G.R. No. C.A. No. 74; May 25, 1946
PATRICIO CONTRERAS and JERUSALEM GINGCO, plaintiffs-appellants, vs. THE CHINA BANKING CORPORATION, JUAN B. MOLINA and TEODORA ARENAS, defendants-appellees.

FACTS

Spouses Arcadio Gingco and Dolores Contreras owned two accesorias in Tondo, Manila. Upon Dolores’s death on June 23, 1928, her heirs were her husband and daughter, Jerusalem Gingco. On November 6, 1928, Arcadio Gingco sold the properties to spouses Juan B. Molina and Teodora Arenas. In a subsequent case (Civil Case No. 36669), the Court of First Instance of Manila declared the sale null and void as to one-half of the properties, which belonged to Jerusalem Gingco, and ordered her to pay the Molina spouses P1,500 for half the cost of repairs. Both parties appealed but later withdrew their appeals; the decision became final on December 29, 1930.
Notwithstanding this decision, on November 8, 1930, while the appeals were still pending (the decision was not yet final), the Molina spouses mortgaged the two accesorias to China Banking Corporation to secure a P2,000 loan. The Molina spouses and the bank were represented by the same law firm (Feria & La O). In a separate case (Civil Case No. 44960), the Molina spouses were ordered to pay Jerusalem Gingco P4,836.31, a decision affirmed by the Supreme Court on May 10, 1935. When execution was sought against the Molina spouses’ share in the property, the China Banking Corporation filed a third-party claim based on the mortgage, halting the auction. The property was insured and, after a fire in 1934, the insurance proceeds were paid to the Molina spouses and endorsed to the bank.
The lower court declared the mortgage valid, ordered the Molina spouses to pay Jerusalem Gingco indemnity, and made other monetary orders. Plaintiffs appealed, contesting the validity of the mortgage.

ISSUE

Whether the deed of mortgage executed by the Molina spouses in favor of China Banking Corporation is valid.

RULING

The Supreme Court, through Justice Perfecto, ruled that the deed of mortgage is null and void ab initio with respect to the one-half portion of the property belonging to Jerusalem Gingco, as the Molina spouses had no authority to mortgage property belonging to a third person. As to the remaining one-half belonging to the mortgagors (the Molina spouses), the mortgage is rescinded under Article 1291(3) or (4) of the Civil Code.
The facts show the mortgage was executed to defeat the effectiveness of the decision declaring one-half belonging to Jerusalem Gingco and to frustrate her monetary claims. Article 1291(3) applies because Jerusalem Gingco was unable to collect her claims due to the bank’s third-party claim based on the mortgage. Although direct evidence of fraud is absent, the purpose can be deduced from the mortgage’s execution after an adverse decision. Furthermore, Article 1291(4) applies because the mortgage involved property in litigation, executed without the knowledge and approval of the plaintiff or the court, and at the time, the appeals in the case had not been withdrawn.
The presumption of bad faith arises from the fact that the same attorneys represented both the Molina spouses and the China Banking Corporation. The bank, through its attorneys, was aware of the litigation and the adverse decision, making it a mortgagee in bad faith. Therefore, the mortgage cannot prejudice Jerusalem Gingco’s rights.
The decision of the lower court is reversed. The mortgage is declared null and void as to Jerusalem Gingco’s one-half share and rescinded as to the Molina spouses’ one-half share.
(Note: A concurring and dissenting opinion by Justice Moran is summarized within the provided text, arguing that the mortgage should only be annulled as to Jerusalem Gingco’s portion, not rescinded as to the mortgagors’ half, as the issue of rescission under Article 1291 was not properly raised.)