GSIS vs Court of Appeals and Mr. & Mrs.

Racho, GR No. L-40824 February 23, 1989

Posted by Pius Morados on January 12, 2012
(Negotiable Instruments payable to order or to bearer)
Facts: Spouses Racho together with Spouses Lagasca executed a deed of mortgage in favor of
GSIS in connection with 2 loans granted by the latter in the sums of p11,500.00 and p3,000.00,
respectively. A parcel of land co-owned by the mortgagor spouses was govern as security under
the aforesaid deeds and executed a promissory note promising to pay the said amounts to GSIS
jointly, severally and solidarily.
The Lagasca spouses executed an instrument obligating themselves in the assumption of the
aforesaid obligation and to secure the release of the mortgage.
Failing to comply with the conditions of the mortgage, GSIS extrajudicially foreclosed the
mortgage and caused the property to be sold at public auction.
More than 2 years after, Spouses Racho filed a complaint against GSIS and Spouses Lagasca
praying that the extrajudicial foreclosure be declared null and void. They allege that they signed
the mortgage contracts not as sureties for the Lagasca spouses but merely as accommodation
party
Issue: WON the promissory note and mortgage deeds are negotiable.
Held: No. Section 29 of the NIL provides that an accommodation party is one who has signed an
instrument as maker, drawer, acceptor of indorser without receiving value therefore, but is held
liable on the instrument to a holder for value although the latter knew him to be only an
accommodation party.
Both parties appears to be misdirected and their reliance misplaced. The promissory note, as well
as the mortgage deeds subject of this case, are clearly not negotiable instrument because it did
not comply with the fourth requisite to be considered as such under Sec. 1 of the NIL they are
neither payable to order nor to bearer. The note is payable to a specified party, the GSIS.

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G.R. No. L-40824

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-40824 February 23, 1989
GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.
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 mortgage, dated April 14, 1958, in connection with two loans granted by the
latter in the sums of P 11,500.00 and P 3,000.00, respectively. 1 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, was given as security under the aforesaid two deeds. 2 They also executed a
'promissory note" which states in part:
... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE
INSURANCE SYSTEM the sum of . . . (P 11,500.00) Philippine
Currency, with interest at the rate of six (6%) per centum compounded
monthly payable in . . . (120)equal monthly installments of . . . (P 127.65)
each. 3
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 herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
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 December 3, 1962. 6

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
First Instance of Quezon City, 7 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
attorney's 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 action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... 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 delinquency 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 for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed thatIn 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 P
35,000.00, and (3) ordering the appellees Flaviano Lagasca and Esther
Lagasca to pay the appellants the sum of P 10,00.00 as moral damages, P
5,000.00 as attorney's fees, and costs. 11

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

In submitting their case to this Court, both parties relied 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 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.
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
spouses. 12 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 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.
The parol evidence rule 13 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. 14
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.
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 promissory 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 Bonnevie, et al. vs. Court of appeals, et al., 15 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.
There is no showing that the foregoing requirement on notice was 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 Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.
Footnotes
1 Record on Appeal, 9, 22; Rollo, 54.
2 Rollo, 58.
3 Ibid., 26.
4 Record on Appeal, 27-31; Rollo, 54.

5 Rollo, 59.
6 Ibid., Id.; Record on Appeal, 64.
7 Branch IV, Civil Case No. Q-9418; Record on Appeal, 1- 38; Rollo, 54.
8 Record on Appeal, 69-73; Ibid.
9 CA-G.R. No. 42193-R; Justice Pacifica P. de Castro, ponente, Justices
Luis B. Reyes and Ramon G. Gaviola, Jr., concurring.
10 Rollo, 61-63.
11 Ibid., 66.
12 Ibid., 61.
13 Sec. 7, Rule 130, Rules of Court.
14 Record on Appeal, 3-4; Rollo, 54.
15 125 SCRA 122 (1983).
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