SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

VOL. 170, FEBRUARY 23, 1989

533

Government Service Insurance System vs. Court of Appeals

*

G.R. No. 40824. February 23, 1989.

GOVERNMENT SERVICE INSURANCE SYSTEM,

petitioner, vs. COURT OF APPEALS and MR. & MRS.
ISABELO R. RACHO, respondents.
Mercantile Law; Negotiable Instruments; Promissory Note; The
promissory note and the mortgage deeds in question are not
negotiable instruments because they are neither payable to order nor
to bearer.This approach of both parties appears to be misdirected
and their reliance misplaced. The promissory note hereinbefore
quoted, as well as the mortgage deeds subject of this case, are
clearly not negotiable intruments. These documents do not comply
with the fourth requisite to be considered as such under Section 1 of
Act No. 2031 because they are neither payable to order nor to
bearer. The note is payable to a specified party, the GSIS. Absent
the aforesaid requisite, the provisions of Act No. 2031 would not
apply; governance shall be afforded, instead, by the provisions of
the Civil Code and special laws on mortgages.
Remedial Law; Evidence; Parol Evidence Rule; The
introduction of the evidence in question falls under the exception to
the parol evidence rule since the complaint filed in the lower court
alleges the failure of the mortgage contracts to express the true
agreement of the parties.The parol evidence rule cannot be used
by petitioner as a shield in this case for it is clear that there was no
objection in the court below regarding the admissibility of the
testimony and documents that were presented to prove that the
private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides, the
introduction of such evidence falls under the exception to said rule,
there being allegations in the complaint of private respondents in
the court below regarding the failure of the mortgage contracts to
express the true agreement of the parties.
Civil Law; Obligations and Contracts; Mortgage Contracts; The
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 1 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

fact that the loans were contracted solely for the benefit of the
Lagasca spouses would not invalidate the mortgage with respect to
private respondents share in the mortgaged property, the latter
having given a

________________
*

SECOND DIVISION.

534

534

SUPREME COURT REPORTS ANNOTATED

Government Service Insurance System vs. Court of Appeals

valid consent to such mortgage.However, contrary to the holding

of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The
factual context of this case is precisely what is contemplated in the
last paragraph of Article 2085 of the Civil Code to the effect that
third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own property. So
long as valid consent was given, the fact that the loans were solely
for the benefit of the Lagasca spouses would not invalidate the
mortgage with respect to private respondents share in the property.
In consenting thereto, even assuming that private respondents may
not be assuming personal liability for the debt, their share in the
property shall nevertheless secure and respond for the performance
of the principal obligation. The parties to the mortgage could not
have intended that the same would apply only to the aliquot portion
of the Lagasca spouses in the property, otherwise the consent of the
private respondents would not have been required.
Remedial Law; Extra-Judicial Foreclosure of Mortgage; Notice;
Act No. 3135 does not require personal notice on the mortgagor of
the extrajudicial foreclosure sale.Coming now to the extrajudicial
foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the
extrajudicial foreclosure sale impairs the validity thereof. In
Bonnevie, et al. vs Court of Appeals, et al., the Court ruled that Act
No. 3135, as amended, does not require personal notice on the
mortgagor, quoting the requirement on notice in such cases as
follows: Section 3. Notice shall be given by posting notices of sale

http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 2 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

for not less than twenty days in at least three public places of the
municipality where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city. There
is no showing that the foregoing requirement on notice was not
complied with in the foreclosure sale complained of.

PETITION to review the judgment of the Court of Appeals.

The facts are stated in the opinion of the Court.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
535

VOL. 170, FEBRUARY 23, 1989

535

Government Service Insurance System vs. Court of Appeals

REGALADO, J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho,
together with the spouses Mr. and Mrs Flaviano Lagasca,
executed a deed of mortgage, dated November 13, 1957, in
favor of petitioner Government Service Insurance System
(hereinafter referred to as GSIS) and subsequently, another
deed of mortagage, dated April 14, 1958, in connection with
two loans granted by the latter in the sums of P11,500.00
1
and P3,000.00, respectively. A parcel of land covered by
Transfer Certificate of Title No. 38989 of the Register of
Deed of Quezon City, co-owned by said mortgagor spouses,
2
was given as security under the aforesaid two deeds. They
also executed a promissory note which states in part:
x x x for value received, we the undersigned . . . JOINTLY,
SEVERALLY
and
SOLIDARILY,
promise
to
pay
the
GOVERNMENT SERVICE INSURANCE SYSTEM the sum of . . .
(P11,500.00) Philippine Currency, with interest at the rate of six
(6%) per centum compounded monthly payable in . . . (120) equal
3
monthly installments of . . .(P127.65) each.

On July 11, 1961, the Lagasca spouses executed an

instrument denominated Assumption of Mortgage under
which they obligated themselves to assume the aforesaid
obligation to the GSIS and to secure the release of the
mortgage covering that portion of the land belonging to
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 3 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

herein4 private respondents and which was5 mortgaged to the

GSIS. This undertaking was not fulfilled.
Upon failure of the mortgagors to comply with the
conditions of the mortgage, particularly the payment of the
amortizations due, GSIS extrajudicially foreclosed the
mortgage and caused the mortgaged property to be sold at
public auction on Decem_______________
1

Record on Appeal, 9, 22; Rollo, 54.

Rollo, 58.

Ibid., 26.

Record on Appeal, 27-31; Rollo, 54.

Rollo, 59.
536

536

SUPREME COURT REPORTS ANNOTATED

Government Service Insurance System vs. Court of Appeals

6

ber 3, 1962.
More than two years thereafter, or on August 23, 1965,
herein private respondents filed a complaint against the
petitioner and the Lagasca spouses in the former Court of
7
First Instance of Quezon City, praying that the
extrajudicial foreclosure made on their property and all
other documents executed in relation thereto in favor of the
Government Service Insurance System be declared null
and void. It was further prayed that they be allowed to
recover said property, and/or the GSIS be ordered to pay
them the value thereof, and/or they be allowed to
repurchase the land. Additionally, they asked for actual and
moral damages and attorneys fees.
In their aforesaid complaint, private respondents alleged
that they signed the mortgage contracts not as sureties or
guarantors for the Lagasca spouses but they merely gave
their common property to the said co-owners who were
solely benefited by the loans from the GSIS.
The trial court rendered judgment on February 25, 1968
dismissing the complaint for failure to establish a cause of
8
action.
Said 9decision was reversed by the respondent Court of
Appeals which held that:

http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 4 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

x x x although formally they are co-mortgagors, they are so only

for accomodation (sic) in that the GSIS required their consent to the
mortgage of the entire parcel of land which was covered with only
one certificate of title, with full knowledge that the loans secured
thereby were solely for the benefit of the appellant (sic) spouses who
alone applied for the loan.
xxxx
It is, therefore, clear that as against the GSIS, appellants have a
valid cause for having foreclosed the mortgage without having
given sufficient notice to them as required either as to their delin_______________
6

Ibid., id.; Record on Appeal, 64.

Branch IV, Civil Case No. Q-9418; Record on Appeal, 1-38; Rollo, 54.

Record on Appeal, 69-73; ibid.

CA-G.R. No. 42193-R; Justice Pacifico P. de Castro, ponente, Justices Luis

B. Reyes and Ramon G. Gaviola, Jr., concurring.

537

VOL. 170, FEBRUARY 23, 1989

537

Government Service Insurance System vs. Court of Appeals

guency in the payment of amortization or as to the subsequent
foreclosure of the mortgage by reason of any default in such
payment. The notice published in the newspaper, Daily Record
(Exh. 12) and posted pursuant to Sec. 3 of Act 3135 is not the notice
to which the mortgagor is entitled upon the application being made
10
for an extrajudicial foreclosure. x x x

On the foregoing findings,

consequently decreed that

the

respondent

court

In view of all the foregoing, the judgment appealed from is hereby

reversed, and another one entered (1) declaring the foreclosure of
the mortgage void insofar as it affects the share of the appellants;
(2) directing the GSIS to reconvey to appellants their share of the
mortgaged property, or the value thereof if already sold to third
party, in the sum of P35,000.00, and (3) ordering the appellees
Flaviano Lagasca and Esther Lagasca to pay the appellants the
sum of P10,00.00 as moral damages, P5,000.00 as attorneys fees,
11
and costs.

The case is now before Us in this petition for review.

In submitting their case to this Court, both parties relied
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 5 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

on the provisions of Section 29 of Act No. 2031, otherwise

known as the Negotiable Instruments Law, which provide
that an accommodation party is one who has signed an
instrument as maker, drawer, acceptor of indorser without
receiving value therefor, but is held liable on the
instrument to a holder for value although the latter knew
him to be only an accommodation party.
This approach of both parties appears to be misdirected
and their reliance misplaced. The promissory note
hereinbefore quoted, as well as the mortgage deeds subject
of this case, are clearly not negotiable instruments. These
documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because
they are neither payable to order nor to bearer. The note is
payable to a specified party, the GSIS. Absent the aforesaid
requisite, the provi_______________
10

Rollo, 61-63.

11

Ibid., 66.
538

538

SUPREME COURT REPORTS ANNOTATED

Government Service Insurance System vs. Court of Appeals

sions of Act No. 2031 would not apply; governance shall be
afforded, instead, by the provisions of the Civil Code and
special laws on mortgages.
As earlier indicated, the factual findings of respondent
court are that private respondents signed the documents
only to give their consent to the mortgage as required by
GSIS, with the latter having full knowledge that the loans
secured thereby were solely for the benefit of the Lagasca
12
spouses. This appears to be duly supported by sufficient
evidence on record. Indeed, it would be unusual for the
GSIS to arrange for and deduct the monthly amortizations
on the loans from the salary as an army officer of Flaviano
Lagasca without likewise affecting deductions from the
salary of Isabelo Racho who was also an army sergeant.
Then there is also the undisputed fact, as already stated,
that the Lagasca spouses executed a so-called Assumption
of Mortgage promising to exclude private respondents and
their share of the mortgaged property from liability to the
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 6 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

mortgagee. There is no intimation that the former executed

such instrument for a consideration, thus confirming that
they did so pursuant to their
original agreement.
13
The parol evidence rule cannot be used by petitioner as
a shield in this case for it is clear that there was no objection
in the court below regarding the admissibility of the
testimony and documents that were presented to prove that
the private respondents signed the mortgage papers just to
accommodate their co-owners, the Lagasca spouses. Besides,
the introduction of such evidence falls under the exception
to said rule, there being allegations in the complaint of
private respondents in the court below regarding the failure
of the mortgage
contracts to express the true agreement of
14
the parties.
However, contrary to the holding of the respondent court,
it cannot be said that private respondents are without
liability under the aforesaid mortgage contracts. The factual
context of
_______________
12

Ibid., 61.

13

Sec. 7, Rule 130, Rules of Court.

14

Record on Appeal, 3-4; Rollo, 54.

539

VOL. 170, FEBRUARY 23, 1989

539

Government Service Insurance System vs. Court of Appeals

this case is precisely what is contemplated in the last
paragraph of Article 2085 of the Civil Code to the effect that
third persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own
property.
So long as valid consent was given, the fact that the loans
were solely for the benefit of the Lagasca spouses would not
invalidate the mortgage with respect to private respondents
share in the property. In consenting thereto, even assuming
that private respondents may not be assuming personal
liability for the debt, their share in the property shall
nevertheless secure and respond for the performance of the
principal obligation. The parties to the mortgage could not
have intended that the same would apply only to the aliquot
portion of the Lagasca spouses in the property, otherwise
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 7 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

the consent of the private respondents would not have been

required.
The supposed requirement of prior demand on the
private respondents would not be in point here since the
mortgage contracts created obligations with specific terms
for the compliance thereof. The facts further show that the
private respondents expressly bound themselves as solidary
debtors in the promisory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by
GSIS, We cannot agree with the ruling of respondent court
that lack of notice to the private respondents of the
extrajudicial foreclosure sale impairs the validity
thereof. In
15
Bonnevie, et al. vs. Court of Appeals, et al., the Court ruled
that Act No. 3135, as amended, does not require personal
notice on the mortgagor, quoting the requirement on notice
in such cases as follows:
Section 3. Notice shall be given by posting notices of sale for not
less than twenty days in at least three public places of the
municipality where the property is situated, and if such property is
worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a
newspaper of general circulation in the municipality or city.
________________
15

125 SCRA 122 (1983).

540

540

SUPREME COURT REPORTS ANNOTATED

Joseph vs. Bautista

There is no showing that the foregoing requirement on

noticewas not complied with in the foreclosure sale
complained of.
The respondent court, therefore, erred in annulling the
mortgage insofar as it affected the share of private
respondents or in directing reconveyance of their property
or the payment of the value thereof. Indubitably, whether or
not private respondents herein benefited from the loan, the
mortgage and the extrajudicial foreclosure proceedings were
valid.
WHEREFORE,
judgment
is
hereby
rendered
REVERSING the decision of the respondent Court of
http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 8 of 9

SUPREME COURT REPORTS ANNOTATED VOLUME 170

8/3/15 5:30 PM

Appeals and REINSTATING the decision of the court a quo

in Civil Case No. Q-9418 thereof.
SO ORDERED.
Melencio-Herrera, (Chairman), Paras, Padilla and
Sarmiento, JJ., concur.
Judgment reversed.
Note.Promissory note must be payable to order or
bearer to be negotiable. (Consolidated Plywood Industries,
Inc. vs. IFC Leasing and Acceptance Corporation, 149 SCRA
448.)
o0o

Copyright 2015 Central Book Supply, Inc. All rights reserved.

http://central.com.ph/sfsreader/session/0000014ef2e5064cb8dfa105000a0094004f00ee/p/AKC898/?username=Guest

Page 9 of 9