Development Bank of the Philippines v. Court of Appeals

G.R. No. 118180 (September 20, 1996)

DBP must convey a foreclosed property to payers, as contracts remain valid despite new laws.

Facts:

The case involves a dispute between the Development Bank of the Philippines (DBP) and private respondents, who were the original owners of a parcel of agricultural land covered by Transfer Certificate of Title No. T-1432, located in Barrio Capucao, Ozamis City. The land, measuring approximately 113,695 square meters, was mortgaged to DBP on May 30, 1977. Following the private respondents' default on their mortgage obligations, DBP foreclosed on the property and emerged as the sole bidder in the auction sale, resulting in the issuance of Transfer Certificate of Title No. T-10913 in DBP's name.

On April 6, 1984, DBP and the private respondents entered into a Deed of Conditional Sale, wherein DBP agreed to reconvey the foreclosed property to the private respondents. The Deed stipulated a total purchase price of P73,700.00, with a down payment of P8,900.00 and the remaining balance payable in six years through quarterly amortizations at an interest rate of 18% per annum. The private respondents completed their payment on April 6, 1990, and subsequently demanded the execution of a Deed of Conveyance from DBP.

However, DBP refused to execute the deed, citing the legal impossibility of compliance due to Section 6 of Republic Act No. 6657 (Comprehensive Agrarian Reform Law) and Section 1 of Executive Order No. 407, both of which were enacted after the conditional sale. The private respondents then filed a complaint for specific performance and damages against DBP in the Regional Trial Court of Ozamis City.

The trial court ruled in favor of the private respondents, ordering DBP to execute the deed of final sale and awarding damages and attorney's fees. DBP appealed the decision to the Court of Appeals, maintaining that its obligation to execute the deed had become legally impossible due to the aforementioned laws.

Legal Issues:

  1. Whether DBP's obligation to execute a Deed of Sale in favor of the private respondents was rendered legally impossible by the enactment of Republic Act No. 6657 and Executive Order No. 407.
  2. Whether the trial court and the Court of Appeals erred in awarding nominal damages and attorney's fees to the private respondents.

Arguments:

  • Petitioner (DBP): DBP argued that the enactment of Republic Act No. 6657 and Executive Order No. 407 created a legal impossibility for it to execute the Deed of Sale. It contended that Section 6 of RA 6657 nullified any sale or transfer of agricultural land executed by the original landowner in violation of the law, and since the property was subject to agrarian reform, it could not comply with its obligation. DBP also claimed that the award of damages and attorney's fees was not justified.

  • Respondents (Private Respondents): The private respondents contended that their obligation to pay for the property was fulfilled prior to the enactment of the laws cited by DBP. They argued that the conditional sale was perfected upon full payment, and thus, the property was no longer part of DBP's foreclosed assets. They maintained that DBP's refusal to execute the deed constituted a breach of contract and sought enforcement of their rights under the conditional sale.

Court's Decision and Legal Reasoning:

The Court of Appeals affirmed the trial court's decision, ruling that the obligation of DBP to execute the Deed of Sale was not rendered legally impossible by the enactment of RA 6657 or EO 407. The court reasoned that the private respondents had completed their payment on April 6, 1990, prior to the enactment of these laws, thus perfecting the contract of sale. The court emphasized that the laws in question were not intended to impair existing contractual obligations and that the provisions of RA 6657 specifically addressed transactions executed by the original landowner, which did not apply to DBP as it was not the original owner.

The court also noted that the obligation to execute the deed of sale was a contractual obligation that must be complied with in good faith. The court rejected DBP's argument that the laws created a legal impossibility, stating that the laws could not have retroactive effect unless explicitly stated.

Regarding the awards of nominal damages and attorney's fees, the court found that the trial court had erred in awarding these amounts, as there was no sufficient factual or legal basis provided in the decision to justify such awards.

Significant Legal Principles Established:

  1. The principle that obligations arising from contracts have the force of law between the contracting parties and must be complied with in good faith.
  2. The non-retroactive effect of laws unless expressly stated, particularly in relation to existing contractual obligations.
  3. The distinction between the original landowner and a financial institution in the context of agrarian reform laws, clarifying that the latter's obligations under a conditional sale are not nullified by such laws.