Case Digest: Naguiat vs. Court of Appeals, G.R. No. 118375, October 3, 2003

Commercial Law | Real Contract

Recit Ver: 

• Aurora Queaño applied for a ₱200,000 loan from Celestina Naguiat, which Naguiat granted. Naguiat indorsed a ₱95,000 check and issued her own ₱95,000 check to Queaño as part of the loan. To secure the loan, Queaño executed a Deed of Real Estate Mortgage and surrendered property titles to Naguiat. Queaño issued a promissory note for ₱200,000 with 12% interest, and a postdated Security Bank check to Naguiat. The postdated check was dishonored for insufficient funds.
• Queaño received a letter from Naguiat’s lawyer demanding settlement of the loan. Queaño claimed not to have received the loan proceeds and alleged that the checks were retained by Ruby Ruebenfeldt, purportedly Naguiat's agent.
• Naguiat applied for mortgage foreclosure, scheduled for August 14, 1981, but Queaño filed a case seeking annulment of the Real Estate Mortgage three days before the sale, stopping it.
• Absolutely no evidence was submitted by Naguiat that the checks she issued or endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the perfection of the contract of loan. For the Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed. It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected. A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the object of the contract.
• A mortgage contract being a mere accessory contract, its validity would depend on the validity of the loan secured by it.

Facts: 

• In 1980, Aurora Queaño applied with Celestina Naguiat for a loan of ₱200,000.
• Naguiat granted the loan. She indorsed a check of ₱95,000 and issued her own check of ₱95,000.
• To secure the loan, Queaño executed a Deed of Real Estate Mortgage and surrendered owner’s duplicates of the titles covering the mortgaged properties.
• Queaño issued a promissory note for ₱200,000 with 12% interest per annum, payable on September 11, 1980. Queaño also issued a Security Bank postdated check for the amount payable to Naguiat.
• Upon presentment on its maturity date, the postdated check was dishonored for insufficiency of funds. Queaño's request to stop payment was rejected by the Security Bank pursuant to its policy not to honor such requests if the check is drawn against insufficient funds.
• On 16 October 1980, Queaño received a letter from Naguiat’s lawyer, demanding settlement of the loan.
• Queaño claimed she did not receive the loan proceeds, and that the checks were retained by Ruby Ruebenfeldt, who purportedly was Naguiat's agent.
• Naguiat applied for mortgage foreclosure, scheduled for August 14, 1981.
• Three days before the scheduled sale, Queaño filed a case seeking annulment of the Real Estate Mortgage, stopping the auction sale.

RTC-Pasay: Declared the real estate mortgage deed null and void, ordering Naguiat to return property titles to Queaño. 

Court of Appeals: Affirmed the RTC decision.

Issue: 

• Whether Queaño had actually received the loan proceeds which were supposed to be covered by the two checks Naguiat had issued or indorsed. NO
• Whether the mortgage which is supposed to secure the loan is null and void. YES

Arguments of Petitioner: 

• Being a notarial instrument or public document, the mortgage deed enjoys the presumption that the recitals therein are true. 
• Questions the admissibility of various representations and pronouncements of Ruebenfeldt, invoking the rule on the non-binding effect of the admissions of third persons.

Held:

Against the common finding of the courts below, Naguiat vigorously insists that Queaño received the loan proceeds. Capitalizing on the status of the mortgage deed as a public document, she cites the rule that a public document enjoys the presumption of validity and truthfulness of its contents. The Court of Appeals, however, is correct in ruling that the presumption of truthfulness of the recitals in a public document was defeated by the clear and convincing evidence in this case that pointed to the absence of consideration. This Court has held that the presumption of truthfulness engendered by notarized documents is rebuttable, yielding as it does to clear and convincing evidence to the contrary, as in this case.

On the other hand, absolutely no evidence was submitted by Naguiat that the checks she issued or endorsed were actually encashed or deposited. The mere issuance of the checks did not result in the perfection of the contract of loan. For the Civil Code provides that the delivery of bills of exchange and mercantile documents such as checks shall produce the effect of payment only when they have been cashed. It is only after the checks have produced the effect of payment that the contract of loan may be deemed perfected. Art. 1934 of the Civil Code provides:

"An accepted promise to deliver something by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perfected until the delivery of the object of the contract."

A loan contract is a real contract, not consensual, and, as such, is perfected only upon the delivery of the object of the contract. In this case, the objects of the contract are the loan proceeds which Queaño would enjoy only upon the encashment of the checks signed or indorsed by Naguiat. If indeed the checks were encashed or deposited, Naguiat would have certainly presented the corresponding documentary evidence, such as the returned checks and the pertinent bank records. Since Naguiat presented no such proof, it follows that the checks were not encashed or credited to Queaño’s account.

Naguiat questions the admissibility of the various written representations made by Ruebenfeldt on the ground that they could not bind her following the res inter alia acta alteri nocere non debet rule. The Court of Appeals rejected the argument, holding that since Ruebenfeldt was an authorized representative or agent of Naguiat the situation falls under a recognized exception to the rule. Still, Naguiat insists that Ruebenfeldt was not her agent.

Suffice to say, however, the existence of an agency relationship between Naguiat and Ruebenfeldt is supported by ample evidence. As correctly pointed out by the Court of Appeals, Ruebenfeldt was not a stranger or an unauthorized person. Naguiat instructed Ruebenfeldt to withhold from Queaño the checks she issued or indorsed to Queaño, pending delivery by the latter of additional collateral. Ruebenfeldt served as agent of Naguiat on the loan application of Queaño’s friend, Marilou Farralese, and it was in connection with that transaction that Queaño came to know Naguiat. It was also Ruebenfeldt who accompanied Queaño in her meeting with Naguiat and on that occasion, on her own and without Queaño asking for it, Reubenfeldt actually drew a check for the sum of ₱220,000.00 payable to Naguiat, to cover for Queaño’s alleged liability to Naguiat under the loan agreement.24

The Court of Appeals recognized the existence of an "agency by estoppel citing Article 1873 of the Civil Code. Apparently, it considered that at the very least, as a consequence of the interaction between Naguiat and Ruebenfeldt, Queaño got the impression that Ruebenfeldt was the agent of Naguiat, but Naguiat did nothing to correct Queaño’s impression. In that situation, the rule is clear. One who clothes another with apparent authority as his agent, and holds him out to the public as such, cannot be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith, and in the honest belief that he is what he appears to be. The Court of Appeals is correct in invoking the said rule on agency by estoppel.

More fundamentally, whatever was the true relationship between Naguiat and Ruebenfeldt is irrelevant in the face of the fact that the checks issued or indorsed to Queaño were never encashed or deposited to her account of Naguiat.

All told, we find no compelling reason to disturb the finding of the courts a quo that the lender did not remit and the borrower did not receive the proceeds of the loan. That being the case, it follows that the mortgage which is supposed to secure the loan is null and void. The consideration of the mortgage contract is the same as that of the principal contract from which it receives life, and without which it cannot exist as an independent contract. A mortgage contract being a mere accessory contract, its validity would depend on the validity of the loan secured by it.

WHEREFORE, the petition is denied and the assailed decision is affirmed. Costs against petitioner.