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G.R. No. L-30173 September 30, 1971 GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees, vs.

ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants. Castillo & Suck for plaintiffs-appellees. Jose Q. Calingo for defendants-appellants. REYES, J.B.L., J.: Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the reason that only questions of law are involved. This case was originally commenced by defendants-appellants in the municipal court of Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-appellants appealed to the court a quo (Civil Case No. 30993) which also rendered a decision against them, the dispositive portion of which follows: WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and against the defendants, ordering the latter to pay jointly and severally the former a monthly rent of P200.00 on the house, subject-matter of this action, from March 27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956, the filing of the complaint, until fully paid, plus attorney's fees in the sum of P300.00 and to pay the costs. It appears on the records that on 1 September 1955 defendants-appellants executed a chattel mortgage in favor of plaintiffs-appellees over their house of strong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented from Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds of Manila on 2 September 1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of P3,150 was payable on or before August, 1956. It was also agreed that default in the payment of any of the amortizations, would cause the remaining unpaid balance to becomeimmediately due and Payable and the Chattel Mortgage will be enforceable in accordance with the provisions of Special Act No. 3135, and for this purpose, the Sheriff of the City of Manila or any of his deputies is hereby empowered and authorized to sell all the Mortgagor's property after the necessary publication in order to settle the financial debts of P4,800.00, plus 12% yearly interest, and attorney's fees... 2 When defendants-appellants defaulted in paying, the mortgage was extrajudicially foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to the said contract. As highest bidder, plaintiffs-appellees were issued the corresponding certificate of sale. 3 Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of Manila, praying, among other things, that the house be vacated and its possession surrendered to them, and for defendants-appellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the possession is surrendered. 4 On 21 September 1956, the municipal court rendered its decision ... ordering the defendants to vacate the premises described in the complaint; ordering further to pay monthly the amount of P200.00 from March 27,

1956, until such (time that) the premises is (sic) completely vacated; plus attorney's fees of P100.00 and the costs of the suit. 5 Defendants-appellants, in their answers in both the municipal court and court a quo impugned the legality of the chattel mortgage, claiming that they are still the owners of the house; but they waived the right to introduce evidence, oral or documentary. Instead, they relied on their memoranda in support of their motion to dismiss, predicated mainly on the grounds that: (a) the municipal court did not have jurisdiction to try and decide the case because (1) the issue involved, is ownership, and (2) there was no allegation of prior possession; and (b) failure to prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court. 6 During the pendency of the appeal to the Court of First Instance, defendants-appellants failed to deposit the rent for November, 1956 within the first 10 days of December, 1956 as ordered in the decision of the municipal court. As a result, the court granted plaintiffsappellees' motion for execution, and it was actually issued on 24 January 1957. However, the judgment regarding the surrender of possession to plaintiffs-appellees could not be executed because the subject house had been already demolished on 14 January 1957 pursuant to the order of the court in a separate civil case (No. 25816) for ejectment against the present defendants for non-payment of rentals on the land on which the house was constructed. The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond and withdrawal of deposited rentals was denied for the reason that the liability therefor was disclaimed and was still being litigated, and under Section 8, Rule 72, rentals deposited had to be held until final disposition of the appeal. 7 On 7 October 1957, the appellate court of First Instance rendered its decision, the dispositive portion of which is quoted earlier. The said decision was appealed by defendants to the Court of Appeals which, in turn, certified the appeal to this Court. Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision without it. Defendants-appellants submitted numerous assignments of error which can be condensed into two questions, namely: . (a) Whether the municipal court from which the case originated had jurisdiction to adjudicate the same; (b) Whether the defendants are, under the law, legally bound to pay rentals to the plaintiffs during the period of one (1) year provided by law for the redemption of the extrajudicially foreclosed house. We will consider these questions seriatim. (a) Defendants-appellants mortgagors question the jurisdiction of the municipal court from which the case originated, and consequently, the appellate jurisdiction of the Court of First Instance a quo, on the theory that the chattel mortgage is void ab initio; whence it would follow that the extrajudicial foreclosure, and necessarily the consequent auction sale, are also void. Thus, the ownership of the house still remained with defendants-appellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is argued by defendants-appellants, the issue of ownership will have to be adjudicated first in order to determine possession. lt is contended further that ownership being in issue, it is the Court of First Instance which has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of the chattel mortgage on two grounds, which are: (a) that, their signatures on the chattel mortgage were obtained through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a house of strong materials, and, being an immovable, it can only be the subject of a real estate mortgage and not a chattel mortgage. On the charge of fraud, deceit or trickery, the Court of First Instance found defendantsappellants' contentions as not supported by evidence and accordingly dismissed the charge, 8 confirming the earlier finding of the municipal court that "the defense of ownership as well as the allegations of fraud and deceit ... are mere allegations." 9 It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer is a mere statement of the facts which the party filing it expects to prove, but it is not evidence; 11 and further, that when the question to be determined is one of title, the Court is given the authority to proceed with the hearing of the cause until this fact is clearly established. In the case of Sy vs. Dalman, 12 wherein the defendant was also a successful bidder in an auction sale, it was likewise held by this Court that in detainer cases the aim of ownership "is a matter of defense and raises an issue of fact which should be determined from the evidence at the trial." What determines jurisdiction are the allegations or averments in the complaint and the relief asked for. 13 Moreover, even granting that the charge is true, fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to Article 1390 of the New Civil Code, by a proper action in court. 14 There is nothing on record to show that the mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-appellants' claim of ownership on the basis of a voidable contract which has not been voided fails. It is claimed in the alternative by defendants-appellants that even if there was no fraud, deceit or trickery, the chattel mortgage was still null and void ab initio because only personal properties can be subject of a chattel mortgage. The rule about the status of buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre Inc., 15 cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that ... it is obvious that the inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real properties (art. 415, New Civil Code) could only mean one thing that a building is by itself an immovable property irrespective of whether or not said structure and the land on which it is adhered to belong to the same owner. Certain deviations, however, have been allowed for various reasons. In the case of Manarang and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable that the parties to a contract may by agreement treat as personal property that which by nature would be real property", citing Standard Oil Company of New York vs. Jaramillo. 18In the latter case, the mortgagor conveyed and transferred to the mortgagee by way of mortgage "the following described personal property." 19 The "personal property" consisted of leasehold rights and a building. Again, in the case of Luna vs. Encarnacion, 20 the subject of the contract designated as Chattel Mortgage was a house of mixed materials, and this Court hold therein that it was a valid Chattel mortgage because it was so expressly designated and specifically that the property given as security "is a house of mixed materials, which by its very nature is considered personal property." In the later case of Navarro vs. Pineda, 21 this Court stated that

The view that parties to a deed of chattel mortgage may agree to consider a house as personal property for the purposes of said contract, "is good only insofar as the contracting parties are concerned. It is based, partly, upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a case, a mortgaged house built on a rented land was held to be a personal property, not only because the deed of mortgage considered it as such, but also because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an object placed on land by one who had only a temporary right to the same, such as the lessee or usufructuary, does not become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a person stands on a rented land belonging to another person, it may be mortgaged as a personal property as so stipulated in the document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted, however that the principle is predicated on statements by the owner declaring his house to be a chattel, a conduct that may conceivably estop him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374): 22 In the contract now before Us, the house on rented land is not only expressly designated as Chattel Mortgage; it specifically provides that "the mortgagor ... voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage 23 the property together with its leasehold rights over the lot on which it is constructed and participation ..." 24 Although there is no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property by way of chattel mortgage defendants-appellants could only have meant to convey the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented lot to which defendats-appellants merely had a temporary right as lessee, and although this can not in itself alone determine the status of the property, it does so when combined with other factors to sustain the interpretation that the parties, particularly the mortgagors, intended to treat the house as personalty. Finally unlike in the Iya cases,Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L. Strong Machinery and Williamson, 26wherein third persons assailed the validity of the chattel mortgage, 27 it is the defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein defendants-appellants, having treated the subject house as personalty. (b) Turning to the question of possession and rentals of the premises in question. The Court of First Instance noted in its decision that nearly a year after the foreclosure sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood. For this reason, the said court limited itself to sentencing the erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage was foreclosed and the house sold) until 14 January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's fees. Appellants mortgagors question this award, claiming that they were entitled to remain in possession without any obligation to pay rent during the one year redemption period after

the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the appellants. Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No. 1508. 28 Section 14 of this Act allows the mortgagee to have the property mortgaged sold at public auction through a public officer in almost the same manner as that allowed by Act No. 3135, as amended by Act No. 4118, provided that the requirements of the law relative to notice and registration are complied with. 29 In the instant case, the parties specifically stipulated that "the chattel mortgage will be enforceable in accordance with the provisions of Special Act No. 3135 ... ." 30(Emphasis supplied). Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendantsappellants herein) may, at any time within one year from and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the same Act 32 allows the purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires the filing of a petition with the proper Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the court. 33 In the absence of such a compliance, as in the instant case, the purchaser can not claim possession during the period of redemption as a matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of Court 34 which also applies to properties purchased in extrajudicial foreclosure proceedings. 35 Construing the said section, this Court stated in the aforestated case of Reyes vs. Hamada. In other words, before the expiration of the 1-year period within which the judgment-debtor or mortgagor may redeem the property, the purchaser thereof is not entitled, as a matter of right, to possession of the same. Thus, while it is true that the Rules of Court allow the purchaser to receive the rentals if the purchased property is occupied by tenants, he is, nevertheless, accountable to the judgment-debtor or mortgagor as the case may be, for the amount so received and the same will be duly credited against the redemption price when the said debtor or mortgagor effects the redemption.Differently stated, the rentals receivable from tenants, although they may be collected by the purchaser during the redemption period, do not belong to the latter but still pertain to the debtor of mortgagor . The rationale for the Rule, it seems, is to secure for the benefit of the debtor or mortgagor, the payment of the redemption amount and the consequent return to him of his properties sold at public auction. (Emphasis supplied) The Hamada case reiterates the previous ruling in Chan vs. Espe. 36 Since the defendants-appellants were occupying the house at the time of the auction sale, they are entitled to remain in possession during the period of redemption or within one year from and after 27 March 1956, the date of the auction sale, and to collect the rents or profits during the said period. It will be noted further that in the case at bar the period of redemption had not yet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess

was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was no assignment of error to that effect. The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision of the cases. 37 It follows that the court below erred in requiring the mortgagors to pay rents for the year following the foreclosure sale, as well as attorney's fees. FOR THE FOREGOING REASONS, the decision appealed from is reversed and another one entered, dismissing the complaint. With costs against plaintiffs-appellees. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. TUMALAD V. VICENCIO 41 SCRA 143

FACTS: Vicencio and Simeon executed a chattel mortgage in favor of plaintiffs Tumalad over their house, which was being rented by Madrigal and company. This was executed to guarantee a loan, payable in one year with a 12% per annum interest. The mortgage was extrajudicially foreclosed upon failure to pay the loan. The house was sold at a public auction and the plaintiffs were the highest bidder. A corresponding certificate of sale was issued. Thereafter, the plaintiffs filed an action for ejectment against the defendants, praying that the latter vacate the house as they were the proper owners. HELD: Certain deviations have been allowed from the general doctrine that buildings are immovable property such as when through stipulation, parties may agree to treat as personal property those by their nature would be real property. This is partly based on the principle of estoppel wherein the principle is predicated on statements by the owner declaring his house as chattel, a conduct that may conceivably stop him from subsequently claiming otherwise. In the case at bar, though there be no specific statement referring to the subject house as personal property, yet by ceding, selling or transferring a property through chattel mortgage could only have meant that defendant conveys the house as chattel, or at least, intended to treat the same as such, so that they should not now be allowed to make an inconsistent stand by claiming otherwise.

PRESIDENTIAL DECREE No. 1521 THE SHIP MORTGAGE DECREE OF 1978 WHEREAS, it is the declared policy of the State to accelerate the growth and development of the shipping industry; WHEREAS, due to the heavy capital requirement for ship acquisition and operation, the shipping industry has turned to financial institutions, both local and foreign, for assistance; WHEREAS, Philippine laws on ship mortgage have not been responsive to the needs of vessel financing such that it has deterred the extensions of needed loans to the industry; WHEREAS, there is a recognized need for extending the benefits accorded to overseas shipping under Presidential Decree No. 214 to domestic shipping. NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, do hereby order the enactment of a ship mortgage law as follows: Section 1. Title. This Decree shall be known as "The Ship Mortgage Decree of 1978." Section 2. Who may Constitute a Ship Mortgage. Any citizen of the Philippines, or any association or corporation organized under the laws of the Philippines, at least sixty per cent of the capital of which is owned by citizens of the Philippines may, for the purpose of financing the construction, acquisition, purchase of vessels or initial operation of vessels, freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank or other financial institutions, domestic or foreign. Section 3. Mortgage of Vessel of Domestic Ownership; records. (a) No mortgage, which at the time such mortgage is made includes a vessel of domestic ownership as this term is defined in Presidential Decree No. 761, or any portion thereof, as the whole or any part of the property mortgaged, shall be valid, in respect to such vessel, against any person other than the mortgagor, his heir or assign, and a person having actual notice thereof, until such mortgage is recorded in the office of the Philippine Coast Guard of the port of documentation of such vessel. (b) The Coast Guard District or Station Commander shall record mortgages delivered to him, in the order of their reception, in books to be kept for that purpose and indexed to show 1. The name of the vessel; 2. The names of the parties tot he mortgage; 3. The time and date of reception of the instrument; 4. The interest in the vessel so mortgaged; 5. The amount and date of maturity of the mortgage; 6. Name, citizenship, nationality and residence of owner, and 7. Any material change of condition in respect to any of the preceding items.

MALACAANG Manila

A copy of the instrument or mortgage shall be furnished the Central Bank of the Philippines. Section 4. Preferred Mortgages (a) A valid mortgage which at the time it is made includes the whole of any vessel of domestic ownership shall have, in respect to such vessel and as of the date of recordation, the preferred status given by the provisions of Section 17 hereof, if 1. The mortgage is recorded as provided in Section 3 hereof; 2. An affidavit is filed with the record of such mortgage to the effect that the mortgage is made in good faith and without any design to hinder, delay, or defraud any existing or future creditor of the mortgagor or any lien or of the mortgaged vessel; 3. The mortgage does not stipulate that the mortgagee waives the preferred status thereof; (b) Any mortgage which complies with the above conditions is hereafter called a "preferred mortgage". For purposes of this Decree, a vessel holding a Provisional Certificate of Philippine Registry is considered a vessel of domestic ownership such that it can be subject of preferred mortgage. The Philippine Coast Guard is hereby authorized to enter a vessel holding a Provisional Certificate of Philippine Registry in the Registry of Vessels and to record any mortgage executed thereon. Such mortgage shall have the preferred status as of the date of recordation upon compliance with the above conditions. (c) There shall be endorsed upon the documents of a vessel covered by a preferred mortgage 1. The names of the mortgagor and mortgagee; 2. The time and date the endorsement is made; 3. The amount and date of maturity of the mortgage; and 4. Any amount required to be endorsed by the provisions of paragraphs (e) or (f) of this Section. (d) Such endorsement shall be made (1) by the Coast Guard District or Station Commander of the port of documentation of the mortgaged vessel, or (2) by the Coast Guard District or Station Commander of any port in which the vessel is found, if such Coast Guard District or Station Commander is directed to make the endorsement by the Coast Guard District or Station Commander of the port of documentation. The Coast Guard District or Station Commander of the port of documentation shall give such direction by wire of letter at the request of the mortgagee and upon the tender of the cost of communication of such direction. Whenever any new document is issued for the vessel, such endorsement shall be transferred to and endorsed upon the new document by the Coast Guard District or Station Commander. In the case of a vessel holding a provincial certificate of Philippine Registry, the endorsement shall be made by the Philippine consul abroad upon direction by wire or letter from the Maritime Industry Authority at the request of the mortgagee and upon tender of the cost of communication of such direction. A certificate of such endorsement, giving the place, time and description of the endorsement, shall be

recorded with the records of registration to be maintained at the Philippine Consulate. (e) A mortgage which includes property other than a vessel shall not be held a preferred mortgage unless the mortgage provides for the separate discharge of such property by the payment of a specified portion of the mortgage indebtedness. If a preferred mortgage so provides for the separate discharge, the amount of the portion of such payment shall be endorsed upon the documents of the vessel. (f) A preferred mortgage includes more than one vessel and provides for the separate discharge of each vessel by the payment of a portion of mortgage indebtedness, the amount of such portion of such payment shall be endorsed upon the documents of the vessel. In case such mortgage does not provide for the separate discharge of a vessel and the vessel is to be sold upon the order of a district court of the Philippines in a suit in rem in admiralty, the court shall determine the portion of the mortgage indebtedness increased by 20 per centum (1) which, in the opinion of the court, the approximate value of all the vessels covered by the mortgage, and (2) upon the payment of which the vessel shall be discharged from the mortgage. Section 5. Certified Copies of Mortgage; exhibition. The Coast Guard District or Station Commander upon the recording of a preferred mortgage shall deliver two certified copies thereof to the mortgagor who shall place, and use due diligence to retain, one copy on board the mortgaged vessel notice of which shall be posted in a conspicuous place thereat and cause such copy and the documents of the vessel to be exhibited by the master to any person having business with the vessel, which give rise to a maritime lien upon the vessel or to the sale, conveyance, or mortgage thereof. The master of the vessel shall upon the request of any such person, exhibit to him the documents of the vessel placed on board thereof. The requirement of this Section that a copy of a preferred mortgage be placed and retained on board the mortgaged vessel shall not apply in the case of a mortgaged vessel which is not self-propelled (including but not limited to, barges, scors, lighters, and car floats). If the master of the vessel willfully fails to exhibit the documents of the vessel or the copy of any preferred mortgage thereof, the Philippine Coast Guard may suspend or cancel the master's license. Section 6. Prior and Subsequent Maritime Liens on Mortgaged Vessel. The mortgagor (1) shall, upon request of the mortgagee, disclose in writing to him prior to the execution of any preferred mortgage, the existence of any maritime lien, prior mortgage, or other obligation or liability upon the vessel to be mortgaged, that is known to the mortgagor, and (2) without the consent of the mortgagee, shall not incur, after the execution of such mortgage and before the mortgagee has had a reasonable time in which to record the mortgage and have indorsements in respect thereto made upon the documents of the vessel, any contractual obligation creating a lien upon the vessel other than a lien for wages of stevedores when employed directly by the owner, operator, master, ship's husband, or agent of the vessel, for wages of the crew of the vessel, for general average, or for salvage, including contract salvage, in respect to the vessel, tonnage dues and all other charges (not to exceed P20,000) of the Philippine Government in respect to the vessel.

A mortgagor, who, with intent to defraud, violates the above provision and if the mortgagor is a corporation or association, the president or other principal executive officer of the corporation or association, shall be punished by a fine of not, more than P5,000 or imprisonment of not more than two years, or both. The mortgage indebtedness shall thereupon become immediately due and payable at the election of the mortgagee. Section 7. Record of Notice of Claim of Lien on Mortgaged Vessel; discharge of lien (a) The Coast Guard District or Station Commander of the port of documentation shall, upon the request of any person, record notice of his claim of a lien upon a vessel covered by a preferred mortgage, together with the nature, date of creation, and amount of the lien, and the name and address of the person. Any person who has caused notice of his claim of lien to be so recorded shall, upon a discharge in whole or in part of the indebtedness, forthwith file with the Coast Guard District or Station Commander a certificate of such discharge. The Coast Guard District or Station Commander shall thereupon record the certificate. (b) The mortgagor upon a discharge in whole or in part of the mortgage indebtedness, shall forthwith file with the Coast Guard District or Station Commander for the port of documentation of the vessel, a certificate of such discharge duly executed by the mortgagee. Such Coast Guard District or Station Commander shall there upon record the certificate. In case of a vessel covered by a preferred mortgage, the Coast Guard District or Station Commander at the port of documentation shall endorse upon the documents of the vessel, or direct the Coast Guard District or Station Commander at any port in which the vessel is found, to so endorse, the fact of such discharge. A certificate of such endorsement, giving the time, place and description of the endorsement, shall be recorded with the Philippine Coast Guard. Where the endorsement is made by a person other than the Coast Guard District or Station Commander such certificate shall be promptly forwarded to the Philippine Coast Guard. Section 8. Conditions Precedent to Record; interest on Preferred Mortgage (a) No mortgage shall be recorded unless it states the interest of the mortgagor in the vessel, and the interest so mortgaged. (b) No mortgage, notice of claim of lien, or certificate of discharge thereof, shall be recorded unless previously acknowledged before the Coast Guard District or Station Commander of the port of documentation or a notary public or other officer authorized by a law of the Philippines to take acknowledgment of deeds or before a Philippine consul or consular agent. (c) In case of a change in the port of documentation of a vessel of the Philippines, no mortgage shall be recorded at the new port of documentation unless there is furnished to the Coast Guard District or Station Commander of such port, together with the copy of the mortgage to be recorded, a certified copy of the record of the vessel at the former port of documentation furnished by the Coast Guard District or Station Commander of such port. The Coast Guard District or Station Commander at the new port of documentation is authorized and directed to record such certified copy.

Section 9. Inspection of the Copies for Records; fees. Each Coast Guard District or Station Commander shall permit records made under the provisions of this decree to be inspected during office hours, under such reasonable regulation as the Philippine Coast Guard may establish. Upon the request of any person the Coast Guard District or Station Commander shall furnish him from the records of the Coast Guard's office (1) a certificate setting forth the names of the owners of any vessel, the interest held by each owner, and the material facts as to any mortgage covering, or any lien or other encumbrance upon, a specified vessel, (2) a certified copy of any mortgage, notice of claim of lien, or certified copy discharge in respect to such vessel, or (3) a certified copy as required by subsection (c) of Section 8 hereof. The Philippine Coast Guard shall collect the fees as provided for under existing laws and regulations for any mortgage recorded, or any certificate or certified copy furnished by it. Section 10. Lien of preferred Mortgage; foreclosure; jurisdiction; procedure A preferred mortgage shall constitute a lien upon the mortgaged vessel in the amount of the outstanding mortgage indebtedness secured by such vessel. Upon the default of any term or condition of the mortgage such lien may be enforced by the mortgagee by suit in remaining admiralty, wherein the vessel itself may be made a partly defendant and be arrested in the manner as provided in Section 11 hereof. Original jurisdiction of all such suits is granted to the Court of First Instance of the Philippines exclusively. In addition to any notice by publication, actual notice of commencement of any such suit shall direct, to (1) the master, other ranking officer, or caretaker of the vessel, and (2) any person who has recorded a notice of claim of an undischarged lien upon the vessel, as provided in Section 7 hereof, unless after search by the mortgage satisfactory to the court, such mortgagor, master, other ranking officer, caretaker, or claimant is not found within the Philippines. Failure to give notice to any such person, as required by this Section, shall be liable to such person for damages in the amount of his interest in the vessel terminated by the suit. In case of judicial foreclosure as provided herein, the provisions of Rule 68 of the New Rules of Court, if not inconsistent herewith, shall apply. The lien of a preferred ship mortgage may also be enforced by a suit in rem in admiralty or otherwise in any foreign country in which the vessel may be found pursuant to the procedure of said country for the enforcement of ship mortgages constituting maritime liens on vessels documented under the laws of said country. Section 11. Arrest of Vessels Upon the filing of the petition for the judicial foreclosure of a Preferred Ship Mortgage, or immediately thereafter, the applicant may apply ex-parte for an order for the arrest of the mortgaged vessel or vessels and the judge shall immediately issue the same, provided that it is made to appear by affidavit of the applicant, or of some other person who personally knows the facts that a default in the mortgage has occurred and that applicant files a bond executed to the adverse party in an amount to be fixed by the judge, not exceeding the applicant's claim, conditioned that the latter will pay all the costs which may be adjudged to the adverse party and all damages which he may sustain by reason of such arrest, if the court shall finally adjudge that the applicant was not entitled thereto.

Section 12. Discharge of Order of Arrest; Counterbond At any time after an order of arrest has been granted, the party whose vessel or vessels had been arrested, or the person appearing in his behalf, may, upon reasonable notice to the applicant, apply to the judge who granted the order, or to the judge of the court in which the action is pending, for an order discharging the order of arrest. That judge shall order the discharge of the arrest if a cash deposit is made, or counterbond executed to the creditor is filed, on behalf of the adverse party, with the clerk or judge of the court where the application is made in an amount double the value of the claim to secure the payment of any judgment that the creditor may recover in the action. Upon the filing of such counterbond, copy thereof shall forthwith be served on the creditor or his lawyer. Upon discharge of the order of arrest, the property arrested or seized shall be delivered to the party making the deposit or giving the counterbond, or the person appearing in his behalf, the deposit or counterbond aforesaid standing in place of the vessel or vessels released. Should such deposit or counterbond for any reason be found to be, or become insufficient, and the party furnishing the same fails to file an additional co-counterbond, the attaching creditor may apply for a new order of arrest or seizure. Section 13. Discharge of Order of Arrest for Improper or Irregular Issuance The party whose vessel/s has been arrested may also, at any time either before or after the release of the arrested vessel, or before any arrest or seizure has been effected, upon reasonable notice to the creditor, apply to the judge who granted the order, or to the judge of the court in which the action is pending, for an order to discharge the order of arrest or seizure on the ground that the same improperly or irregularly issued. After hearing, the judge shall order the discharge of the order of arrest or seizure if it appears that it was improperly or irregularly issued and the defect is not cured forthwith. Section 14. Extrajudicial Foreclosure The provisions of the Chattel Mortgage Law on the remedy of extra-judicial foreclosure of mortgages in so far as they are not inconsistent herewith shall still apply. For the purpose of taking possession of the vessel or vessels, the foreclosing creditor may secure from a judge of the Court of First Instance of the province where the vessel may be found or where the creditor or debtor resides an order for the arrest or seizure of the vessel. Upon such order of seizure or arrest being issued, the sheriff shall immediately take possession of the vessel or vessels for the purpose of foreclosure and sale. The vessel may only be released in accordance with the provisions of Section 13 of this Act, or when the debtor pays the outstanding obligation. Section 15. Foreign Ship Mortgages As used in Sections 10 to 18 hereof, the term "preferred mortgage" shall include, in addition to a preferred mortgage made pursuant to the provisions of this Decree, any mortgage, hypothecation, or similar charge created as security upon any documented foreign vessel if such mortgage, hypothecation, or similar charge has been duly and validly executed in accordance with the laws of the foreign nation under the laws of which the vessel is documented and has been duly registered in accordance with such laws in a public register either at the port of registry of the vessel or at a central office; and the term "preferred mortgage lien" shall also include the lien of such mortgage, hypothecation, or similar charge: Provided, however, That such "preferred mortgage lien" in the case of a foreign vessel shall be subordinate to maritime liens for

repairs, supplies, towage, use of drydock or marine railway, or other necessaries, performed or supplied in the Philippines. Section 16. Receiver in Foreclosure; possession by sheriff In any suit in rem in admiralty for the enforcement of the preferred mortgage lien, the court may appoint a receiver and, in its discretion, authorize the receiver to operate the mortgaged vessel. The sheriff may be authorized and directed by the court to take possession of the mortgaged vessel notwithstanding the fact that the vessel is in the possession or under the control of any person claiming a possessory common law lien. Section 17. Preferred Maritime Lien, Priorities, Other Liens (a) Upon the sale of any mortgaged vessel in any extra-judicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon, all pre-existing claims in the vessel, including any possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree, shall be held terminated and shall thereafter attach in like amount and in accordance with the priorities established herein to the proceeds of the sale. The preferred mortgage lien shall have priority over all claims against the vessel, except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government; (2) crew's wages; (3) general average; (4) salvage; including contract salvage; (5) maritime liens arising prior in time to the recording of the preferred mortgage; (6) damages arising out of tort; and (7) preferred mortgage registered prior in time. (b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade, the residue shall be divided among them pro rata. All credits not paid, whether fully or partially shall subsist as ordinary credits enforceable by personal action against the debtor. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances of Vessels in the port of documentation. Section 18. Suit in Personam in Admiralty on Default (a) Upon the default of any term or condition of a preferred mortgage upon a vessel, the mortgagee may, in addition to all other remedies granted by this Decree, bring suit in personal in admiralty in a district court of the Philippines, against the mortgagor for the amount of the outstanding mortgage indebtedness secured by such vessel or any deficiency in the full payment thereof. (b) This Decree shall not be construed, in the case of a mortgage covering, in addition to vessels, realty or personality other than vessels, or both, to authorize the enforcement by suit in rem in admiralty of the rights of the mortgage in respect to such realty or personality other than vessels. Section 19. Surrender of Documents; termination of mortgagee's interest; sale of mortgaged vessel (a) The documents of a vessel of the Philippines covered by a preferred mortgaged may not be surrendered (except in the case of the forfeiture of the vessel or its sale by the order of any court of the Philippines or any foreign country) without the

approval of the Maritime Industry Authority. The Administrator shall not grant such approval without the mortgagee's consent. (b) The interest of the mortgage in a vessel of the Philippines covered by a mortgage, shall not be terminated by the forfeiture of the vessel for a violation of any law of the Philippines, unless the mortgage authorized, consented, or conspired to effect the illegal act, failure, or omission which constituted such violation. Neither shall the chance by the shipowner in the use or character of the vessel or in the business of the mortgagor, without the consent of the mortgagee, nor the failure by the mortgagor to comply with the provisions of Section 5 hereof affect the validity or preference of the preferred ship mortgage as against third persons. (c) Upon the sale of any vessel of the Philippines covered by a preferred mortgage in any extrajudicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a maritime lien other than a preferred maritime lien, the vessel shall be sold free from all pre-existing claims thereon; but the court shall, upon the request of the mortgagee, the plaintiff, or any intervenor, require the purchase at such sale to give and the mortgagee to accept a new mortgage of the vessel for the balance of the term of the original mortgage. The conditions of such new mortgage shall be the same, so far as practicable, as those of the original mortgage and shall be subject to the approval of the court. If such new mortgage is given, the mortgagee shall not be paid from the proceeds of the sale and the amount payable as the purchase price shall be held diminished in the amount of the new mortgage indebtedness. (d) No vessel of domestic ownership shall be mortgaged, nor, any rights under said mortgage shall be assigned, to any person not a citizen of the Philippines without the approval of the Maritime Industry Authority. The penalties and sanctions provided for under Commonwealth Act No. 606 shall apply in case of any violation hereof. (e) The foreclosure sale of vessels mortgaged under the provisions of this Decree, whether judicially or extra- judicially, shall not require the approval of the Maritime Industry Authority. Section 20. Who May Bid in the Foreclosure Sale The following persons are qualified to bid in the foreclosure sale of the mortgaged vessel: (a) Citizens of the Philippines or corporations 60% of the capital of which is owned by Filipino citizens. (b) A foreign mortgagee or foreign national whose country has diplomatic relations with the Philippines or whose country grants reciprocal rights to Filipino citizens. In case the purchaser is a foreign individual or entity, the Philippine Coast Guard shall, upon presentation of the certificate of sale, cancel the registration of the vessel and issue a certificate to that effect upon request. Section 21. Maritime Lien for Necessaries; persons entitled to such lien Any person furnishing repairs, supplies, towage, use of dry dock or marine railway, or other necessaries to any vessel, whether foreign or domestic, upon the order of the owner of such vessel, or of a person authorized by the owner, shall have a maritime lien on the vessel,

which may be enforced by suit in rem, and it shall be necessary to allege or prove that credit was given to the vessel. Section 22. Persons Authorized to Procure Repairs, Supplies, and Necessaries The following persons shall be presumed to have authority from the owner to procure repairs, supplies, towage, use of dry dock or marine railway, and other necessaries for the vessel: The managing owner, ship's husband, master or any person to whom the management of the vessel at the port of supply is entrusted. No person tortuously or unlawfully in possession or charge of a vessel shall have authority to bind the vessel. Section 23. Notice to Person Furnishing Repairs, Supplies, and Necessaries The officers and agents of a vessel specified in Section 22 of this Decree shall be taken to include such officers and agents when appointed by a character, by an owner pro hac vice, or by an agreed purchaser in possession of the vessel; but nothing in this Decree shall be construed to confer a lien when the furnisher know, or by exercise of reasonable diligence could have ascertained, that because of the terms of a charter party, agreement for sale of the vessel, or for any other reason, the person ordering the repairs, supplies, or other necessaries was without authority to bind the vessel therefor. Section 24. Waiver of Right to Lien Nothing in this Decree shall be construed to prevent the furnisher of repairs, supplies, towage, use of dry dock or marine railway, or other necessaries, or the mortgagee, from waiving his right to a lien, or in the case of a preferred mortgage lien, to the preferred status of such lien, at any time by agreement or otherwise. Section 25. Existing Mortgages Not Affected; exception This Decree shall not apply (1) to any existing mortgage, or (2) to any mortgage hereafter placed at any vessel under an existing mortgage, so long as such existing mortgage remains undischarged. The Decree shall, however, apply to mortgages executed pursuant to Presidential Decree No. 214, provided, that no vested rights of third parties are affected thereby. Section 26. Rules and Regulations by Philippine Coast Guard and the Maritime Industry Authority The Philippine Coast Guard and the Maritime Industry Authority are hereby authorized to make such rules and regulations within their respective spheres of jurisdiction, as they may deem necessary for the efficient execution of the provisions of this Decree. Section 27. Port of Documentation Whenever in the Ship Mortgage Decree of 1978 the words "port of documentation" are used, they shall be deemed to mean the port of registry of the vessel. Section 28. Instruments and Acts Validated All mortgages of any vessel of any part thereof, and all documentations, recordations, indorsements and indexing thereof, and proceedings incidental thereto made or done, prior to the effectivity of this Decree are declared valid to the extent they would have been valid if the port or ports at which it should have been documented in accordance with law; and this Section is declared retroactive so as to

accomplish such validations: Provided, That nothing herein contained shall be construed to deprive any person of any vested right. Section 29. Repealing Clause The provisions of the New Civil Code, the Code of Commerce, the Chattel Mortgage Law, the Revised Rules of Court and of such other laws, decrees, executive orders, rules and regulations which are in conflict or inconsistent with the provisions of this Decree are hereby repealed, amended or modified accordingly. If for any reason, any section, subsection, sentence, clauses or term of this Decree is held to be unconstitutional such decision shall not affect the validity of the other provisions of this Decree. Section 30. Effectivity This Decree shall take a effect upon its approval. Done in the City of Manila, this 11th day of June, in the year of Our Lord, nineteen hundred and seventy-eight. CASE Digest Case Digest on Philippine National Bank vs. Court of Appeals Philippine National Bank vs. Court of Appeals [337 SCRA 381 (Aug. 8, 2000)] Preference of Credit: Maritime Lien Facts: To finance the acquisition of 7 shipping vessels, the Philippine International Shipping Corporation (PISC) applied for and was granted by National Investment Development Corporation (NIDC) guaranty accomodations. As security for these guaranty accomodations, PISC executed chattel mortgages on the vessels to be acquired by it. Meanwhile, PISC entered into a contract with Hong Kong United Dockyards, Ltd. for the repair and conversion of one of the vessels, M/V Asean Liberty. The Central Bank of the Phils. authorized PISC to open with China Banking Corporation (CBC) a standby letter of credit for US$545,000 in favor of Citibank, N.A. to cover the repair and partial conversion of the vessel M/V Asean Liberty. PISC executed an Application and Agreement for Commercial Letter of Credit for US$545,000 with CBC in favor of Citibank. CBC then issued its Irrevocable Standby Letter of Credit for US$545,000 in favor of Citibank for the account of PISC. PISC executed a promissory note for US$545,000 in favor of Citibank pursuant to the Loan Agreement between PISC and Citibank. Upon failure of PISC to fulfill its obligations, Citibank sent CBC a letter drawing on the Letter of Credit. CBC then instructed its correspondent Irving Trust Co. to pay to Citibank the amount of US$242,225. Subsequently, for failure of PISC to settle its obligations under the guaranty accommodations, the Philippine National Bank (PNB) conducted an auction sale of the mortgaged vessels. NIDC emerged as the highest bidder in these auctions. PISC, claiming that the foreclosure sale of its mortgaged vessels was illegal and irregular, instituted a civil case for the annulment of the foreclosure and auction sale. CBC filed a complaint in intervention for recovery upon a maritime lien against the proceeds of the sale of the foreclosed vessels. Issue: Whether or not CBCs claim as evidenced by its Irrevocable Letter of Credit is in the nature of a maritime lien under the provisions of P.D. No. 1521; and if so, whether or not

said maritime lien is preferred over the mortgage lien of PNB/NIDC on the foreclosed vessel M/V Asean Liberty Held: Under the provisions of P.D. No. 1521, any person furnishing repairs, supplies, or other necessities to a vessel on credit will have a maritime lien. Such maritime lien, if it arose prior to the recording of a preferred mortgage lien, shall have priority over the said mortgage lien. In this case, it was Hongkong United Dockyards, Ltd. which originally possessed a maritime lien over the vessel M/V Asean Liberty by virtue of its repair of the said vessel on credit. CBC, however, stands as guarantor of the loan extended by Citibank to PISC. It was Citibank which advanced the money to PISC. It was only upon the failure of PISC to fulfill its obligations under its promissory note to Citibank that CBC was called upon by Citibank to exercise its duties under the Standby Letter of Credit. The applicable law, which is the Shipping Mortgage Decree of 1978, was patterned closely after the U.S. Ship Mortgage Act of 1920. Being of foreign origin, the provisions of the Ship Mortgage Decree of 1978 may thus be construed with the aid of foreign jurisprudence. Under American jurisprudence, furnishing money to a master in good faith to obtain repairs or supplies or to remove liens, in order to forward the voyage of the vessel, raises a lien just as though the things for which money was obtained to pay for had been furnished by the lender. This is in accord with Art5. 1302 of the Civil Code which provides that there is legal subrogation when a third person, not interested in the fulfillment of the obligation, pays with the express or tacit approval of the debtor. In this case, the amount for the repair of vessel M/V Asean Liberty was advanced by Citibank and was used for the purpose of paying off the original maritime lienor, Hongkong United Dockyards, Ltd. As a person not interested in the fulfillment of the obligation between PISC and Hongkong United Dockyards, Ltd., Citibank was subrogated to the rights of Hongkong United Dockyards, Ltd. as maritime lienor over the vessel. CBC, as guarantor, was itself subrogated to all the rights of Citibank as against PISC, the latters debtor. Art. 2067 of the civil Code provides that the guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. When CBC honored its contract of guaranty with Citibank on March 30, 1983, it also acquired by subrogation the maritime lien over the vessel which attached to it on March 12, 1979 in favor of Hongkong United Drydocks, Ltd. The maritime lien of CBC thus arose prior to the recording of PNB/NIDCs mortgage on September 25, 1979. As such, the said maritime lien has priority over the said mortgage lien.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 103576 August 22, 1996 ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY,respondents. VITUG, J.:p Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant petition for review oncertiorari. Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect (c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. . . . In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage. 1 In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These borrowings were on due date also fully paid. On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial foreclosure of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the

court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5 Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice. Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debt or is secured by the personalcommitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit upon the essential condition that if the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, 7 but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character 8 of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void. 9 While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by

the Chattel Mortgage Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid between the parties (not against third persons acting in good faith 12), the fact, however, that the statute has provided that the parties to the contract must execute an oath that . . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of fraud. 13 makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court said . . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are made and not from the date of the mortgage. 15 The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of Appeals, 19 we have said: Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by respondent bank as an artificial person. 20

While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation. Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz: In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction. 21 (Emphasis supplied.) The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs.Villamor; 22 thus: (L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts of justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude towards the court is to be observed, "not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance." And it is through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of the respect due to the courts and judicial officers . . . 23 The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED. Kapunan and Hermosisima, Jr., JJ., concur. Padilla, J., took no part. Bellosillo, J., ic on leave. Case Digest CASE DIGEST (Credit Transactions): ACME vs. Court of Appeals ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC vs.HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY G.R. No. 103576 August 22, 1996 FACTS:

Petitioner Chua Pac, the president and general manager of co-petitioner Acme executed a chattel mortgage in favor of private respondent Producers Bank as a security for a loan of P3,000,000. A provision in the chattel mortgage agreement was to this effect: "In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after the constitution of this mortgage." In due time, the loan of P3,000,000.00 was paid. Subsequently it obtained additional loan totalling P2,700,000.00 which was also duly paid. Another loan was again extended (P1,000,000.00) covered by four promissory notes for P250,000.00 each, but went unsettled prompting the bank to apply for an extrajudicial foreclosure with the Sheriff. ISSUE: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations yet to be contracted or incurred? HELD: No. While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

EN BANC

Torres vs. Limjap No. 34385, No. 34386, 56 Phil. 141, September 21, 1931 ALEJANDRA TORRES, ET AL., plaintiff-appellees, vs. FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B. Henson,defendant-appellant.

Duran, Lim and Tuason for appellant. Guevara, Francisco and Recto for appellees. JOHNSON, J.: These two actions were commenced in the Court of First Instance of Manila on April 16, 1930, for the purpose of securing from the defendant the possession of two drug stores located in the City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the plaintiffs. In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties. In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof they became entitled to the possession of the chattels and to foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary bonds, the court issued in each case an order directing the sheriff of the City of Manila to take immediate possession of said drug stores. The defendant filed practically the same answer to both complaints. He denied generally and specifically the plaintiffs' allegations, and set up the following special defenses: (1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in the description of the property mortgaged; and (2) That the chattels which the plaintiffs sought to recover were not the same property described in the mortgage.

The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and P100,000 in the second case. Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of the parties. After hearing the evidence adduced during the trial and on July 17, 1930, the Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion (a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows: En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y 37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el Sheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en ambas causas. From the judgment the defendant appealed, and now makes the following assignments of error: I. The lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattels mortgaged and in failing to hold that the chattel mortgages were null and void for lack of particularity in the description of the chattels mortgaged. II. The lower court erred in refusing to allow the defendant to introduce evidence tending to show that the stock of merchandise found in the two drug stores was not in existence or owned by the mortgagor at the time of the execution of the mortgages in question. III. The lower court erred in holding that the administrator of the deceased is now estopped from contesting the validity of the mortgages in question. IV. The lower court erred in failing to make a finding on the counterclaims of the defendant. With reference to the first assignment of error, we deem it unnecessary to discuss the

question therein raised, inasmuch as according to our view on the question of estoppel, as we shall hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped from questioning the validity of these chattel mortgages. In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No. 1508, which reads as follows: A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding. In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body was undoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of business, it would be practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic development of the country. In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given effect, and courts will not follow the letter of a statute when it leads away from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the Act. On this subject, Sutherland, the foremost authority on statutory construction, says: The Intent of Statute is the Law. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and the primary rule of construction is to ascertain and give effect to that intent. The intention of the legislature in enacting a law is the law itself, and must be enforced when ascertained, although it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the legislature

and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives life to a legislative enactment. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes best with the content and promotes in the fullest manner the apparent policy and objects of the legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.) A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding . . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.) Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.) In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendantappellant to introduce evidence tending to show that the goods seized by the sheriff were in the nature of after-acquired property. With reference to the third assignment of error, we agree with the lower court that, from the facts of record, the defendant-appellant is estopped from contenting the validity of the mortgages in question. This feature of the case has been very ably and fully discussed by the lower court in its decision, and said discussion is made, by reference, a part of this opinion. As to the fourth assignment of error regarding the counterclaims of the defendantappellant, it may be said that in view of the conclusions reached by the lower court, which are sustained by this court, the lower court committed no error in not making any express finding as to said counterclaims. As a matter of form, however, the counter-claims should have been dismissed, but as the trial court decided both cases in favor of the plaintiffs and

confirmed and ratified the orders directing the sheriff to take possession of the chattels on behalf of the plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims. For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in accordance with the facts and the law, and the same should be and is hereby affirmed, with costs. So ordered. Avancea, C.J., Street, Malcolm, Villamor, Ostrand, Romualdez, Villa-Real, and Imperial, JJ., concur. Case Digest TorresV.Limjap 56 Phil. 141GR No.34386 , Sept. 21, 1931 Facts: On 16 April 1930, Torres raised cases against Limjap before the Court of First Instance tosecure the possession of 2 drug stores located in the city of Manila, covered by twochattel mortgage executed by the deceased John B. Henson in favor of the plaintiff In the first case the plaintiffs alleged that Jose B. Henson, had executed in their favor, achattel mortgage on his drug store at Nos. 101-103 Calle Rosario, known as FarmaciaHenson, to secure a loan of P7,000, although it was made to appear in the instrumentthat the loan was for P20,000. In the second case the plaintiffs alleged that they were the heirs of the late DonFlorentino Torres; and that Jose B. Henson executed in favor of Don Florentino Torres achattel mortgage on his three drug stores known as Henson's Pharmacy, FarmaciaHenson and Botica Hensonina, to secure a loan of P50,000, which was later reduced toP26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the onlysecurity by agreement of the parties. In both cases the plaintiff argues that the defendant had violated the terms of themortgage, thus, they have the right to take in possession and foreclose the chattelmortgage Issue: Should Torres camp be allowed to take possession of the drugstores? Lower Court Decision: In favor of Torres Higher Court Decision: Affirmed Reasons: A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding . . . where the after-acquired property is in renewal of, or insubstitution for, goods on hand when the mortgage was executed, oris purchased with the proceeds of the sale of such goods, etc. (11 C.J.,p. 436.)

G.R. No. 74225 April 17, 1989 REPUBLIC OF THE PHILIPPINES, petitioner, vs. INTERMEDIATE APPELLATE COURT, SIMPLICIO BERDON, GAUDIOSA BERDON and LUIS BERDON,respondents. The Solicitor General for petitioner. Bernardito A. Florido for private respondents. CORTES, J.: The Republic assails as erroneous the decision of the Intermediate Appellate Court affirming that of the Court of First Instance which dismissed the petition for forfeiture of unexplained wealth under Republic Act No. 1379 filed against private respondents herein. The dismissed petition charged Simplicio Berdon, an Assistant Staff Civil Engineer assigned to Regional Office No. VII of the Bureau of Public Highways in Cebu City, with having acquired unexplained wealth in violation of Republic Act No. 1379. It alleged that during the period from 1963 to 1969 he and his wife Gaudiosa Mangubat Berdon purchased parcels of land and constructed a house, the purchase prices and costs of which were not commensurate to their incomes, savings or declared assets. Pleaded as defendants in the petition were Berdon, his wife, and Luis Berdon, his father. Petitioner Republic of the Philippines, which valued the unexplained wealth at P124,495.82, thus sought the forfeiture of the properties and the issuance of a writ of attachment. Upon orders of the trial court, the properties enumerated in the petition were attached. During the course of the trial, the following evidence was adduced by the parties: xxx xxx xxx The evidence for the petitioner as testified to by Joselito Magno and Atty. David Macayayong may be summarized as follows: That on the basis of a letter complaint sent to the Office of the President by a certain George Valde against Simplicio Berdon, the Complaint and Investigation Office, Malacaang, Manila, sent Joselito Magno and Atty. David Macayayong to conduct an actual field investigation on Mr. Simplicio Berdon. Both investigators went to Cebu City, Danao City and the Northern Towns of Bogo and Borbon, Cebu and secured pertinent documents relative to the case such as the service record of the respondent Simplicio Berdon (Exh. 'B') copies of sworn statement of financial condition, assets, income and liabilities of respondent-spouses Berdon, Exhibit "C" for the year 1962; Exhibit "D" for 1963; Exhibit "E" for 1965; Exhibit "F" for 1967 and Exhibit "G" for 1969. Copies of documents regarding the acquisition of respondent Simplicio Berdon were also obtained, to wit: Exhibit 'H' which is a Deed of Absolute Sale of a parcel of land in favor of respondents-spouses Berdon for a consideration of P3,700.00 executed on July 19,1967; Exh. "I" is a contract to sell by installments of a parcel of land of the Singson Village Subdivision, Cebu City, in favor of respondent Simplicio Berdon for a monthly installment

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

of P107.00, more or less, and with a total consideration of P9,000.00; Exh. "J" is a Deed of Absolute Sale of a parcel of agricultural land dated September 6,1967 also in favor of respondent Simplicio Berdon for a consideration of P3,000.00; Exh. "K" is another Deed of Absolute Sale of a parcel of land situated in Cebu City, containing an area of 623 square meters in favor of respondent Simplicio Berdon for the sum of P15,825.00 executed on November 9, 1967; Exh. "L" is a Deed of Sale With Right to Repurchase within a period of 5 years of a parcel of agricultural land situated at Managasa, Borbon, Cebu executed by Fidel Sepulveda in favor of respondent Simplicio Berdon on November 27, 1967 for a consideration of P5,000.00; Exh. 'M' is another Deed of Sale with Right to Repurchase within the period of three (3) years of a parcel of agricultural land also situated at Managasa, Borbon, Cebu, executed by Felicidad S. Guiachon on December 7, 1967 in favor of respondent Simplicio Berdon for a consideration of P3,000.00; Exh. "N-1" is a Deed of Absolute Sale of a parcel of agricultural land situated in Managasa, Borbon, Cebu, executed by Elias M. Dosdos on December 17, 1967 in favor of respondent Simplicio Berdon for the sum of P25,000.00; Exh. "Y" is a Deed of Sale with Right to Repurchase executed by Felicidad S. Guiachon on July 4, 1968 in favor of respondent Simplicio Berdon for a sum of P5,000.00; Exh. "P" is another Deed of Sale with Right to Repurchase executed by Fidel Sepulveda on November 8, 1968 in favor of Simplicio Berdon for the sum of P10,000. 00 and Exh. "O" refer to a Deed of Absolute Sale dated November 18, 1969 of a parcel of land situated at Bogo, Cebu in favor of respondent Simplicio Berdon; Exh. "S" refer to a Deed of Extrajudicial partition of a parcel of land acquired by respondent Luis Berdon for a consideration of P1,000.00. This parcel of land is included since the respondent Luis Berdon had no known source of income and this land must have been purchased by the respondent Simplicio Berdon but under the name of respondent Berdon; and Exh. "R" is a Declaration of Real Property, a residential house of strong materials owned by respondent Simplicio Berdon with an assessed value of P34,480.00. An analysis and evaluation of respondent Simplicio Berdon's financial condition, income, assets and liabilities reflected in Exhs. "C", "D", "E", "F" and "G" from 1962 to 1969 show an unexplained total income of P105,495.92. Not included in the computation is the sum of P1,000.00 which was the consideration of the parcel of land purchased in the name of respondent Luis Berdon so that the total unexplained income of respondent Simplicio Berdon for the years 1962 to 1969 is P109,495.92. The total amounts paid by respondents spouses in the several real properties purchased and/or constructed by them amounts to P101,305.00 as shown in Exhs. "H", "I" , "J" , "K", "L", "M", "N-1", "O" and "P", "Q" and "R" plus the aforementioned sum of P1,000.00 purchased for a parcel of land in the name of Luis Berdon (Exh. 'S'). Since the money used to purchase those real properties came from an unexplained income these properties should be forfeited in favor of the state. The evidence for the respondents as testified to by respondents spouses Simplicio Berdon and Gaudiosa Mangubat Berdon is as follows:

Respondent Mrs. Berdon is employed as a pharmacist at the Danao General Hospital (Exh. '4'). Her parents who have several landholdings in the municipality of Borbon, Cebu (Exh. '9') extended to respondents spouses a loan in the sum of P5,000.00 (Exh. '10-A') to buy the house and lot in Danao City. Aside from this amount respondents spouses were given by Mrs. Berdon's mother the sum of P3,000.00 to repair said house which was already very dilapidated. Respondents deny having owned a moviehouse in Bogo, Cebu. Moreover, Mrs. Romualda Mangubat, respondent Mrs. Berdon's mother, owns the moviehouse. Respondent Simplicio Berdon testified that he started in the government service as construction foreman in the year 1955. Since then he has been in the government service and rose from the ranks when he was promoted to the position of Assistant Staff Civil Engineer in the Ministry of Public Highways, Region 7. Aside from respondents spouses' income as government employees they have also other income, and for which they have paid taxes thereon under Presidential Decree 370 (Exhs. '12' and '12- A') and Presidential Decree 631 (Exhs. '13' & '13-A'). In respondents-spouses' statement of assets and liabilities as of December 31, 1967, the P20,000.00 disbursed as insurance premiums was erroneous. This amount represents the face value of the insurance policy of respondent Simplicio Berdon (Exh.'15'). Insurance premiums should have been only P427.66 semiannually (Exh. '15-A'). The respondent Simplicio Berdon also denied petitioner's allegation that the purchase price of the parcel of land he bought from a certain Elias Dosdos was P45,000.00. The truth is that he paid only P25,000.00 as shown in Exhs. "16" & "16-A". The residential house of respondents spouses situated in Lahug, Cebu City, actually costs about P25,000.00 as shown in the building permit of said house (Exhs. '17' and '17A') and respondents spouses were able to obtain a real estate loan of P14,000.00 from the GSIS to finance the construction of said building (Exhs. '18' & '19'). Sometime on November 7, 1967, the respondent Simplicio Berdon obtained a personal loan from former Congressman Ramon Durano in the sum of P100,000.00 under a Memorandum of Agreement (Exhs. '20') which amount he used to purchase the several parcels of agricultural lands in 1967 and 1968. The marriage contract of the respondents spouses marked Exh. "21" showed that Congressman and Mrs. Durano stood as sponsors of the wedding of respondents spouses. Defendants spouses had also obtained a loan from the Development Bank of the Philippines (Exh. '22') which they used to purchase the lot in Bogo, Cebu containing an area of 359 sq. m. (Exh. '23') mentioned in petitioner's Exh. "O". Respondent Luis Berdon was not presented. However, Exhibit "11" which is a medical certificate issued by the municipal health officer of Bordon, Cebu was presented to show that the general physical condition of the respondent Luis Berdon cannot sustain long distance land travel. Exhs. "5" and "9" were also presented showing that the respondent Luis Berdon is a retired school teacher and a declared owner of several parcels of land situated in Bordon,

Cebu, respectively. (pp. 67-76, Record on Appeal). [IAC Decision, pp. 3-7; Rollo, pp. 34-38.] On the basis of the aforesaid evidence, the trial court dismissed the petition, holding that respondents have no unexplained wealth. The Republic appealed the trial court's decision to the Intermediate Appellate Court. The appellate court, finding no reversible error in the decision appealed from, affirmed said decision. Said court found that, on the basis of the evidence presented, "the assets acquired by the respondent-spouses in excess of their income and receipts from their employment in the Government were satisfactorily explained, thus justifying the conclusion of the trial court that respondent-spouses do not have unexplained wealth subject to forfeiture under Republic Act 1379." [IAC Decision, p. 7; Rollo, p. 38.] Hence, the instant recourse by the Republic to this Court through a petition to review the appellate court's decision. Republic Act No. 1379, entitled "An Act Declaring Forfeiture in Favor of the State of Any Property Found to Have Been Unlawfully Acquired By Any Public Officer or Employee and Providing for the Procedure Thereof," providesinter alia: Sec. 2. Filing of petition. Whenever any public officer or employee has acquired during his incumbency an amount of property which is manifestly out of proportion to his salary as such public officer or employee and to his other lawful income from legitimately acquired property, said property shall be presumed prima facie to have been unlawfully acquired.... xxx xxx xxx Sec. 6. Judgment. If the respondent is unable to show to the satisfaction of the court that he has lawfully acquired the property in question, then the court shall declare such property, forfeited in favor of the State, and by virtue of such judgment the property aforesaid shall become property of the State: Provided, That no judgment shall be released within six months before any general election or within three months before any special election. The Court may, in addition, refer this case to the corresponding Executive Department for administrative or criminal action, or both. xxx xxx xxx Clear from these provisions is that the law creates a presumption against the public officer or employee who acquires property grossly disproportionate to his income, i.e. that the property was unlawfully acquired. However, this presumption is juris tantum. It may be rebutted by the public officer or employee by showing to the satisfaction of the court that his acquisition of the property was lawful. In the instant case, both the trial and the appellate courts had found satisfactory the private respondents' explanation of their acquisition of the properties and consequently held that they do not have any unexplained wealth as contemplated by the law. The Solicitor General contends that the findings of the appellate court are not supported by the evidence and, hence, should not bind the Court. The Court finds the contention unmeritorious, as the evidence indeed obviates a finding of unexplained wealth. The Court has carefully gone over the evidence presented by private respondents, and like the trial court and the Intermediate Appellate Court, finds the acquisition of the subject properties satisfactorily explained.

While respondent spouses had acquired properties and constructed a house the costs of which were disproportionate to their combined incomes from their employment in the government it had been proved that such were financed through a donation and loans, to wit: (1) a P3,000.00 donation and a P5,000.00 loan from the parents of Mrs. Berdon who owned several parcels of land and a moviehouse [TSN, October 3,1979, pp. 11-17; Exh. "9"]; (2) a P14,000.00 loan from the Government Service Insurance System [Exhs. "18" and "19"]; (3) a P6,000.00 loan from the Development Bank of the Philippines [TSN, November 21, 1979, pp. 21-22; Exhs. "22" and "23"]; and, (4) a P100,000.00 loan from Congressman Ramon Durano, a wedding sponsor of respondent spouses [TSN, November 20, 1979, pp. 18-19; Exh. "21"], for the purchase of agricultural land to be planted with sugarcane (although only a total amount of approximately P60,000.00 was actually released) [TSN, November 21, 1979, pp. 17-19; Exh. "20"]. The Solicitor General also makes much of the fact that the statements of assets and liabilities filed by private respondent Simplicio Berdon covering the years material to the case did not accurately reflect the donation and the loans granted to private respondent spouses and that Simplicio's testimony in effect contradicts the entries in said statements. It must be emphasized, however, that in determining whether or not there is unexplained wealth within the purview of R.A. No. 1379 the courts are not bound by the statements of assets and liabilities filed by the respondent. ** On the contrary, this statute affords the respondent every opportunity to explain, to the satisfaction of the court, how he had acquired the property in question [Sec. 5, R.A. No. 1379.] In sum, the presumption under See. 2 of R.A. No. 1379 that the subject properties were unlawfully acquired had been successfully rebutted by private respondents through competent evidence. Hence, the Intermediate Appellate Court did not err in affirming the trial court's decision dismissing the Republic's petition. WHEREFORE, no reversible error having been committed by the Intermediate Appellate Court, the instant petition is hereby DENIED and its decision dated March 31, 1986 is AFFIRMED. SO ORDERED. Fernan, C.J., and Feliciano, J., concur. Gutierrez, Jr. and Bidin, JJ., took no part. Case Digest Republic vs. CA 172 SCRA 296 Facts: Spouses Berdon were charged of unexplained wealth under R.A. 1379. Husband Berdon, an assistant civil engineer of the DPWH, and wife, a pharmacist, acquired parcels of land and constructed a house. The amount is said to be disproportionate to their income. The RTC dismissed the case. Likewise, CA found nothing to reverse. Hence, the Republic made this appeal.

Held/Ratio: The courts are not bound by the statement of assets and liabilities in determining whether a wealth is unexplained under the language of R.A. 1739. It was satisfactorily explained how the spouses acquired the money for the purchase of parcels of land and the construction of a house. The money came from loans and donations.

REPUBLIC ACT NO. 1506 REPUBLIC ACT NO. 1506 - AN ACT TO AMEND SECTION EIGHT OF REPUBLIC ACT NUMBERED FIVE HUNDRED AND EIGHTY- EIGHT, ENTITLED "AN ACT TO AMEND CERTAIN SECTION OF COMMONWEALTH ACT NUMBERED FOUR HUNDRED AND SIXTY-SIX, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED," TO MAKE THE RATES PRESCRIBED THEREIN PERMANENT

Section 1. Section eight of Republic Act Numbered Five hundred and eighty-eight, as amended by Republic Act Numbered Seven hundred twenty-six, Republic Act Numbered Nine hundred and fifty-eight, Republic Act Numbered One thousand ninety-one, and Republic Act One thousand two hundred eighty, is further amended to read as follows: "Sec. 8. Sec. 2. The provisions of this Act shall take effect upon its approval." This Act shall take effect upon its approval.

Approved: June 16, 1956