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RCBC v. Royal Cargo Corp (2009) Carpio-Morales, J. Terrymanila was undergoing insolvency proceedings. RCBC, a creditor, was a mortgagee of chattel mortgage of Terrymanila. Royal Cargo, another creditor, was in the middle of a collection case against Terrymanila. Terrymanila was declared insolvent. RCBC sought permission from the RTC to extrajudicially foreclose the chattel. Granated. Royal Cargo filed an MR but this was denie d. A public auction ensued and RCBC was the sole bidder. Royal Cargo assails this stating the failure of RCBC to notify it of the sale at least 10 days prior to the sale. Feb 1991: Terrymanila filed a petition for voluntary insolvency. One of its creditors was RCBC (Feb 1989, for P3 mil, secured by a chattel mortage, duly recorded in the notarial register of Castano, a notary public in Bataan). Royal Cargo, another creditor, filed an action in the RTC-Manila for collection of sum of money and preliminarily attached "some" of Terrymanilas personal properties on March 1991. April 1991: RTC-Bataan declared Terrymanila insolvent. June 1991: RTC-Manila declared judgment in favor of Royal Cargo. In the meantime, RCBC sought in the insolvency proceedings permission to extrajudicially foreclose the chattel mortgage. This was granted by Feb 1992. o Royal Cargo filed an MR but it was denied on March 1992. Sheriff of Bataan scheduled the public auction sale of the mortgaged personal properties for June 1992. RCBC was the sole bidder, purchased for P1.5 mil. RCBC then sold these to Bondoc and See. July 1992: Royal Cargo filed in RTC-Manila a petition against the Bataan Sheriff and RCBC for annulment of the auction sale, questioning the failure to duly notify it of the sale at least 10 days before the sale, citing Sec 14 of the Chattel Mortgage Law. Royal claims to have received notice by its counsel only on the day of the sale. RTC-Manila decides in favor of Royal, but dismissed the petition as to the Sheriff. CA says that Royal had a right to be timely informed of the foreclosure sale. o Held that the Chattel Mortgage Law requires that the mortgagee (RCBC) should notify in writing the mortgagor or person holding under him the time and place of the sale by personal delivery of the notice

Issue/Held: Whether Royal should have been given a 10 day prior notice of the foreclosure sale --- YES Whether the sale should be annulled and Royal be allowed to exercise equity of redemption --- NO RCBC argument: Chattel Mortgage Law enumerates who are entitled to be notified under Sec 14. Had the law intended to include an attaching creditor or a judgment creditor [like Royal], it could have so specifically stated, since in the preceding section, Sec 13, it already mentioned that a subsequent attaching creditor may redeem. Sec 13 permits a subsequent attaching creditor to "redeem" the mortgage only BEFORE the holding of the auction sale, and cites Paray v. Rodriguez which says that no right of redemption exists over personal property Ratio: Sec 13 of the Chattel Mortgage Law allows the would-be redemptioner to redeem the mortgaged property only BEFORE its sale. Paray v. Rodriguez: There is no law in our statute books which vests the right of redemption over personal property. The Chattel Mortgage Law, could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is silent on the point. Sec 39 of the 1997 Rules of Civil Procedure says that the right of redemption applies to real properties, not personal properties, sold on execution. The redemption cited in Sec 13 partakes of an equity of redemption. Equity of redemption is the right of the mortgagor (debtor) to redeem the property AFTER his default but BEFORE the sale of the property to clear it from the encumbrance of the mortgage. It is NOT the same as right of redemption which is the right of the mortgagor (debtor) to redeem the mortgaged property AFTER registration of the foreclosure sale, and even after confirmation of the sale. While Royal had attached some of Terrymanilas assets to secure the satisfaction of a P296,662 judgment rendered in another case, what it attached was Terrymanilas equity of redemption. That Royals claim is much lower than the P1.5 mil actual bid of RCBC at the auction sale does not defeat Royals equity of redemption. Top Rate International Services Inc v. IAC: o It is error on the part of the petitioner to say that since respondents lien is only a total of P343,227, they cannot be entitled to the equity of redemption because the exercise of such right would require the payment of an amount which cannot be less than P40,000,000 o When respondents prayed for the attachment of the properties to secure their claims against Consolidated Mines, the properties had already been mortgaged to the consortium of 12 banks to secure an obligation of $62,062,720. Thus, like subsequent mortgagees, the respondents liens on such properties became inferior to that of banks, which claims in the event of foreclosure proceedings, must first be satisfied.

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IAC was correct in holding that in reality, what was attached by the respondents was merely Consolidated Mines equity of redemption, an incorporeal and intangible right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised Having attached Terrymanilas equity of redemption, Royal had to be informed of the date of sale of the mortgaged assets for it to exercise such equity of redemption over some of those foreclosed properties.

However, Royal filed a MR the Feb 1992 Order of the RTC-Bataan which granted RCBCs request to foreclose the chattel mortgage. Even prior to receiving, through counsel, a mailed notice of the auction sale, Royal was already put on notice of the impending foreclosure sale. It could have expediently exercised its equity of redemption, at the earliest when it received the Order of March 1992 denying its MR of the February 1992 Order Despite its window to exercise its equity of redemption, Royal chose to be technically shrewd about its chances, preferring instead to seek annulment of the auction sale. Its negligence to exercise its equity of redemption within a reasonable time, or even on the day of the auction sale, warrants a presumption that it had either abandoned it or opted not to assert it. Equitable considerations sway against it. As early as April 1991, Terrymanila had been judicially declared insolvent. Royals recourse was to demand the satisfaction of its judgment award before the insolvency court as its judgment award is a preferred credit under NCC 2244. To now allow Royal to have its way in annulling the auction sale and at the same time let it proceed with its claims before the insolvency court would neither rhyme with reason nor with justice. Royal has not shown that it was prejudiced by the auction sale since the insolvency court already determined that even if the mortgaged properties were foreclosed, there were still sufficient, unencumbered assets of Terrymanila to cover the obligations owing to other creditors. Even if Royal would have participated in the auction sale and matched RCBCs bid, the superiority of RCBCs lien over the assets would preclude Royal from recovering the chattels. The right of those who acquire said properties should not and cannot be superior to that of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least indication of fraud. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much willing to respect the lien existing, since he should not have expected that with the purchase, he would acquire a better right than that which the vendor then had. The chattel mortgage in favor of RCBC was registered more than 2 years before the issuance of a writ of attachment over some of Terrymanilas chattels in favor of Royal. This is significant in determining who should be given preference over the properties. Since the registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien that follows the property wherever it may be, the right of Royal, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his f avor a valid chattel mortgage. RCBC is not liable for constructive fraud for proceeding with the auction sale nor for subsequently selling the chattel. Foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtai ned from the insolvency court as what RCBC did. Award of exemplary damages and attorneys fees for Royal, given petitioners good faith, is thus not warranted. Petition granted.