G.R. No. 173454 & 173456; October 6, 2008
PHILIPPINE NATIONAL BANK, petitioner, vs. MEGA PRIME REALTY AND HOLDINGS CORPORATION, respondent. (Consolidated Cases)

FACTS

Philippine National Bank (PNB) sold all its stockholdings in its subsidiary, PNB Management and Development Corporation (PNB-Madecor), to Mega Prime Realty and Holdings Corporation (Mega Prime) via a Deed of Sale dated September 27, 1996, for P505,620,000.00. The sale was on an “As is where is” basis. The contract specified that the sale included PNB-Madecor’s real properties, notably a 19,080 sq. m. parcel in Quezon City (Pantranco property) covered by five titles, including TCT No. 160470. Mega Prime entered the agreement primarily to acquire these assets. Subsequently, Mega Prime discovered that the property under TCT No. 160470 was also registered under a separate title (TCT No. RT-9987) in the name of the Quezon City Government, rendering the lot a road and thus “outside the commerce of man.” This discovery caused Mega Prime’s joint venture partner to withdraw from a development project. Mega Prime filed a complaint for annulment of the Deed of Sale, alleging fraudulent misrepresentation by PNB, and sought reimbursement of payments made, damages, and development expenses. The Regional Trial Court (RTC) ruled in favor of Mega Prime, declaring the sale void and ordering rescission, restitution, and damages. The Court of Appeals (CA) reversed the RTC, dismissing the complaint but also dismissing PNB’s counterclaim. Both parties filed petitions for review.

ISSUE

Whether the sale of shares of stock may be annulled or the purchase price reduced due to a breach of warranty regarding the inclusion of a property (TCT No. 160470) that is allegedly outside the commerce of man.

RULING

The Supreme Court denied both petitions but modified the CA decision. It held that the sale of shares was valid and not voidable, as the transaction involved corporate shares, not a direct sale of real property. The “as is where is” clause did not absolve PNB from liability for breach of warranty under Article 1547 of the Civil Code, as PNB expressly warranted in the Deed of Sale that the shares included specific real properties, one of which (TCT No. 160470) was defective. The Court applied Article 1561 on breach of warranty in sales, entitling the buyer to a proportionate reduction of the purchase price. It computed the reduction based on the relative value of the defective property (P19,443,050.00) to the total purchase price. The Court affirmed the dismissal of PNB’s counterclaim, finding no evidence of bad faith in Mega Prime’s filing of the complaint. Thus, the consideration in the Deed of Sale was ordered reduced proportionately by P19,443,050.00.