufficient to make the rate valid. Courts are given the discretionary power to equitably reduce an unconscionable rate, approximating what the prevailing market rate would have been under the circumstances had the parties had equal bargaining power. An interest rate is not inherently conscionable or unconscionable; it becomes unconscionable in light of the context in which it was imposed or applied.

• Family Home Exemption — Under Article 155 of the Family Code, the family home is exempt from execution, forced sale, or attachment except for, among others, debts secured by mortgages on the premises before or after the constitution of the family home. A property voluntarily used as security for a loan may thus be subject to execution and attachment notwithstanding its constitution as a family home.

• "Parties who have validly executed a contract and have availed themselves of its benefits may not, to escape their contractual obligations, invoke irregularities in its execution to seek its invalidation." — This opening statement of the ponencia states the core ratio decidendi of the case, framing the entire disposition against petitioner's attempt to escape foreclosure by impugning the mortgage's execution.

• "Contracts that only subject a property owner's property rights to conditions or limitations but otherwise contain all the elements of a valid contract are merely voidable by the person in whose favor the conditions or limitations are made." — This is the canonical formulation of the voidable-versus-void ab initio distinction applied to contracts executed in violation of annotated restrictions, and is the doctrinal centerpiece of the decision.

• "The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man." — Quoted from Castro vs. Tan, this passage supplies the standard for invalidating and equitably reducing stipulated interest rates, and is the formulation the Court relied upon in reducing the rate to 6% per annum.

• "Under this principle, courts shall not aid parties in their illegal acts. The court shall leave them as they are." — This states the operational effect of the principle of in pari delicto under Articles 1411 and 1412 of the Civil Code, which the Court applied to bar petitioner from assailing the validity of the mortgage he voluntarily executed.

• Municipality of Camiling vs. Lopez, 99 Phil. 187 (1956) — Controlling precedent for the rule that contracts entered into in violation of restrictions or limitations on a party's power are not always void ab initio but may be merely voidable; the Court relied on it to characterize the Vitug–Abuda mortgage as voidable at the NHA's option.

• Sarmiento vs. Salud, 150-A Phil. 566 (1972) — Followed and quoted at length; recognized that only the party in whose favor a condition was made has the cause of action for annulment, and that the beneficiary's failure to assail the contract amounts to a waiver, leaving the contract valid between the parties who executed it.

• Castro vs. Tan, 620 Phil. 239 (2009) — Quoted for the ruling that an unconscionable rate of interest, even if knowingly and voluntarily assumed, is immoral and unjust and has no support in law, justice, or human conscience.

• Medel vs. Court of Appeals, 359 Phil. 820 (1998) — Cited as the leading example of a stipulated interest of 5.5% or 66% per annum being declared unconscionable and reduced to 1% per month or 12% per annum.

• Toledo vs. Hyden, 652 Phil. 70 (2010) — Distinguished; the Court there found a 6% to 7% monthly interest rate not unconscionable because the borrower was not in dire need of money and did not come to court with clean hands, unlike the petitioner here who obtained the loan out of extreme necessity.

• Nacar vs. Gallery Frames, G.R. No. 189871, August 13, 2013, 703 SCRA 439 — Cited for the guidelines on the award of interest, pursuant to which the Court further reduced the interest on the loan to 6% per annum from July 1, 2013 until full satisfaction.

• Villegas vs. Rural Bank of Tanjay, Inc., 606 Phil. 427 (2009) — Cited for the application of in pari delicto, where parties who participated in a ploy to circumvent the Rural Banks Act were denied affirmative relief against each other.

• Philippine Banking Corporation vs. Lui She, 129 Phil. 526 (1967) — Cited as an exception to in pari delicto, where the principle was not applied because doing so would have defeated the policy to conserve land in favor of Filipinos.

• Batarra vs. Marcos, 7 Phil. 156 (1906) — Cited as an early application of in pari delicto, denying recovery to parties to a promise to marry based on the consideration of "carnal connection."

• Bough vs. Cantiveros, 40 Phil. 210 (1919) — Cited for the refusal to enforce in favor of guilty parties a simulated contract of sale executed to defeat a husband's attempt to recover properties from his wife.

• Liguez vs. Court of Appeals, 102 Phil. 577 (1957) — Cited for the statement that parties are barred from pleading the illegality of the bargain either as a cause of action or as a defense, although in pari delicto was held inapplicable there because of the claimant's minority.

• Article 2085, Civil Code — Enumerates the essential requisites of contracts of pledge and mortgage: that they be constituted to secure the fulfillment of a principal obligation; that the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged; and that the persons constituting the pledge or mortgage have free disposal of their property, and in the absence thereof, that they be legally authorized for the purpose. The Court applied this provision to hold that all the elements of a valid mortgage were present, petitioner having held title in his own name and having free disposal of the property.

• Article 428, Civil Code — Provides that the owner has the right to enjoy and dispose of a thing without other limitations than those established by law. The Court invoked this provision to hold that petitioner's ownership and title gave him free disposal of the property, and that the NHA restrictions were mere burdens on his jus disponendi rather than divestments of ownership.

• Article 1306, Civil Code — Limits the contracting parties' freedom to establish stipulations to those not contrary to law, morals, good customs, public order, or public policy. The Court used this provision to justify judicial intervention in correcting market imperfections and reducing unconscionable interest rates.

• Articles 1411 and 1412, Civil Code — Codify the principle of in pari delicto: when the nullity proceeds from the illegality of the cause or object of the contract and both parties are at fault, neither may recover what he has given or demand the performance of the other's undertaking. The Court applied these provisions to bar petitioner from assailing the mortgage's validity as a defense.

• Article 1397, Civil Code — Provides that the action for annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily, but that persons who are capable cannot allege the incapacity of those with whom they contracted, nor can those who exerted intimidation, violence, or undue influence or employed fraud or caused mistake base their actions upon these flaws. Cited in relation to the voidable nature of the mortgage and the proper party to assail it.

• Article 155, Family Code — Provides that the family home shall be exempt from execution, forced sale, or attachment except for non-payment of taxes, debts incurred prior to the constitution of the family home, debts secured by mortgages on the premises before or after such constitution, and debts due to laborers, mechanics, architects, builders, materialmen, and others who rendered service or furnished materials for the construction of the building. The Court applied exception (3) to hold that petitioner's property, voluntarily used as security for the loan, was not exempt from execution.

• Section 15, Rule 44, 1997 Rules of Civil Procedure — Provides that an appellant may include in his assignment of errors any question of law or fact that has been raised in the court below and which is within the issues framed by the parties. Cited in connection with the rule that arguments not raised in the trial court may not be considered by the reviewing court.

• Antonio T. Carpio (Associate Justice; Chairperson, Second Division, who attested that the conclusions in the Decision had been reached in consultation before the case was assigned to the writer of the opinion)
• Arturo D. Brion (Associate Justice)
• Mariano C. del Castillo (Associate Justice)
• Jose Catral Mendoza (Associate Justice)

Chief Justice Maria Lourdes P.A. Sereno certified, pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, that the conclusions in the Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.