You are on page 1of 23

CHATTEL MORTGAGE

PCI LEASING AND FINANCE V. TROJAN METAL INDUSTRIES 2010


The Facts

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to


petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of
extending a loan, PCILF offered to buy various equipment TMI owned,
namely: a Verson double action hydraulic press with cushion, a Hinohara
powerpress 75-tons capacity, a USI-clearing powerpress 60-tons capacity,
a Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-tons
capacity, a YMGP powerpress 15-tons capacity, a lathe machine, a vertical
milling machine, and a radial drill. Hard-pressed for money, TMI agreed.
PCILF and TMI immediately executed deeds of sale5 evidencing TMIs sale
to PCILF of the various equipment in consideration of the total amount of
P 2,865,070.00.

In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its
complaint. The RTC ruled that the lease agreement must be presumed
valid as the law between the parties even if some of its provisions
constituted unjust enrichment on the part of PCILF. The dispositive portion
of its Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI


Leasing and Finance, Inc. and against defendants Trojan Metal, Walfrido
Dizon, and Elizabeth Dizon, as follows:

1.
Ordering the plaintiff to be entitled to the possession of herein
machineries.
PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997,
whereby the latter leased from the former the various equipment it
previously owned. Pursuant to the lease agreement, TMI issued postdated
checks representing 24 monthly installments. The monthly rental for the
Verson double action hydraulic press with cushion was in the amount of
P62,328.00; for the Hinohara powerpress 75-tons capacity, the USIclearing powerpress 60-tons capacity, the Watanabe powerpress 60-tons
capacity, the YMGP powerpress 30-tons capacity, and the YMGP
powerpress 15-tons capacity, the monthly rental was in the amount of
P49,259.00; and for the lathe machine, the vertical milling machine, and
the radial drill, the monthly rental was in the amount of P22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of
P1,030,350.00,7 which would serve as security for the timely performance
of TMIs obligations under the lease agreement, to be automatically
forfeited should TMI return the leased equipment before the expiration of
the lease agreement.

Further, spouses Walfrido and Elizabeth Dizon, as TMIs President and VicePresident, respectively executed in favor of PCILF a Continuing Guaranty
of Lease Obligations.8 Under the continuing guaranty, the Dizon spouses
agreed to immediately pay whatever obligations would be due PCILF in
case TMI failed to meet its obligations under the lease agreement.

To obtain additional loan from another financing company,9 TMI used the
leased equipment as temporary collateral.10 PCILF considered the second
mortgage a violation of the lease agreement. At this time, TMIs partial
payments had reached P1,717,091.00.11 On 8 December 1998, PCILF
sent TMI a demand letter12 for the payment of the latters outstanding
obligation. PCILFs demand remained unheeded.

On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of
Quezon City a complaint13 against TMI, spouses Dizon, and John Doe
(collectively referred to as respondents hereon) for recovery of sum of
money and personal property with prayer for the issuance of a writ of
replevin, docketed as Civil Case No. Q-99-37559.

On 7 September 1999, the RTC issued the writ of replevin14 PCILF prayed
for, directing the sheriff to take custody of the leased equipment. Not long
after, PCILF sold the leased equipment to a third party and collected the
proceeds amounting to P1,025,000.00.15

2.
Ordering the defendants to pay the remaining rental obligation in
the amount of Php 888,434.48 plus legal interest from the date of filing of
the complaint;
3.
Ordering defendant to pay an attorneys fees in the amount of Php
50,000.00;
4.

Ordering the defendant to pay the cost of suit.

SO ORDERED.17

Respondents appealed to the Court of Appeals alleging that the RTC erred
in ruling that PCILF was entitled to the possession of TMIs equipment and
that respondents still owed PCILF the balance of P888,423.48.

The Ruling of the Court of Appeals

The Court of Appeals ruled that the sale with lease agreement was in fact
a loan secured by chattel mortgage. The Court of Appeals held that since
PCILF sold the equipment to a third party for P1,025,000.00 and TMI paid
PCILF a guaranty deposit of P1,030,000.00, PCILF had in its hands the sum
of P2,055,250.00, as against TMIs remaining obligation of P888,423.48, or
an excess of P1,166,826.52, which should be returned to TMI in
accordance with Section 14 of the Chattel Mortgage Law.

Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the
Decision of the RTC. The Court of Appeals entered a new one dismissing
PCILFs complaint and directing PCILF to pay TMI, by way of refund, the
amount of P1,166,826.52. The decretal part of its Decision reads:

WHEREFORE, premises considered, the July 23, 2002 Decision of the


Regional Trial Court of Quezon City, Branch 79, in Civil Case No. Q-9937559, is hereby REVERSED and SET ASIDE, and a new one entered
DISMISSING the complaint and DIRECTING the plaintiff-appellee PCI
Leasing and Finance, Inc. to PAY, by way of REFUND, to the defendantappellant Trojan Metal Industries, Inc., the net amount of Php
1,166,826.52.

SO ORDERED.18
In their answer,16 respondents claimed that the sale with lease
agreement was a mere scheme to facilitate the financial lease between
PCILF and TMI. Respondents explained that in a simulated financial lease,
property of the debtor would be sold to the creditor to be repaid through
rentals; at the end of the lease period, the property sold would revert
back to the debtor. Respondents prayed that they be allowed to reform
the lease agreement to show the true agreement between the parties,
which was a loan secured by a chattel mortgage.

The Ruling of the RTC

The Issues

The issues for resolution are (1) whether the sale with lease agreement
the parties entered into was a financial lease or a loan secured by chattel
mortgage; and (2) whether PCILF should pay TMI, by way of refund, the
amount of P1,166,826.52.

the lessee in exchange for the latters periodic payment of a fixed amount
of rental.
The Courts Ruling

The petition lacks merit.

PCILF contends that the transaction between the parties was a sale and
leaseback financing arrangement where the client sells movable property
to a financing company, which then leases the same back to the client.
PCILF insists the transaction is not financial leasing, which contemplates
extension of credit to assist a buyer in acquiring movable property which
the buyer can use and eventually own. PCILF claims that the sale and
leaseback financing arrangement is not contrary to law, morals, good
customs, public order, or public policy. PCILF stresses that the guaranty
deposit should be forfeited in its favor, as provided in the lease
agreement. PCILF points out that this case does not involve mere failure
to pay rentals, it deals with a flagrant violation of the lease agreement.

Respondents counter that from the very beginning, transfer to PCILF of


ownership over the subject equipment was never the intention of the
parties. Respondents claim that under the lease agreement, the guaranty
deposit would be forfeited if TMI returned the leased equipment to PCILF
before the expiration of the lease agreement; thus, since TMI never
returned the leased equipment voluntarily, but through a writ of replevin
ordered by the RTC, the guaranty deposit should not be forfeited.

Since the lease agreement in this case was executed on 8 April 1997,
Republic Act No. 5980 (RA 5980), otherwise known as the Financing
Company Act, governs as to what constitutes financial leasing. Section 1,
paragraph (j) of the New Rules and Regulations to Implement RA 598019
defines financial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending


credit through a non-cancelable contract under which the lessor
purchases or acquires at the instance of the lessee heavy equipment,
motor vehicles, industrial machinery, appliances, business and office
machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize
at least 70% of the purchase price or acquisition cost, including any
incidental expenses and a margin of profit, over the lease period. The
contract shall extend over an obligatory period during which the lessee
has the right to hold and use the leased property and shall bear the cost
of repairs, maintenance, insurance, and preservation thereof, but with no
obligation or option on the part of the lessee to purchase the leased
property at the end of the lease contract.

The above definition of financial leasing gained statutory recognition with


the enactment of Republic Act No. 8556 (RA 8556), otherwise known as
the Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines
financial leasing as:

a mode of extending credit through a non-cancelable lease contract under


which the lessor purchases or acquires, at the instance of the lessee,
machinery, equipment, motor vehicles, appliances, business and office
machines, and other movable or immovable property in consideration of
the periodic payment by the lessee of a fixed amount of money sufficient
to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee
has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs,
maintenance, insurance and preservation thereof, but with no obligation
or option on his part to purchase the leased property from the ownerlessor at the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a


finance company purchases on behalf of a cash-strapped lessee the
equipment the latter wants to buy but, due to financial limitations, is
incapable of doing so. The finance company then leases the equipment to

In this case, however, TMI already owned the subject equipment before it
transacted with PCILF. Therefore, the transaction between the parties in
this case cannot be deemed to be in the nature of a financial leasing as
defined by law.

The facts in the instant case are analogous to those in Cebu Contractors
Consortium Co. v. Court of Appeals.21 There, Cebu Contractors
Consortium Co. (CCCC) approached Makati Leasing and Finance
Corporation (MLFC) to obtain a loan. MLFC agreed to extend financial
assistance to CCCC but, instead of a loan with collateral, MLFC induced
CCCC to adopt a sale and leaseback scheme. Under the scheme, several
of CCCCs equipment were made to appear as sold to MLFC and then
leased back to CCCC, which in turn paid lease rentals to MLFC. The rentals
were treated as installment payments to repurchase the equipment.

The Court held in Cebu Contractors Consortium Co. v. Court of Appeals22


that the transaction between CCCC and MLFC was not one of financial
leasing as defined by law, but simply a loan secured by a chattel
mortgage over CCCCs equipment. The Court went on to explain that
where the client already owned the equipment but needed additional
working capital and the finance company purchased such equipment with
the intention of leasing it back to him, the lease agreement was simulated
to disguise the true transaction that was a loan with security. In that
instance, continued the Court, the intention of the parties was not to
enable the client to acquire and use the equipment, but to extend to him
a loan.

Similarly, in Investors Finance Corporation v. Court of Appeals,23 a


borrower came to Investors Finance Corporation (IFC) to secure a loan
with his heavy equipment and machinery as collateral. The parties
executed documents where IFC was made to appear as the owner of the
equipment and the borrower as the lessee. As consideration for the lease,
the borrower-lessee was to pay monthly amortizations over a period of 36
months. The parties executed a lease agreement covering various
equipment described in the lease schedules attached to the lease
agreement. As security, the borrower-lessee also executed a continuing
guaranty.

The Court in Investors Finance Corporation v. Court of Appeals24 held that


the transaction between the parties was not a true financial leasing
because the intention of the parties was not to enable the borrower-lessee
to acquire and use the heavy equipment and machinery, which already
belonged to him, but to extend to him a loan to use as capital for his
construction and logging businesses. The Court held that the lease
agreement was simulated to disguise the true transaction between the
parties, which was a simple loan secured by heavy equipment and
machinery owned by the borrower-lessee. The Court differentiated
between a true financial leasing and a loan with mortgage in the guise of
a lease. The Court said that financial leasing contemplates the extension
of credit to assist a buyer in acquiring movable property which he can use
and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties, according to the
Court, was a loan with mortgage in the guise of a lease.

In the present case, since the transaction between PCILF and TMI involved
equipment already owned by TMI, it cannot be considered as one of
financial leasing, as defined by law, but simply a loan secured by the
various equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties
to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct, or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions
based upon a written contract and for reformation of an instrument is ten
years.25 The right of action for reformation accrued from the date of
execution of the lease agreement on 8 April 1997. TMI timely exercised its
right of action when it filed an answer26 on 14 February 2000 asking for
the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a
proper instrument, it would have been a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing. Thus, upon TMIs
default, PCILF was entitled to seize the mortgaged equipment, not as
owner but as creditor-mortgagee for the purpose of foreclosing the chattel
mortgage. PCILFs sale to a third party of the mortgaged equipment and
collection of the proceeds of the sale can be deemed in the exercise of its
right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the
parties was simply a loan secured by a chattel mortgage. However, in
reckoning the amount of the principal obligation, the Court of Appeals
should have taken into account the proceeds of the sale to PCILF less the
guaranty deposit paid by TMI. After deducting payments made by TMI to
PCILF, the balance plus applicable interest should then be applied against
the aggregate cash already in PCILFs hands.

2.
When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may
be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.
3.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit. (Emphasis supplied)
Applying the rules in the computation of interest, the remaining balance
of the principal loan subject of the chattel mortgage must earn the legal
interest of 12% per annum, which interest, as long as unpaid, also earns
legal interest of 12% per annum, computed from the filing of the
complaint on 7 May 1999.

In accordance with the rules laid down in Eastern Shipping Lines, Inc. v.
Court of Appeals,32 we derive the following formula for the RTCs
guidance:

TOTAL AMOUNT DUE = [principal partial payments made] + [interest +


interest on interest], where
Records show that PCILF paid TMI P2,865,070.0027 as consideration for
acquiring the mortgaged equipment. In turn, TMI gave PCILF a guaranty
deposit of P1,030,350.00.28 Thus, the amount of the principal loan was
P1,834,720.00, which was the net amount actually received by TMI
(proceeds of the sale of the equipment to PCILF minus the guaranty
deposit). Against the principal loan of P1,834,720.00 plus the applicable
interest should be deducted loan payments, totaling P1,717,091.00.29
Since PCILF sold the mortgaged equipment to a third party for
P1,025,000.00,30 the proceeds of the said sale should be applied to offset
the remaining balance on the principal loan plus applicable interest.

Interest = remaining balance x 12% per annum x no. of years from due
date (8 December 1998 when demand was made) until date of sale to a
third party

Interest on interest = interest computed as of the filing of the complaint


on 7 May 1999 x 12% x no. of years until date of sale to a third party
However, the exact date of the sale of the mortgaged equipment, which is
needed to compute the interest on the remaining balance of the principal
loan, cannot be gleaned from the facts on record. We thus remand the
case to the RTC for the computation of the total amount due from the date
of demand on 8 December 1998 until the date of sale of the mortgaged
equipment to a third party, which amount due shall be offset against the
proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining


balance of the loan is the legal rate of 12% per annum, computed from
the date PCILF sent a demand letter to TMI on 8 December 1998. No
interest can be charged prior to this date because TMI was not yet in
default prior to 8 December 1998. The interest due shall also earn legal
interest from the time it is judicially demanded, pursuant to Article 2212
of the Civil Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.

From the computed total amount should be deducted P1,025,000.00


representing the proceeds of the sale already in PCILFs hands. The
difference represents overpayment by TMI, which the law requires PCILF
to refund to TMI.

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage


Law, provides:
Section 14. Sale of property at public auction; officers return; fees;
disposition of proceeds. x x x The proceeds of such sale shall be applied to
the payment, first, of the costs and expenses of keeping and sale, and
then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the mortgages,
shall be paid to the mortgagor or person holding under him on demand.

The foregoing provision has been incorporated in the comprehensive


summary of existing rules on the computation of legal interest laid down
by the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:

1.
When an obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.

Section 14 of the Chattel Mortgage Law expressly entitles the debtormortgagor to the balance of the proceeds, upon satisfaction of the
principal loan and costs. Prevailing jurisprudence33 also holds that the
Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds.

court, which accordingly held that the chattel mortgage constituted


thereon is null and void, as contended by said respondent.
TMIs right to the refund accrued from the time PCILF received the
proceeds of the sale of the mortgaged equipment. However, since TMI
never made a counterclaim or demand for refund due on the resulting
overpayment after offsetting the proceeds of the sale against the
remaining balance on the principal loan plus applicable interest, no
interest applies on the amount of refund due. Nonetheless, in accord with
prevailing jurisprudence,34 the excess amount PCILF must refund to TMI
is subject to interest at 12% per annum from finality of this Decision until
fully paid.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION


MAKATI LEASING V. WEAREVER TEXTILE 1983
Petition for review on certiorari of the decision of the Court of Appeals
(now Intermediate Appellate Court) promulgated on August 27, 1981 in
CA-G.R. No. SP-12731, setting aside certain Orders later specified herein,
of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First
instance of Rizal Branch VI, issued in Civil Case No. 36040, as wen as the
resolution dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from herein
petitioner Makati Leasing and Finance Corporation, the private respondent
Wearever Textile Mills, Inc., discounted and assigned several receivables
with the former under a Receivable Purchase Agreement. To secure the
collection of the receivables assigned, private respondent executed a
Chattel Mortgage over certain raw materials inventory as well as a
machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for
extrajudicial foreclosure of the properties mortgage to it. However, the
Deputy Sheriff assigned to implement the foreclosure failed to gain entry
into private respondent's premises and was not able to effect the seizure
of the aforedescribed machinery. Petitioner thereafter filed a complaint for
judicial foreclosure with the Court of First Instance of Rizal, Branch VI,
docketed as Civil Case No. 36040, the case before the lower court.
Acting on petitioner's application for replevin, the lower court issued a writ
of seizure, the enforcement of which was however subsequently
restrained upon private respondent's filing of a motion for
reconsideration. After several incidents, the lower court finally issued on
February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the
premises of private respondent to enforce said writ. The lower court
reaffirmed its stand upon private respondent's filing of a further motion
for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the
premises of private respondent and removed the main drive motor of the
subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings
subsequently filed by herein private respondent, set aside the Orders of
the lower court and ordered the return of the drive motor seized by the
sheriff pursuant to said Orders, after ruling that the machinery in suit
cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code,
the same being attached to the ground by means of bolts and the only
way to remove it from respondent's plant would be to drill out or destroy
the concrete floor, the reason why all that the sheriff could do to enfore
the writ was to take the main drive motor of said machinery. The appellate
court rejected petitioner's argument that private respondent is estopped
from claiming that the machine is real property by constituting a chattel
mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals
having been denied, petitioner has brought the case to this Court for
review by writ of certiorari. It is contended by private respondent,
however, that the instant petition was rendered moot and academic by
petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner
returned the subject motor drive, it made itself unequivocably clear that
said action was without prejudice to a motion for reconsideration of the
Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative. 1 Considering that petitioner has reserved its
right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by
such return may not be sustained.
The next and the more crucial question to be resolved in this Petition is
whether the machinery in suit is real or personal property from the point
of view of the parties, with petitioner arguing that it is a personality, while
the respondent claiming the contrary, and was sustained by the appellate

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA


143 where this Court, speaking through Justice J.B.L. Reyes, ruled:
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 defendants-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 personality. Finally, unlike in the Iya cases, Lopez vs.
Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the chattel
mortgage, it is the defendants-appellants themselves, as debtorsmortgagors, who are attacking the validity of the chattel mortgage in this
case. The doctrine of estoppel therefore applies to the herein defendantsappellants, having treated the subject house as personality.
Examining the records of the instant case, We find no logical justification
to exclude the rule out, as the appellate court did, the present case from
the application of the abovequoted pronouncement. If a house of strong
materials, like what was involved in the above Tumalad case, may be
considered as personal property for purposes of executing a chattel
mortgage thereon as long as the parties to the contract so agree and no
innocent third party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and becomes
immobilized only by destination or purpose, may not be likewise treated
as such. This is really because one who has so agreed is estopped from
denying the existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad
doctrine, the Court of Appeals lays stress on the fact that the house
involved therein was built on a land that did not belong to the owner of
such house. But the law makes no distinction with respect to the
ownership of the land on which the house is built and We should not lay
down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery
as chattel by the private respondent is indicative of intention and
impresses upon the property the character determined by the parties. As
stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is
undeniable that the parties to a contract may by agreement treat as
personal property that which by nature would be real property, as long as
no interest of third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it
because it had never represented nor agreed that the machinery in suit
be considered as personal property but was merely required and dictated
on by herein petitioner to sign a printed form of chattel mortgage which
was in a blank form at the time of signing. This contention lacks
persuasiveness. As aptly pointed out by petitioner and not denied by the
respondent, the status of the subject machinery as movable or immovable
was never placed in issue before the lower court and the Court of Appeals
except in a supplemental memorandum in support of the petition filed in
the appellate court. Moreover, even granting that the charge is true, such
fact alone does not render a contract void ab initio, but can only be a
ground for rendering said contract voidable, or annullable pursuant to
Article 1390 of the new Civil Code, by a proper action in court. 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. On the other
hand, as pointed out by petitioner and again not refuted by respondent,
the latter has indubitably benefited from said contract. Equity dictates
that one should not benefit at the expense of another. Private respondent
could not now therefore, be allowed to impugn the efficacy of the chattel
mortgage after it has benefited therefrom,
From what has been said above, the error of the appellate court in ruling
that the questioned machinery is real, not personal property, becomes
very apparent. Moreover, the case of Machinery and Engineering Supplies,
Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to
the case at bar, the nature of the machinery and equipment involved
therein as real properties never having been disputed nor in issue, and
they were not the subject of a Chattel Mortgage. Undoubtedly, the
Tumalad case bears more nearly perfect parity with the instant case to be
the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of
Appeals are hereby reversed and set aside, and the Orders of the lower
court are hereby reinstated, with costs against the private respondent.
SO ORDERED.
TORRES V. LIMJAO 1931
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.

contravention of the express provision of the last paragraph of section 7


Act No. 1508, which reads as follows:

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.

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 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. 7173 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

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 lawmaker 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 afteracquired 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 defendant-appellant 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
defendant-appellant, 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
ACME SHOE RUBBER AND PLASTIC V. CA 1996
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 on certiorari.
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. x x x.
"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]

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 principal
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 after-incurred 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 -

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.

"x x x (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]

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 extrajudicial foreclosure of the chattel mortgage, hereinbefore
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.

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 -

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 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.

The instant petition interposed by petitioner corporation was initially


denied 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]

"x x x 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]

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:

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.

"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]

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 debtor is secured by the personal
commitment of another (the guarantor or surety). In contracts of real
security, such as a pledge, a mortgage or an antichresis, that fulfillment is

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:

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.

"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] (Italics supplied.)

by the Bureau of Land Transportations Certificate of Registration issued in


his name on June 22, 1984; that he acquired the said mother vehicle from
a certain Remedios D. Yang under a Deed of Sale dated May 16, 1984;
that he acquired the same free from all lien and emcumbrances; and that
on July 30, 1984, the said automobile was taken from his residence by
Deputy Sheriff Bernardo Bernabe pursuant to the seizure order issued by
the court a quo.

The statement is not called for. The Court invites counsel's attention to
the admonition in Guerrero vs. Villamor;[22] thus:

On March 20, 1985, Alberto Villafranca moved for the dismissal of the
complaint on the ground that there is another action pending between the
same parties before the Regional Trial Court of Makati, Branch 140,
docketed as Civil Case No. 8310, involving the seizure of subject motor
vehicle and the indemnity bond posted by Servicewide (Motion to Dismiss
with Annexes; pp. 57-110, ibid.) On March 28, 1985, the court granted the
aforesaid motion (p. 122, ibid.), but subsequently the order of dismissal
was reconsidered and set aside (pp. 135-136, ibid.). For failure to file his
Answer as required by the court a quo, Alberto Villafranca was declared in
default and plaintiffs evidence was received ex parte.

"(L)awyers x x x should bear in mind their basic duty `to observe and
maintain the respect due to the courts of justice and judicial officers and x
x x (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 x x x.'"[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.
SERVICEWIDE SPECIALIST V. CA 1999
DY V. CA 1991
"On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a
Colt Galant xxx from Fortune Motors (Phils.) Corporation. On the same
date, she executed a promissory note for the amount of P56,028.00,
inclusive of interest at 12% per annum, payable within a period of 48
months starting August, 1976 at a monthly installment of P1,167.25 due
and demandable on the 17th day of each month (Exhibit A, pp. 144, Orig.
Records,). It was agreed upon, among others, that in case of default in the
payment of any installment the total principal sum, together with the
interest, shall become immediately due and payable (Exhibit A; p. 144,
Orig. Records). As a security for the promissory note, a chattel mortgage
was constituted over the said motor vehicle (Exhibit B, ibid.), with a deed
of assignment incorporated therein such that the credit and mortgage
rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit
Corporation with the consent of the mortgagor-debtor Leticia Laus
(Exhibits B-1 and B-2; p. 147, ibid.). The vehicle was then registered in the
name of Leticia L. Laus with the chattel mortgage annotated on said
certificate. (Exhibit "H"; p. 154, ibid.)
On September 25, 1978, Filinvest Credit Corporation in turn assigned the
credit in favor of Servicewide Specialists, Inc. (Servicewide, for brevity)
transferring unto the latter all its rights under the promissory note and the
chattel mortgage (Exhibit B-3; p. 149, ibid.) with the corresponding notice
of assignment sent to the registered car owner (Exhibit C; p. 150, Ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installment for
that month. The installments for the succeeding 17 months were not
likewise fully paid, hence on September 25, 1978, pursuant to the
provisions of the promissory note, Servicewide demanded payment of the
entire outstanding balance of P46,775.24 inclusive of interests (Exhibits D
and E; pp. 151-152, ibid.). Despite said formal demand, Leticia Laus failed
to pay all the monthly installments due until July 18, 1980.
On July 25, 1984, Servicewide sent a statement of account to Leticia Laus
and demanded payment of the amount of P86,613.32 representing the
outstanding balance plus interests up to July 25, 1985, attorneys fees,
liquidated damages, estimated repossession expense, and bonding fee
(Exhibit F; p. 153, ibid.)
As a result of the failure of Leticia Laus to settle her obligation, or at least
to surrender possession of the motor vehicle for the purpose of
foreclosure, Servicewide instituted a complaint for replevin, impleading
Hilda Tee and John Dee in whose custody the vehicle was believed to be at
the time of the filing of the suit.
In its complaint, plaintiff alleged that it had superior lien over the
mortgaged vehicle; that it is lawfully entitled to the possession of the
same together with all its accessories and equipments; (sic) that Hilda Tee
was wrongfully detaining the motor vehicle for the purpose of defeating
its mortgage lien; and that a sufficient bond had been filed in court.
(Complaint with Annexes, pp. 1-13, ibid.). On July 30, 1984, the court
approved the replevin bond (p. 20, ibid.)
On August 1, 1984, Alberto Villafranca filed a third party claim contending
that he is the absolute owner of the subject motor vehicle duly evidenced

Upon motion of the plaintiff below, Alberto Villafranca was substituted as


defendant. Summons was served upon him. (pp. 55-56, ibid).

On December 27, 1985, the lower court rendered a decision dismissing


the complaint for insufficiency of evidence. Its motion for reconsideration
of said decision having been denied, xxx.
In its appeal to the Court of Appeals, petitioner theorized that a suit for
replevin aimed at the foreclosure of a chattel is an action quasi in rem,
and does not require the inclusion of the principal obligor in the
Complaint. However, the appellate court affirmed the decision of the
lower Court; ratiocinating, thus:
A cursory reading, however, of the Promissory Note dated May 14, 1976 in
favor of Fortune Motors (Phils.) Corp. in the sum of P56,028.00 (Annex A
of Complaint, p. 7, Original Records) and the Chattel Mortgage of the
same date (Annex B of Complaint; pp. 8-9, ibid.) will disclose that the
maker and mortgagor respectively are one and the same person: Leticia
Laus. In fact, plaintiff-appellant admits in paragraphs (sic) nos. 2 and 3 of
its Complaint that the aforesaid public documents (Annexes A and B
thereof) were executed by Leticia Laus, who, for reasons not explained,
was never impleaded. In the case under consideration, plaintiff-appellants
main case is for judicial foreclosure of the chattel mortgage against Hilda
Tee and John Doe who was later substituted by appellee Alberto
Villafranca. But as there is no privity of contract, not even a causal link,
between plaintiff-appellant Servicewide Specialists, Inc. and defendantappellee Alberto Villafranca, the court a quo committed no reversible error
when it dismissed the case for insufficiency of evidence against Hilda Tee
and Alberto Villafranca since the evidence adduced pointed to Leticia Laus
as the party liable for the obligation sued upon (p. 2, RTC Decision).[3]
Petitioner presented a Motion for Reconsideration but in its Resolution[4]
of May 10, 1993, the Court of Appeals denied the same, taking notice of
another case pending between the same parties xxx relating to the very
chattel mortgage of the motor vehicle in litigation.
Hence, the present petition for review on certiorari under Rule 45.
Essentially, the sole issue here is: Whether or not a case for replevin may
be pursued against the defendant, Alberto Villafranca, without impleading
the absconding debtor-mortgagor?
Rule 60 of the Revised Rules of Court requires that an applicant for
replevin must show that he is the owner of the property claimed,
particularly describing it, or is entitled to the possession thereof.[5] Where
the right of the plaintiff to the possession of the specified property is so
conceded or evident, the action need only be maintained against him who
so possesses the property. In rem action est per quam rem nostram quae
ab alio possidetur petimus, et semper adversus eum est qui rem possidet.
[6]
Citing Northern Motors, Inc. vs. Herrera,[7] the Court said in the case of
BA Finance (which is of similar import with the present case):
There can be no question that persons having a special right of property
in the goods the recovery of which is sought, such as a chattel
mortgagee, may maintain an action for replevin therefor. Where the
mortgage authorizes the mortgagee to take possession of the property on
default, he may maintain an action to recover possession of the
mortgaged chattels from the mortgagor or from any person in whose
hands he may find them.[8]
Thus, in default of the mortgagor, the mortgagee is thereby constituted as
attorney-in-fact of the mortgagor, enabling such mortgagee to act for and
in behalf of the owner. That the defendant is not privy to the chattel
mortgage should be inconsequential. By the fact that the object of
replevin is traced to his possession, one properly can be a defendant in an
action for replevin. It is here assumed that the plaintiffs right to possess
the thing is not or cannot be disputed.[9] (Italics supplied)
However, in case the right of possession on the part of the plaintiff, or his
authority to claim such possession or that of his principal, is put to great
doubt (a contending party may contest the legal bases for plaintiffs cause
of action or an adverse and independent claim of ownership or right of

possession may be raised by that party), it could become essential to


have other persons involved and impleaded for a complete determination
and resolution of the controversy.[10] In the case under scrutiny, it is not
disputed that there is an adverse and independent claim of ownership by
the respondent as evinced by the existence of a pending case before the
Court of Appeals involving subject motor vehicle between the same
parties herein.[11] Its resolution is a factual matter, the province of which
properly lies in the lower Court and not in the Supreme Court, in the guise
of a petition for review on certiorari. For it is basic that under Rule 45, this
Court only entertains questions of law, and rare are the exceptions and
the present case does not appear to be one of them.
In a suit for replevin, a clear right of possession must be established.
(Italics supplied) A foreclosure under a chattel mortgage may properly be
commenced only once there is default on the part of the mortgagor of his
obligation secured by the mortgage. The replevin in this case has been
resorted to in order to pave the way for the foreclosure of what is covered
by the chattel mortgage. The conditions essential for such foreclosure
would be to show, firstly, the existence of the chattel mortgage and,
secondly, the default of the mortgagor. These requirements must be
shown because the validity of the plaintiffs exercise of the right of
foreclosure is inevitably dependent thereon.[12]
Since the mortgagees right of possession is conditioned upon the actual
fact of default which itself may be controverted, the inclusion of other
parties, like the debtor or the mortgagor himself, may be required in order
to allow a full and conclusive determination of the case. When the
mortgagee seeks a replevin in order to effect the eventual foreclosure of
the mortgage, it is not only the existence of, but also the mortgagors
default on, the chattel mortgage that, among other things, can properly
uphold the right to replevy the property. The burden to establish a valid
justification for such action lies with the plaintiff. An adverse possessor,
who is not the mortgagor, cannot just be deprived of his possession, let
alone be bound by the terms of the chattel mortgage contract, simply
because the mortgagee brings up an action for replevin.[13]
Leticia Laus, being an indispensable party, should have been impleaded in
the complaint for replevin and damages. An indispensable party is one
whose interest will be affected by the courts action in the litigation, and
without whom no final determination of the case can be had. The partys
interest in the subject matter of the suit and in the relief sought are so
inextricably intertwined with the other parties that his legal presence as a
party to the proceeding is an absolute necessity. In his absence, there
cannot be a resolution of the dispute of the parties before the Court which
is effective, complete, or equitable.
Conversely, a party is not indispensable to the suit if his interest in the
controversy or subject matter is distinct and divisible from the interest of
the other parties and will not necessarily be prejudiced by a judgment
which does complete justice to the parties in Court. He is not
indispensable if his presence would merely complete relief between him
and those already parties to the action or will simply avoid multiple
litigation.[14] Without the presence of indispensable parties to a suit or
proceeding, a judgment of a Court cannot attain real finality.[15]
That petitioner could not locate the mortgagor, Leticia Laus, is no excuse
for resorting to a procedural short-cut. It could have properly availed of
substituted service of summons under the Revised Rules of Court.[16] If it
deemed such a mode to be unavailing, it could have proceeded in
accordance with Section 14 of the same Rule.[17] Indeed, petitioner had
other proper remedies, it could have resorted to but failed to avail of. For
instance, it could have properly impleaded the mortgagor. Such failure is
fatal to petitioners cause.
With the foregoing disquisition and conclusion, the other issues raised by
petitioner need not be passed upon.
WHEREFORE, the Petition is DENIED
PAMECA WOOD TREATMENT PLANT V. CA 1999
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc.
(PAMECA) obtained a loan of US$267,881.67, or the equivalent of
P2,000,000.00 from respondent Bank. By virtue of this loan, petitioner
PAMECA, through its President, petitioner Herminio C. Teves, executed a
promissory note for the said amount, promising to pay the loan by
installment. As security for the said loan, a chattel mortgage was also
executed over PAMECAs properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay,
respondent bank extrajudicially foreclosed the chattel mortgage, and, as
sole bidder in the public auction, purchased the foreclosed properties for a
sum of P322,350.00. On June 29, 1984, respondent bank filed a complaint
for the collection of the balance of P4,366,332.46[3] with Branch 132 of
the Regional Trial Court of Makati City against petitioner PAMECA and
private petitioners herein, as solidary debtors with PAMECA under the
promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case,
the dispositive portion of which we reproduce as follows:

WHEREFORE, judgment is hereby rendered ordering the defendants to


pay jointly and severally plaintiff the (1) sum of P4,366,332.46
representing the deficiency claim of the latter as of March 31, 1984, plus
21% interest per annum and other charges from April 1, 1984 until the
whole amount is fully paid and (2) the costs of the suit. SO ORDERED.[4]
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing the decision
of the trial court, and in not holding that the public auction sale of
petitioner PAMECAs chattels were tainted with fraud, as the chattels of the
said petitioner were bought by private respondent as sole bidder in only
1/6 of the market value of the property, hence unconscionable and
inequitable, and therefore null and void.
2. Respondent appellate court gravely erred in not applying by analogy
Article 1484 and Article 2115 of the Civil Code by reading the spirit of the
law, and taking into consideration the fact that the contract of loan was a
contract of adhesion.
3. The appellate court gravely erred in holding the petitioners Herminio
Teves, Victoria Teves and Hiram Diday R. Pulido solidarily liable with
PAMECA Wood Treatment Plant, Inc. when the intention of the parties was
that the loan is only for the corporations benefit.
Relative to the first ground, petitioners contend that the amount of
P322,350.00 at which respondent bank bid for and purchased the
mortgaged properties was unconscionable and inequitable considering
that, at the time of the public sale, the mortgaged properties had a total
value of more than P2,000,000.00. According to petitioners, this is evident
from an inventory dated March 31, 1980[5], which valued the properties
at P2,518,621.00, in accordance with the terms of the chattel mortgage
contract[6] between the parties that required that the inventories be
maintained at a level no less than P2 million. Petitioners argue that
respondent banks act of bidding and purchasing the mortgaged properties
for P322,350.00 or only about 1/6 of their actual value in a public sale in
which it was the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment of the
auction sale.
To this, respondent bank contends that the above-cited inventory and
chattel mortgage contract were not in fact submitted as evidence before
the RTC of Makati, and that these documents were first produced by
petitioners only when the case was brought to the Court of Appeals.[7]
The Court of Appeals, in turn, disregarded these documents for petitioners
failure to present them in evidence, or to even allude to them in their
testimonies before the lower court.[8] Instead, respondent court declared
that it is not at all unlikely for the chattels to have sufficiently deteriorated
as to have fetched such a low price at the time of the auction sale.[9]
Neither did respondent court find anything irregular or fraudulent in the
circumstance that respondent bank was the sole bidder in the sale, as all
the legal procedures for the conduct of a foreclosure sale have been
complied with, thus giving rise to the presumption of regularity in the
performance of public duties.[10]
Petitioners also question the ruling of respondent court, affirming the RTC,
to hold private petitioners, officers and stockholders of petitioner PAMECA,
liable with PAMECA for the obligation under the loan obtained from
respondent bank, contrary to the doctrine of separate and distinct
corporate personality.[11] Private petitioners contend that they became
signatories to the promissory note only as a matter of practice by the
respondent bank, that the promissory note was in the nature of a contract
of adhesion, and that the loan was for the benefit of the corporation,
PAMECA, alone.[12]
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners
submit that Articles 1484[13] and 2115[14] of the Civil Code be applied in
analogy to the instant case to preclude the recovery of a deficiency claim.
[15]
Petitioners are not the first to posit the theory of the applicability of Article
2115 to foreclosures of chattel mortgage. In the leading case of Ablaza vs.
Ignacio[16], the lower court dismissed the complaint for collection of
deficiency judgment in view of Article 2141 of the Civil Code, which
provides that the provisions of the Civil Code on pledge shall also apply to
chattel mortgages, insofar as they are not in conflict with the Chattel
Mortgage Law. It was the lower courts opinion that, by virtue of Article
2141, the provisions of Article 2115 which deny the creditor-pledgee the
right to recover deficiency in case the proceeds of the foreclosure sale are
less than the amount of the principal obligation, will apply.
This Court reversed the ruling of the lower court and held that the
provisions of the Chattel Mortgage Law regarding the effects of
foreclosure of chattel mortgage, being contrary to the provisions of Article
2115, Article 2115 in relation to Article 2141, may not be applied to the
case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law,
states:

xxx
The officer making the sale shall, within thirty days thereafter, make in
writing a return of his doings and file the same in the office of the Registry
of Deeds where the mortgage is recorded, and the Register of Deeds shall
record the same. The fees of the officer for selling the property shall be
the same as the case of sale on execution as provided in Act Numbered
One Hundred and Ninety, and the amendments thereto, and the fees of
the Register of Deeds for registering the officers return shall be taxed as a
part of the costs of sale, which the officer shall pay to the Register of
Deeds. The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a discharge of
the lien thereon created by the mortgage. The proceeds of such sale shall
be applied to the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding under him on
demand. (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under
the Chattel Mortgage Law run inconsistent with those of pledge under
Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no
longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the proceeds, upon satisfaction of
the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds there is a corollary obligation on
the part of the debtor-mortgagee to pay the deficiency in case of a
reduction in the price at public auction. As explained in Manila Trading and
Supply Co. vs. Tamaraw Plantation Co.[17], cited in Ablaza vs. Ignacio,
supra:
While it is true that section 3 of Act No. 1508 provides that a chattel
mortgage is a conditional sale, it further provides that it is a conditional
sale of personal property as security for the payment of a debt, or for the
performance of some other obligation specified therein. The lower court
overlooked the fact that the chattels included in the chattel mortgage are
only given as security and not as a payment of the debt, in case of a
failure of payment.
The theory of the lower court would lead to the absurd conclusion that if
the chattels mentioned in the mortgage, given as security, should sell for
more than the amount of the indebtedness secured, that the creditor
would be entitled to the full amount for which it might be sold, even
though that amount was greatly in excess of the indebtedness. Such a
result certainly was not contemplated by the legislature when it adopted
Act No. 1508. There seems to be no reason supporting that theory under
the provision of the law. The value of the chattels changes greatly from
time to time, and sometimes very rapidly. If, for example, the chattels
should greatly increase in value and a sale under that condition should
result in largely overpaying the indebtedness, and if the creditor is not
permitted to retain the excess, then the same token would require the
debtor to pay the deficiency in case of a reduction in the price of the
chattels between the date of the contract and a breach of the condition.

Petitioners never assailed the validity of the sale in the RTC, and only in
the Court of Appeals did they attempt to prove inadequacy of price
through the documents, i.e., the Open-End Mortgage on Inventory and
inventory dated March 31, 1980, likewise attached to their Petition before
this Court. Basic is the rule that parties may not bring on appeal issues
that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage
document as part of the records, We are not convinced that they
effectively prove that the mortgaged properties had a market value of at
least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale.
At best, the chattel mortgage contract only indicates the obligation of the
mortgagor to maintain the inventory at a value of at least P2,000,000.00,
but does not evidence compliance therewith. The inventory, in turn, was
as of March 31, 1980, or even prior to April 17, 1980, the date when the
parties entered into the contracts of loan and chattel mortgage, and is far
from being an accurate estimate of the market value of the properties at
the time of the foreclosure sale four years thereafter. Thus, even
assuming that the inventory and chattel mortgage contract were duly
submitted as evidence before the trial court, it is clear that they cannot
suffice to substantiate petitioners allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for
the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence,[20] and may not be
inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. The sparseness of petitioners
evidence in this regard leaves Us no discretion but to uphold the
presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with
petitioner corporation in the loan. As found by the trial court and the
Court of Appeals, the terms of the promissory note unmistakably set forth
the solidary nature of private petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA WOOD
TREATMENT PLANT, INC., a corporation organized and existing under the
laws of the Philippines, with principal office at 304 El Hogar Filipina
Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT
BANK OF THE PHILIPPINES at its office located at corner Buendia and
Makati Avenues, Makati, Metro Manila, the principal sum of TWO
HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE &
67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three
per cent (3%) per annum over DBPs borrowing rate for these funds.
Before the date of maturity, we hereby bind ourselves, jointly and
severally, to make partial payments as follows:
xxx
In case of default in the payment of any installment above, we bind
ourselves to pay DBP for advances xxx
xxx
We further bind ourselves to pay additional interest and penalty charges
on loan amortizations or portion thereof in arrears as follows:
xxx

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other
authors on the question of chattel mortgages, have said, that in case of a
sale under a foreclosure of a chattel mortgage, there is no question that
the mortgagee or creditor may maintain an action for the deficiency, if
any should occur. And the fact that Act No. 1508 permits a private sale,
such sale is not, in fact, a satisfaction of the debt, to any greater extent
than the value of the property at the time of the sale. The amount
received at the time of the sale, of course, always requiring good faith and
honesty in the sale, is only a payment, pro tanto, and an action may be
maintained for a deficiency in the debt.

"In addition to the above, we also bind ourselves to pay for bank
advances for insurance premiums, taxes xxx
xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis for all
costs incurred by DBP on the foreign currency borrowings from where the
loan shall be drawn xxx
xxx

We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the
cases reiterating it[18]
Neither do We find tenable the application by analogy of Article 1484 of
the Civil Code to the instant case. As correctly pointed out by the trial
court, the said article applies clearly and solely to the sale of personal
property the price of which is payable in installments. Although Article
1484, paragraph (3) expressly bars any further action against the
purchaser to recover an unpaid balance of the price, where the vendor
opts to foreclose the chattel mortgage on the thing sold, should the
vendees failure to pay cover two or more installments, this provision is
specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be
to expand the application of the provisions of Article 1484 to situations
beyond its specific purview, and ignore the language and intent of the
Chattel Mortgage Law. Equity, which has been aptly described as justice
outside legality, is applied only in the absence of, and never against,
statutory law or judicial rules of procedure.[19]

In case of non-payment of the amount of this note or any portion of it on


demand, when due, or any other amount or amounts due on account of
this note, the entire obligation shall become due and demandable, and if,
for the enforcement of the payment thereof, the DEVELOPMENT BANK OF
THE PHILIPPINES is constrained to entrust the case to its attorneys, we
jointly and severally bind ourselves to pay for attorneys fees as provided
for in the mortgage contract, in addition to the legal fees and other
incidental expenses. In the event of foreclosure of the mortgage securing
this note, we further bind ourselves jointly and severally to pay the
deficiency, if any. (Emphasis supplied)[21]
The promissory note was signed by private petitioners in the following
manner:
PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES

We are also unable to find merit in petitioners submission that the public
auction sale is void on grounds of fraud and inadequacy of price.

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO


(Sgd) VICTORIA V. TEVES[22]
From the foregoing, it is clear that private petitioners intended to bind
themselves solidarily with petitioner PAMECA in the loan. As correctly
submitted by respondent bank, private petitioners are not made to
answer for the corporate act of petitioner PAMECA, but are made liable
because they made themselves co-makers with PAMECA under the
promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED
MAGNA FINANCIAL SERVICES GROUP V. COLARINA 2005
After making a down payment, Colarina executed a promissory note for
the balance of P229,284.00 payable in thirty-six (36) equal monthly
installments at P6,369.00 monthly, beginning 18 July 1997. To secure
payment thereof, Colarina executed an integrated promissory note and
deed of chattel mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization beginning January 1999,
accumulating an unpaid balance of P131,607.00. Despite repeated
demands, he failed to make the necessary payment. On 31 October 2000
Magna Financial Services Group, Inc. filed a Complaint for Foreclosure of
Chattel Mortgage with Replevin[2] before the Municipal Trial Court in
Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.[3]
Upon the filing of a Replevin Bond, a Writ of Replevin was issued by the
MTCC. On 27 December 2000, summons, together with a copy of the Writ
of Replevin, was served on Colarina who voluntarily surrendered physical
possession of the vehicle to the Sheriff, Mr. Antonio Lozano. On 02 January
2001, the aforesaid motor vehicle was turned over by the sheriff to Magna
Financial Services Group, Inc.[4] On 12 July 2001, Colarina was declared in
default for having filed his answer after more than six (6) months from the
service of summons upon him. Thereupon, the trial court rendered
judgment based on the facts alleged in the Complaint. In a decision dated
23 July 2001, it held:[5]
WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna
Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter:
a) to pay plaintiff the principal sum of one hundred thirty one thousand six
hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per
month computed from January, 1999 until fully paid;
b) to pay plaintiff P10,000.00 for attorneys fees; and
c) to pay the costs.
The foregoing money judgment shall be paid within ninety (90) days from
the entry of judgment. In case of default in such payment, the one (1) unit
of Suzuki Multicab, subject of the writ of replevin and chattel mortgage,
shall be sold at public auction to satisfy the said judgment.[6]

subject vehicle and at the same time claim against the defendant for the
unpaid balance of its purchase price. In such a case, the respondent
would luckily have its cake and eat it too. Unfortunately for the defendant,
the lower courts had readily, probably unwittingly, made themselves
abettors to respondents devise to the detriment of the defendant.
...
WHEREFORE, finding error in the assailed decision, the instant petition is
hereby GRANTED and the assailed decision is hereby REVERSED AND SET
ASIDE. Let the records be remanded to the court of origin. Accordingly,
the foreclosure of the chattel mortgage over the subject vehicle as prayed
for by the respondent in its complaint without any right to seek the
payment of the unpaid balance of the purchase price or any deficiency
judgment against the petitioners pursuant to Article 1484 of the Civil
Code of the Philippines, is hereby ORDERED.[10]

A Motion for Reconsideration dated 11 February 2003[11] filed by Magna


Financial Services Group, Inc., was denied by the Court of Appeals in a
resolution dated 22 May 2003.[12] Hence, this Petition for Review on
Certiorari based on the sole issue:
WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE,
EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE 3RD OPTION UNDER
ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of Appeals


and asserts that a mortgage is only an accessory obligation, the principal
one being the undertaking to pay the amounts scheduled in the
promissory note. To secure the payment of the note, a chattel mortgage is
constituted on the thing sold. It argues that an action for foreclosure of
mortgage is actually in the nature of an action for sum of money
instituted to enforce the payment of the promissory note, with execution
of the security. In case of an extrajudicial foreclosure of chattel mortgage,
the petition must state the amount due on the obligation and the sheriff,
after the sale, shall apply the proceeds to the unpaid debt. This, according
to petitioner, is the true nature of a foreclosure proceeding as provided
under Rule 68, Section 2 of the Rules of Court.[13]
On the other hand, respondent countered that the Court of Appeals
correctly set aside the trial courts decision due to the inconsistency of the
remedies or reliefs sought by the petitioner in its Complaint where it
prayed for the custody of the chattel mortgage and at the same time
asked for the payment of the unpaid balance on the motor vehicle.[14]
Article 1484 of the Civil Code explicitly provides:
ART. 1484. In a contract of sale of personal property the price of which is
payable in installments, the vendor may exercise any of the following
remedies:

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch
4, where the case was docketed as Civil Case No. 10013. During the
pendency of his appeal before the RTC, Colarina died and was substituted
in the case by his heirs.[7] In a decision dated 30 January 2002, the RTC
affirmed in toto the decision of the MTCC.[8]
Colarina filed a Petition for Review before the Court of Appeals, docketed
as CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals
rendered its decision[9] holding:
. . . We find merit in petitioners assertion that the MTC and the RTC erred
in ordering the defendant to pay the unpaid balance of the purchase price
of the subject vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage. The principal error
committed by the said courts was their immediate grant, however
erroneous, of relief in favor of the respondent for the payment of the
unpaid balance without considering the fact that the very prayer it had
sought was inconsistent with its allegation in the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial foreclosure
of the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for
the foreclosure of the said mortgage is glaring proof that it intentionally
devised the same to deprive the defendant of his rights. A judgment in its
favor will in effect allow it to retain the possession and ownership of the

(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held:


Undoubtedly the principal object of the above amendment (referring to
Act 4122 amending Art. 1454, Civil Code of 1889) was to remedy the
abuses committed in connection with the foreclosure of chattel
mortgages. This amendment prevents mortgagees from seizing the
mortgaged property, buying it at foreclosure sale for a low price and then
bringing the suit against the mortgagor for a deficiency judgment. The
almost invariable result of this procedure was that the mortgagor found

himself minus the property and still owing practically the full amount of
his original indebtedness.
In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:
In its Memorandum before us, petitioner resolutely declared that it has
opted for the remedy provided under Article 1484(3) of the Civil Code,[17]
that is, to foreclose the chattel mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred
to avail itself of the first and third remedies under Article 1484, at the
same time suing for replevin. For this reason, the Court of Appeals
justifiably set aside the decision of the RTC. Perusing the Complaint, the
petitioner, under its prayer number 1, sought for the payment of the
unpaid amortizations which is a remedy that is provided under Article
1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment
of the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately be
sold at public auction, which remedy is contained under Article 1484(3).
Such a scheme is not only irregular but is a flagrant circumvention of the
prohibition of the law. By praying for the foreclosure of the chattel, Magna
Financial Services Group, Inc. renounced whatever claim it may have
under the promissory note.[18]
Article 1484, paragraph 3, provides that if the vendor has availed himself
of the right to foreclose the chattel mortgage, he shall have no further
action against the purchaser to recover any unpaid balance of the
purchase price. Any agreement to the contrary shall be void. In other
words, in all proceedings for the foreclosure of chattel mortgages
executed on chattels which have been sold on the installment plan, the
mortgagee is limited to the property included in the mortgage.[19]
Contrary to petitioners claim, a contract of chattel mortgage, which is the
transaction involved in the present case, is in the nature of a conditional
sale of personal property given as a security for the payment of a debt, or
the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a
sum of money or doing some other act named.[20] If the condition is
performed according to its terms, the mortgage and sale immediately
become void, and the mortgagee is thereby divested of his title.[21] On
the other hand, in case of non payment, foreclosure is one of the
remedies available to a mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to secure that for which the
mortgage was given. Foreclosure may be effected either judicially or
extrajudicially, that is, by ordinary action or by foreclosure under power of
sale contained in the mortgage. It may be effected by the usual methods,
including sale of goods at public auction.[22] Extrajudicial foreclosure, as
chosen by the petitioner, is attained by causing the mortgaged property
to be seized by the sheriff, as agent of the mortgagee, and have it sold at
public auction in the manner prescribed by Section 14 of Act No. 1508, or
the Chattel Mortgage Law.[23] This rule governs extrajudicial foreclosure
of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of
foreclosure under Article 1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change what it has opted for nor
to ask for more. On this point, the Court of Appeals correctly set aside the
trial courts decision and instead rendered a judgment of foreclosure as
prayed for by the petitioner.
The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.
In the case at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.
Where the mortgagee elects a remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would
bar the creditor (who chooses to foreclose) from recovering any unpaid
balance.[25] And it is deemed that there has been foreclosure of the
mortgage when all the proceedings of the foreclosure, including the sale
of the property at public auction, have been accomplished.[26]
That there should be actual foreclosure of the mortgaged vehicle was
reiterated in the case of De la Cruz v. Asian Consumer and Industrial
Finance Corporation:[27]
Be that as it may, although no actual foreclosure as contemplated under
the law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has persistently
and consistently avowed that it elects the remedy of foreclosure, the
Court of Appeals, thus, ruled correctly in directing the foreclosure of the
said vehicle without more.

WHEREFORE, premises considered, the instant petition is DENIED for lack


of merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.
TA-OCTA V. SHERIFF EGUIA 2002
In a complaint, dated 20 March 2000, filed with the Office of the Executive
Judge of the Regional Trial Court (RTC) of Iloilo City, Criste Ta-Octa charged
respondent sheriffs Winston Eguia and Edwin Torres with grave abuse of
authority in connection with a petition for foreclosure of chattel mortgage
instituted by AC (Iloilo) Lenders, Inc., against complainant Ta-Octa for the
latter's failure to comply with the conditions of the Chattel Mortgage and
Promissory Note he had executed on 02 July 1999. The chattel mortgage
covered a one (1) unit motor vehicle, viz:
Make : FUSO
Type : Fighter Tanker
Motor NO. : 6D14-563562
Serial No. : FK335J-530111
Plate No. : FEA-691
Complainant claimed that the petition for foreclosure of chattel mortgage
had been served by respondent sheriffs on the same day it was filed with
the Office of Provincial/City Sheriff of Iloilo, without any raffle being first
conducted and sans the approval of the trial court. He asserted that no
notice or demand from either AC (Iloilo) Lenders, Inc., or respondents had
been made before possession of the motor vehicle was taken away from
him nor did respondents issue any receipt on the accessories of the
vehicle. Complainant said that respondents, after taking possession of the
subject vehicle, hid it instead of having it parked at the grounds of the
Hall of Justice. Complainant added that respondents had made erasures
on the entry in the foreclosure book at the Office of the Sheriff when the
petition for foreclosure of mortgage was filed and recorded.
Executive Judge Tito A. Gustilo required respondents to submit their
respective answers to the complaint.
In their joint comment, respondents averred that they had complied with
the procedure for extrajudicial foreclosures of mortgages. The petition
was filed and docketed, and the filing fees were duly paid with the Office
of the Clerk of Court. Respondents, however, admitted that the petition
was immediately served, without a raffle having first been conducted
because of the fear, entertained by AC Lenders, Inc., that complainant
might abscond. In fact, respondents already found the subject vehicle at
the house of a relative of complainant. Respondents were informed that
complainant had pending criminal cases before the municipal trial courts
for violation of Batas Pambansa Blg. 22. Respondents denied having made
erasures on the entries in the foreclosure book and, by way of
substantiating the denial, submitted the affidavits of Josephine Marie
Lagura and Jonalyn Gasataya, employees both assigned at the Office of
the Clerk of Court ("OCC") of the Regional Trial Court of Iloilo City and
tasked with receiving, docketing and updating the entries in the Sheriff
and Notary Public Foreclosure cases filed before the OCC. In her affidavit,
Josephine Lagura attested that on 22 February 2000 (the date when
petition was filed), the Rural Bank of Guimbal, through its counsel, had
filed notarial foreclosure incidents which she erroneously docketed in the
Sheriff's Foreclosure Book, and the mistake was only discovered when
Atty. Gerry Sumaculub, Assistant Clerk of Court, reviewed the book. She
claimed that the erasures and erroneous entries were done in good faith.
Jonalyn Gasataya, in her affidavit, corroborated the statements of
Josephine.
The Executive Judge conducted an investigation pursuant to
Administrative Order No. 6, dated 30 June 1975.[1] In his report of 13
October 2000, Judge Gustilo stated that "After a thorough reading and evaluation of the evidence both oral and
documentary submitted by the complainant and the respondents the
undersigned Executive Judge finds respondents Sheriff Winston T. Eguia
and Edwin G. Torres, of RTC, Branch 26 and Branch 38, respectively, Guilty
for violation of Administrative Circular No. 3-98, dated February 5, 1998,
and Administrative Order No. 3, dated October 9, 1984, which mandates
the raffling of extra-judicial foreclosure of mortgage shall be strictly
enforced by the Executive Judge among the deputy sheriffs in order to
avoid an unequal distribution of cases and fraternization between sheriffs
and the applicant mortgagee."
The Investigating Judge recommended that the penalty of one month
suspension, without pay, be imposed on respondents.
The Office of the Court Administrator, in its memorandum of 02 March
2001, adopted in toto the findings and recommendation of the
Investigating Judge.
The Court sees the findings of the Investigating Judge and the Office of
the Court Administrator to be well-taken but finds the recommended
penalty of suspension, given the circumstances, a bit too harsh.

A.M. No. 99-10-05-0, issued by the Court En Banc on 07 August 2001 and
made effective on 01 September 2001, provides for the procedure in the
extra-judicial foreclosure of mortgage, thusly:
"1. All applications for extra-judicial foreclosure of mortgage whether
under the direction of the sheriff or a notary public, pursuant to Act 3135,
as amended by Act 4118, and Act 1508, as amended, shall be filed with
the Executive Judge, through the Clerk of Court who is also the Ex-Officio
Sheriff.

impleaded for having purchased at public auction one of the mortgaged


properties.
The answer of the defendant Teague set up a general denial and a special
defense, which are not involved in this appeal.
Defendant Antonio Gimenez also filed a general denial, and raised four
special defenses in his answer, to wit:
As a first special defense said defendant alleges:

"2. Upon receipt of an application for extra-judicial foreclosure of


mortgage, it shall be the duty of the Clerk of Court to:
"a) receive and docket said application and to stamp thereon the
corresponding file number, date and time of filing;
"b) collect the filing fees therefor pursuant to Rule 141, Section 7(c), as
amended by A.M. No. 00-2-01-SC, and issue the corresponding official
receipt;
"x x x x x x x x x
"d) sign and issue the certificate of sale, subject to the approval of the
Executive Judge, or in his absence, the Vice-Executive Judge. No
certificate of sale shall be issued in favor of the highest bidder until all
fees provided for in the aforementioned sections and in Rule 141, Section
9(1), as amended by A.M. No. 00-2-01-SC, shall have been paid; Provided,
that in no case shall the amount payable under Rule 141, Section 9(1), as
amended, exceed P100,000.00;
"e) after the certificate of sale has been issued to the highest bidder, keep
the complete records, while awaiting any redemption within a period of
one (1) year from date of registration of the certificate of sale with the
Register of Deeds concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons whose property
is sold pursuant to an extra-judicial foreclosure, shall have the right to
redeem the property until, but not after, the registration of the certificate
of foreclosure sale which in no case shall be more than three (3) months
after foreclosure, whichever is earlier, as provided in Section 47 of
Republic Act No. 8791 (as amended, Res. of August 7, 2001).
"x x x x x x x x x
"3. The notices of auction sale in extrajudicial foreclosure for publication
by the sheriff or by a notary public shall be published in a newspaper of
general circulation pursuant to Section 1, Presidential Decree No. 1079,
dated January 2, 1977, and non-compliance therewith shall constitute a
violation of Section 6 thereof.
"4. The Executive Judge shall, with the assistance of the Clerk of Court,
raffle applications for extrajudicial foreclosure of mortgage under the
direction of the sheriff among all sheriffs, including those assigned to the
Office of the Clerk of Court and Sheriffs IV assigned in the branches.
"5. The name/s of the bidder/s shall be reported by the sheriff or the
notary public who conducted the sale to the Clerk of Court before the
issuance of the certificate of sale."
Verily, respondent sheriffs have violated the procedure set forth in A.M.
No. 99-10-05-0 in failing to conduct a raffle of the petition for extrajudicial
foreclosure of mortgage filed by AC Lenders, Inc., against complainant
before the office of the Clerk of Court. The raffling of cases is designed to
avoid the unequal distribution of cases and fraternization between the
sheriff and the applicant-mortgagee.[2]
While it might be true that petitioner (AC Iloilo Lenders Inc.) requested for
the immediate enforcement of the petition for foreclosure of chattel
mortgage on the ground that complainant could likely flee and abscond
with his assets and that, in fact, the subject vehicle was recovered from
the house of one of his relatives, respondents, nevertheless, were not
excused from observing the mandated procedure therefor.
Respondents should not forget that they are public officials entrusted with
a grave responsibility, and their conduct not only should be characterized
by great circumspection but also be always above suspicion.[3] Sheriffs
play an important role in the administration of justice, called upon, no less
than others, to carry out their tasks with utmost care and diligence. High
standards in their performance of duty are rightly required of them.[4]
Regrettably, respondents have failed to live up to expectations. Being
respondents first offense, however, the Court deems it proper to decrease
the recommended penalty of suspension to a fine of One Thousand Pesos
(P1,000.00) on each respondent and to caution them to do better than
what they have shown.
WHEREFORE, respondents Winston T. Eguia and Edwin G. Torres are found
to have violated
ANTICHRESIS
PANDO V. GIMENEZ
This action was instituted for the purpose of foreclosing a mortgage
executed by defendant Antonio Gimenez. Massy Teague was also

1. That on the 27th day of October, 1924, said defendant Gimenez was
indebted to the plaintiff in the sum of P8,000, and to secure the payment
of the said amount duly made, executed and delivered a real estate
mortgage in favor of the said plaintiff over the properties and leasehold
rights mentioned in paragraph VIII of the plaintiff's complaint, and which
contract of mortgage is evidenced by the document, Exhibit A attached to
the complaint.
2. That owing to the fact that said defendant was leaving the City of
Manila in order to attend to his business in the Province of Cagayan, and
at the special instance and request of the herein plaintiff, said defendant
gave to the plaintiff the full control, and complete and absolute
administration of the building and the parcel of land on which said
building was erected, situated in Santa Mesa, District of Santa Mesa,
mortgaged to the plaintiff, under the condition that said plaintiff would
attend to the administration, care and preservation of the said building
and the property leased from the Hacienda Tuason on which said building
was erected, the payment of the premium on the insurance of this
building, the payment of the taxes might become due on the said
building, the payment to the lessor Hacienda Tuason of the rents of the
leased property, and to collect the rents from the tenants of the said
building.
3. That the rents that would be collected from the said building, the
plaintiff would apply the same to the payment of all the expenses
necessary for the preservation and maintenance of the said building, the
rents of the leased property, and the balance to be applied in payment on
account of the interest that may become due in favor of the plaintiff under
the mortgage.
4. That in accordance with this agreement, the defendant gave, and the
plaintiff took absolute control and possession and entered in the full
administration of the said building and land since October 27, 1924, and
up to the present time.
5. That in the course of the administration by the plaintiff of the said
building and land leased from the Hacienda Tuason, said plaintiff failed
and neglected to pay to the government of the City of Manila taxes due
for several years on the said building and has also failed and neglected to
pay to the lessor Hacienda Tuason the rents due for several years on the
land leased and on which said building was erected.
6. That by reason of this failure, neglect and abandonment by the plaintiff
to pay the taxes due on the said building, the City of Manila, on November
23, 1926, sold at public auction the said building was sold for the sum of
P244.50, and was bought by the other defendant Massy Teague, and since
that time the said building was lost to the defendant Gimenez.
7. That by reason of the failure, neglect and abandonment of the plaintiff
to pay the Hacienda Tuason the rents due for several years on the leased
property on which the building in question is erected, the said lessor
cancelled the contract of lease of the defendant Gimenez, and has
brought a suit against the said defendant Gimenez for desahucio in the
municipal court of the City of Manila.
As a second special defense, alleges that the building which was sold to
the defendant Massy Teague is worth P11,000, and the leasehold right of
the defendant which was cancelled by the Hacienda Tuason as above
stated is worth P3,000.
As a third special defense, alleges that by reason of the negligence,
failure and abandonment of the plaintiff to properly administer the
building and land in question and to pay the taxes due to the government
and the rents due the lessor Hacienda Tuason, and as a result of which the
defendant Gimenez has been deprived of the building, and his leasehold
right was cancelled, said defendant has suffered irreparable damages in
the sum of P14,000.
And as a fourth special defense and by way of counter-claim and set-off
against the claim of the said plaintiff, the defendant Gimenez alleges that
he reproduces herein the first three special defenses heretofore
mentioned, and that by reason of the negligent acts committed by the
plaintiff in the administration of the said building and land which caused
irreparable damage and prejudice to the defendant Gimenez, said
defendant has suffered damages in the sum of P14,000.
Wherefore, the defendant Gimenez by the undersigned attorneys,
respectfully prays the court to render judgment in his favor and against
the plaintiff, condemning the latter to pay the former the sum of fourteen
thousand pesos (P14,000), as damages suffered by the defendant
Gimenez; and that should this court find that the said defendant Gimenez

is liable to pay to plaintiff any sum of money under the mortgage, that
this amount of P14,000 be set-off against the amount that might rightfully
be found by the court to be due and owing by the defendant Gimenez to
plaintiff, and that should there be a difference in favor of the defendant
Gimenez that the plaintiff be condemned to pay to the said defendant
Gimenez the amount of such difference and for the costs of this action;
and also asks for such other and further relief as may be proper and
equitable under the premises. (Pages 23, 24, 25, 26 and 27, Bill of
Exceptions.)
After trial, the Court of First Instance of Manila rendered a decision,
dismissing the counterclaim presented by the defendant Antonio
Gimenez, the dispositive part of which reads as follows:
For the foregoing considerations, the court renders judgment, ordering
Antonio Gimenez to pay Recaredo Pando eight thousand pesos (P8,000),
Philippine currency, with annual interest at twelve per centum from June
1, 1928, until fully paid; two thousand three hundred and forty-four pesos
and sixty centavos (P2,344.60) as accrued interest with legal interest
thereon from the date of the complaint, May 19, 1928, until fully paid; and
eight hundred pesos (P800) as the stipulated attorney's fees, and the
costs; all of said sums to be paid within three months from the date
hereof.
Defendant Massy Teague is hereby authorized to pay to the plaintiff the
amounts set forth in the preceding paragraph, if he so desires, in order to
obtain the cancellation of the plaintiff's mortgage, and to acquire the
properties of defendant Gimenez free of all liens and encumbrances,
within the same three-month period from the date hereof.
In case neither of the defendants pay to the plaintiff the foregoing
amounts within the period named, the mortgaged properties shall be sold
at public auction in accordance with the law, and from the proceeds of the
sale, the aggregate sum of the aforementioned amounts shall be paid to
the plaintiff, and the balance, if any, delivered to defendant Massy
Teague, the present owner of the mortgaged property. (Pages 40 and 41,
Bill of Exceptions.)
Antonio Gimenez, defendant, appealed from this decision and now makes
the following assignments of error:
I. The lower court erred in not finding that, after the execution of the
contract of mortgage, Exhibit A, and just before the time said mortgage
matured, the appellee and the appellant entered into an agreement by
virtue of which:
(a) The appellee assumed and took over the general administration
(administracion directa) of the house No. 655 Santa Mesa, Manila, with
the right to collect the rents of the said house;
(b) But with the duty and obligation, that said appellee should pay the
taxes owing or accruing on the said house to the City of Manila;
(c) Should pay the rentals owing or accruing on the land occupied by said
house to the owners of said land the "Hacienda de Santa Mesa y Diliman",
in accordance with the terms of the contract of lease; and
(d) Should pay all other expenses necessary for the proper preservation
and maintenance of said house, such as repairs and so forth, including the
premium of the policy of insurance thereon and that the balance of said
rents should be applied by him toward the liquidation of interest accruing
under the mortgage.
II. The lower court erred in not finding that the appellee violated his duty
by neglecting and failing to pay the taxes on the house No. 655 Santa
Mesa, to the Government of the City of Manila, which became due during
the years 1925 and 1926, while said house was under his general
administration, and that by reason of that failure to pay said taxes, said
house was sold by public auction by the City of Manila to satisfy said
taxes, and finally adjudicated to the defendant Massy Teague, the
immediate consequence thereof being the loss to the appellant of all his
rights, legal and equitable in the said house.
III. The lower court erred in not finding that the appellant had suffered
damages for the loss of his said house No. 655 Santa Mesa, and that the
appellee should be responsible to the appellant for all damages suffered
by him.
IV. The lower court erred in not finding that the appellee violated his duty
by neglecting and failing to pay the rentals for the land occupied by said
house No. 655 Santa Mesa, to the owners thereof, which rentals became
due during the years 1925, 1926, 1927 and 1928, while the said land and
house were under his general administration, and that by reason of that
failure to pay said rentals, the owners of the land cancelled the contract of
lease of the appellant, the immediate consequence thereof being that the
appellant lost all his rights, use and enjoyment of said land for the
remaining unexpired period of 26 years.
V. The lower court erred in not finding that the appellant had suffered
damages for the loss of his leasehold right, the improvements on the land
and the use and enjoyment of said land for the remaining unexpired

period of 26 years, and that the appellee should be responsible to the


appellant for all damages suffered by him.
VI. The lower court erred in not rendering judgment in favor of the
appellant and against the appellee on the counterclaim for the damages
suffered by the appellant for the total amount proven.
VII. The lower court erred in not granting the motion for new trial.
In order to secure the payment of P8,000 which the defendant Gimenez
owed the plaintiff, he mortgaged the house at No. 655 Santa Mesa,
Manila, and the leasehold right on the lot upon which it stands (Exhibit A).
It was agreed between them that the plaintiff would collect the rents of
said house, in order to apply them to the payment of interest on the
amount of the indebtedness. This was payable on October 27, 1925, but,
in spite of nonpayment, the creditor, who is the plaintiff herein, did not
foreclose the mortgage.
For default in the payment of taxes for the years 1925 and 1926, the
house was on November 23, 1926 sold at public auction, and, for failure
to exercise the right of legal redemption, the City of Manila, the
attachment creditor and vendor of the property, executed a final deed of
sale in favor of the purchaser, the other defendant Massy Teague.
Furthermore, for default in the payment of the rents due on the lot of said
house for the years 1925 to 1928, the Santa Mesa estate, the lessor of
said land, cancelled the lease on July 13, 1928, pursuant to the terms of
the contract.
The appellant Gimenez contends that the plaintiff was responsible for the
delinquency in the payment of both the tax on the house and the rent of
the lot, which caused him the loss of the said house and the leasehold
right on the lot, because the plaintiff was at that time in charge of the
administration of the premises with the obligation to attend to the
payment of the tax and the rents. The plaintiff denied that he had such
obligation, alleging that his duties were confined to the collection of the
rents of the house in order to apply them to the payment of the interest
on the mortgage.
Such was in fact the original agreement; but the appellant assert
The appellant testified further, that when he turned over the
administration of the property to the plaintiff, it was agreed that the
plaintiff "would keep the property in good condition of repair, pay the
insurance and other expenses inherent in the preservation of the building,
such as land taxes," and "would pay the rents of the land upon which the
property is situated" (transcript of the stenographic notes, page 6). These
points have not been contradicted by the plaintiff.
Taking into account the language of the letter Exhibit 1 and the
appellant's unimpeached testimony, we are constrained to hold that it has
been proved by a preponderance of evidence, that even though at first
the plaintiff had only undertaken to collect the rents of the house, later
on, towards the end of October, 1925, he assumed the obligation to pay
both the tax on the house, and the rent of the lot.
As to the consideration contained in the judgment appealed from to the
effect that, in view of the reduction of the rent of the house in May, 1926,
the plaintiff would not have accepted the administration under the
conditions alleged by the defendant-appellant, it must be remembered
that the plaintiff took over such complete administration months before
such reduction of rents, and it does not appear that the reduction was
foreseen.
From all these circumstances it follows that the administration of the
property in question assumed by the plaintiff toward the end of October,
1925 is antichretic in character, and therefore justice and equity demand
that application be here made of the Civil Code provisions touching the
obligations of the antichretic creditor, to wit:
The creditor is obliged to pay the taxes and charges which burden the
estate, in the absence of an agreement to the contrary.
He shall also be obliged to pay any expenses necessary for its
preservation and repair.
Any sums he may expend for such purposes shall be chargeable against
the fruits. (Art. 1882, Civil Code.)
These obligations arise from the very nature of the covenant, and are
correlated with the plaintiff's acquired right to take charge of the property
and collect the fruits for himself. Hence, the illustrious Manresa, explains
the basis of this article 1882 in the following terms:
The right which the creditor acquires by virtue of antichresis to enjoy the
fruits of the property delivered to him, carries two obligations which are a
necessary consequence of the contract, because they arise from its very
nature.
And the plaintiff having failed in his obligation to pay the tax on the house
and the rent of the lot, he is by law required to pay indemnity for
damages (article 1101, Civil Code).

Considering the evidence of record as to the value and condition of the


house and the improvements made by the appellant upon said lot, as well
as the other circumstances of the case the total amount of the damages
sustained by said appellant must be fixed at P5,000.
Wherefore, the judgment appealed from is modified, and it is held that the
appellant, Antonio Gimenez, is entitled to recover from the plaintiff the
sum of P5,000 and it is so ordered; and the judgment appealed from is
hereby affirmed in all respects consistent with the present decision,
without express pronouncement of costs.
CONCURRENCE AND PREFERENCE OF CREDITS
BARAYOGA V. ASSET PRIVATIZATION TRUST
Bisudeco-Philsucor Corfarm Workers Union is composed of workers of
Bicolandia Sugar Development Corporation (BISUDECO), a sugar
plantation mill located in Himaao, Pili, Camarines Sur.

On December 8, 1986, [Respondent] Asset Privatization Trust (APT), a


public trust was created under Proclamation No. 50, as amended,
mandated to take title to and possession of, conserve, provisionally
manage and dispose of non-performing assets of the Philippine
government identified for privatization or disposition.
Pursuant to Section 23 of Proclamation No. 50, former President Corazon
Aquino issued Administrative Order No. 14 identifying certain assets of
government institutions that were to be transferred to the National
Government. Among the assets transferred was the financial claim of the
Philippine National Bank against BISUDECO in the form of a secured loan.
Consequently, by virtue of a Trust Agreement executed between the
National Government and APT on February 27, 1987, APT was constituted
as trustee over BISUDECOs account with the PNB.
Sometime later, on August 28, 1988, BISUDECO contracted the services of
Philippine Sugar Corporation (Philsucor) to take over the management of
the sugar plantation and milling operations until August 31, 1992.
Meanwhile, because of the continued failure of BISUDECO to pay its
outstanding loan with PNB, its mortgaged properties were foreclosed and
subsequently sold in a public auction to APT, as the sole bidder. On April
2, 1991, APT was issued a Sheriffs Certificate of Sale.
On July 23, 1991, the union filed a complaint for unfair labor practice,
illegal dismissal, illegal deduction and underpayment of wages and other
labor standard benefits plus damages.
In the meantime, on July 15, 1992, APTs Board of Trustees issued a
resolution accepting the offer of Bicol-Agro-Industrial Cooperative (BAPCI)
to buy the sugar plantation and mill. Again, on September 23, 1992, the
board passed another resolution authorizing the payment of separation
benefits to BISUDECOs employees in the event of the companys
privatization. Then, on October 30, 1992, BAPCI purchased the foreclosed
assets of BISUDECO from APT and took over its sugar milling operations
under the trade name Peafrancia Sugar Mill (Pensumil).
On December 17, 1992, the union filed a similar complaint, later to be
consolidated with its earlier complaint and docketed as RAB V Case No.
07-00184-91.

On March 2, 1993, it filed an amended complaint, impleading as


additional party respondents APT and Pensumil.
In their Position Paper, the union alleged that when Philsucor initially took
over the operations of the company, it retained BISUDECOs existing
personnel under the same terms and conditions of employment.
Nonetheless, at the start of the season sometime in May 1991, Philsucor
started recalling workers back to work, to the exception of the union
members. Management told them that they will be re-hired only if they
resign from the union. Just the same, thereafter, the company started to
employ the services of outsiders under the pakyaw system.
BISUDECO, Pensumil and APT all interposed the defense of lack of
employer-employee relationship.
xxxxxxxxx
After due proceedings, on April 30, 1998, Labor Arbiter Fructuoso T.
Aurellano disposed as follows:

WHEREFORE, premises considered, respondent APT is hereby ordered to


pay herein complainants of the mandated employment benefits provided
for under Section 27 of Proclamation No. 50 which benefits had been
earlier extended to other employees similarly situated.
SO ORDERED.
Both the union and APT elevated the labor arbiters decision before NLRC.
[7]

The NLRC affirmed APTs liability for petitioners money claims. While no
employer-employee relationship existed between members of the
petitioner union and APT, at the time of the employees illegal dismissal,
the assets of BISUDECO had been transferred to the national government
through APT. Moreover, the NLRC held that APT should have treated
petitioners claim as a lien on the assets of BISUDECO. The Commission
opined that APT should have done so, considering its awareness of the
pending complaint of petitioners at the time BISUDECO sold its assets to
BAPCI, and APT started paying separation pay to the workers.
Finding their computation to be in order, the NLRC awarded to petitioners
their money claims for underpayment, labor-standard benefits, and
ECOLA. It also awarded them their back wages, computed at the
prevailing minimum wage, for the period May 1, 1991 (the date of their
illegal dismissal) until October 30, 1992 (the sale of BISUDECO assets to
the BAPCI). On the other hand, the NLRC ruled that petitioners were not
entitled to separation pay because of the huge business losses incurred
by BISUDECO, which had resulted in its bankruptcy.
Respondent sought relief from the CA via a Petition for Certiorari under
Rule 65 of the Rules of Court.
Ruling of the Court of Appeals
The CA ruled that APT should not be held liable for petitioners claims for
unfair labor practice, illegal dismissal, illegal deduction and underpayment
of wages, as well as other labor-standard benefits plus damages. As found
by the NLRC, APT was not the employer of petitioners, but was impleaded
only for possessing BISUDECOs mortgaged properties as trustee and,
later, as the highest bidder in the foreclosure sale of those assets.
Citing Batong Buhay Gold Mines v. Dela Serna,[8] the CA concluded that
petitioners claims could not be enforced against APT as mortgagee of the
foreclosed properties of BISUDECO.
Hence, this Petition.[9]

Issues

In their Memorandum, petitioners raise the following issues for our


consideration:
I. Whether or not the Court of Appeals erred in ruling that Respondent
Asset Privatization Trust (APT) should not be held liable for the petitioner
unions claim for unfair labor practice, illegal dismissal, illegal deduction
and underpayment of wages and other labor standard benefits plus
damages.
II. Whether or not the claims of herein petitioners cannot be enforced
against APT/PNB as mortgagee of the foreclosed properties of BISUDECO.
III. Whether or not the entitlement of petitioners upon their claims against
Respondent APT is recognized under the law.[10]

In brief, the main issue raised is whether Respondent APT is liable for
petitioners monetary claims.
The Courts Ruling
The Petition has no merit.

Main Issue:
Whether APT Is Liable for the Claims of
Petitioners Against Their Former Employer

It should be stressed at the outset that, pursuant to Administrative Order


No. 14, Series of 1987,[11] PNBs assets, loans and receivables from its
borrowers were transferred to APT as trustee of the national government.
Among the liabilities transferred to APT was PNBs financial claim against
BISUDECO, not the latters assets and chattel. Contrary to petitioners
assertions, BISUDECO remained the owner of the mortgaged properties in
August 1988, when the Philippine Sugar Corporation (Philsucor) undertook
the operation and management of the sugar plantation until August 31,
1992, under a so-called Contract of Lease between the two corporations.
At the time, APT was merely a secured creditor of BISUDECO.[12]

It was only in April 1991 that APT foreclosed the assets and chattels of
BISUDECO because of the latters continued failure to pay outstanding
loan obligations to PNB/APT. The properties were sold at public auction to
APT, the highest bidder, as indicated in the Sheriffs Certificate of Sale
issued on April 2, 1991. It was only in September 1992 (after the
expiration of the lease/management Contract with Philsucor in August
1992), however, when APT took over BISUDECO assets, preparatory to the
latters privatization.
In the present case, petitioner-unions members who were not recalled to
work by Philsucor in May 1991 seek to hold APT liable for their monetary
claims and allegedly illegal dismissal. Significantly, prior to the actual sale
of BISUDECO assets to BAPCI on October 30, 1992, the APT board of
trustees had approved a Resolution on September 23, 1992. The
Resolution authorized the payment of separation benefits to the
employees of the corporation in the event of its privatization. Not included
in the Resolution, though, were petitioner-unions members who had not
been recalled to work in May 1991.

The question now before the Court is whether APT is liable to pay
petitioners monetary claims, including back wages from May 1, 1991, to
October 30, 1992 (the date of the sale of BISUDECO assets to BAPCI).
We rule in the negative. The duties and liabilities of BISUDECO, including
its monetary liabilities to its employees, were not all automatically
assumed by APT as purchaser of the foreclosed properties at the auction
sale. Any assumption of liability must be specifically and categorically
agreed upon. In Sundowner Development Corp. v. Drilon,[13] the Court
ruled that, unless expressly assumed, labor contracts like collective
bargaining agreements are not enforceable against the transferee of an
enterprise. Labor contracts are in personam and thus binding only
between the parties.
No succession of employment rights and obligations can be said to have
taken place between the two. Between the employees of BISUDECO and
APT, there is no privity of contract that would make the latter a substitute
employer that should be burdened with the obligations of the corporation.
To rule otherwise would result in unduly imposing upon APT an
unwarranted assumption of accounts not contemplated in Proclamation
No. 50 or in the Deed of Transfer between the national government and
PNB.
Furthermore, under the principle of absorption, a bona fide buyer or
transferee of all, or substantially all, the properties of the seller or
transferor is not obliged to absorb the latters employees.[14] The most
that the purchasing company may do, for reasons of public policy and
social justice, is to give preference of reemployment to the selling
companys qualified separated employees, who in its judgment are
necessary to the continued operation of the business establishment.[15]
In any event, the national government (in whose trust APT previously held
the mortgage credits of BISUDECO) is not the employer of petitionerunions members, who had been dismissed sometime in May 1991, even
before APT took over the assets of the corporation. Hence, under existing
law and jurisprudence, there is no reason to expect any kind of bailout by
the national government.[16] Even the NLRC found that no employeremployee relationship existed between APT and petitioners. Thus, the
Commission gravely abused its discretion in nevertheless holding that
APT, as the transferee of the assets of BISUDECO, was liable to
petitioners.

Petitioners also contend that in Central Azucarera del Danao v. Court of


Appeals,[17] this Court supposedly ruled that the sale of a business of a
going concern does not ipso facto terminate the employer-employee
relations insofar as the successor-employer is concerned, and that change
of ownership or management of an establishment or company is not one
of the just causes provided by law for termination of employment[.][18]
A careful reading of the Courts Decision in that case plainly shows that it
does not contain the words quoted by counsel for petitioners. At this
juncture, we admonish their counsel[19] of his bounden duty as an officer
of the Court to refrain from misquoting or misrepresenting the text of its
decisions.[20] Ever present is the danger that, if not faithfully and exactly
quoted, they may lose their proper and correct meaning, to the detriment
of other courts, lawyers and the public who may thereby be misled.[21]
In that case, contrary to the assertions of petitioners, the Court held as
follows:
There can be no controversy for it is a principle well-recognized, that it is
within the employers legitimate sphere of management control of the
business to adopt economic policies or make some changes or
adjustments in their organization or operations that would insure profit to
itself or protect the investment of its stockholders. As in the exercise of
such management prerogative, the employer may merge or consolidate
its business with another, or sell or dispose all or substantially all of its
assets and properties which may bring about the dismissal or termination
of its employees in the process. Such dismissal or termination should not
however be interpreted in such a manner as to permit the employer to
escape payment of termination pay. x x x.
In a number of cases on this point, the rule has been laid down that the
sale or disposition must be motivated by good faith as an element of
exemption from liability. Indeed, an innocent transferee of a business
establishment has no liability to the employees of the transferor to
continue employing them. Nor is the transferee liable for past unfair labor
practices of the previous owner, except, when the liability therefor is
assumed by the new employer under the contract of sale, or when liability
arises because of the new owners participation in thwarting or defeating
the rights of the employees.[22] (Citations omitted.)

In other words, the liabilities of the previous owner to its employees are
not enforceable against the buyer or transferee, unless (1) the latter
unequivocally assumes them; or (2) the sale or transfer was made in bad
faith. Thus, APT cannot be held responsible for the monetary claims of
petitioners who had been dismissed even before it actually took over
BISUDECOs assets.
Moreover, it should be remembered that APT merely became a transferee
of BISUDECOs assets for purposes of conservation because of its lien on
those assets -- a lien it assumed as assignee of the loan secured by the
corporation from PNB. Subsequently, APT, as the highest bidder in the
auction sale, acquired ownership of the foreclosed properties.
Relevant to this transfer of assets is Article 110 of the Labor Code, as
amended by Republic Act No. 6715, which reads:
Article 110. Workers preference in case of bankruptcy. In the event of
bankruptcy or liquidation of the employers business, his workers shall
enjoy first preference as regards their unpaid wages and other monetary
claims shall be paid in full before the claims of the Government and other
creditors may be paid.[23]

This Court has ruled in a long line of cases[24] that under Articles 2241
and 2242 of the Civil Code, a mortgage credit is a special preferred credit
that enjoys preference with respect to a specific/determinate property of
the debtor. On the other hand, the workers preference under Article 110
of the Labor Code is an ordinary preferred credit. While this provision
raises the workers money claim to first priority in the order of preference
established under Article 2244 of the Civil Code, the claim has no
preference over special preferred credits.
Thus, the right of employees to be paid benefits due them from the
properties of their employer cannot have any preference over the latters
mortgage credit. In other words, being a mortgage credit, APTs lien on
BISUDECOs mortgaged assets is a special preferred lien that must be
satisfied first before the claims of the workers.
Development Bank of the Philippines v. NLRC[25] explained the rationale
of this ruling as follows:

x x x. A preference applies only to claims which do not attach to specific


properties. A lien creates a charge on a particular property. The right of
first preference as regards unpaid wages recognized by Article 110 does
not constitute a lien on the property of the insolvent debtor in favor of
workers. It is but a preference of credit in their favor, a preference in
application. It is a method adopted to determine and specify the order in
which credits should be paid in the final distribution of the proceeds of the
insolvents assets. It is a right to a first preference in the discharge of the
funds of the judgment debtor. x x x

Furthermore, workers claims for unpaid wages and monetary benefits


cannot be paid outside of a bankruptcy or judicial liquidation proceedings
against the employer.[26] It is settled that the application of Article 110 of
the Labor Code is contingent upon the institution of those proceedings,
during which all creditors are convened, their claims ascertained and
inventoried, and their preferences determined.[27] Assured thereby is an
orderly determination of the preference given to creditors claims; and
preserved in harmony is the legal scheme of classification, concurrence
and preference of credits in the Civil Code, the Insolvency Law, and the
Labor Code.
The Court hastens to add that the present Petition was brought against
APT alone. In holding that the latter, which has never really been an
employer of petitioners, is not liable for their claims, this Court is not
reversing or ruling upon their entitlement to back wages and other unpaid
benefits from their previous employer.

7. To x x x pay plaintiff the sum equivalent of 25% of the total money


claim plus P200,000.00 acceptance fee and P2,500.00 per court
appearance;
8. To x x x pay the cost of suit.
On the same day of November 21, 1997, [petitioner] filed a notice of lis
pendens for annotation of the pendency of Civil Case No. 97-707 on titles
TCTs nos. T-30228, 30229, 30230, 30231 and 30232. When the lots
covered by said titles were subsequently subdivided into 50 lots, the
notices of lis pendens were carried over to the titles of the subdivided
lots, i.e., Transfer Certificate of Title Nos. T-36179 to T-36226 and T-36245
to T-36246 of the Register of Deeds of Tagaytay City.
On January 30, 1998, [respondent] and x x x Ernest L. Escaler, filed a
Motion to Dismiss [petitioners] Complaint for lack of jurisdiction and for
failure to state a cause of action. They claimed [that] the Makati RTC has
no jurisdiction over the subject matter of the case because the parties
Construction Contract contained a clause requiring them to submit their
dispute to arbitration.
xxxxxxxxx
On March 17, 1998, [RTC Judge Ranada] dismissed the Complaint as
against [respondent] for [petitioners] failure to comply with a condition
precedent to the filing of a court action which is the prior resort to
arbitration and as against x x x Escaler for failure of the Complaint to
state a cause of action x x x.
[Petitioner] filed a Motion for Reconsideration of the March 17, 1998
dismissal order. [Respondent] filed its Opposition thereto.

On the basis of the foregoing clarification, the Court finds no reversible


error in the questioned CA Decision, which set aside the February 8, 2000
Decision of the NLRC. As a mere transferee of the mortgage credit and
later as the purchaser in a public auction of BISUDECOs foreclosed
properties, APT cannot be held liable for petitioners claims against
BISUDECO: illegal dismissal, unpaid back wages and other monetary
benefits.

On April 24, 1998, [respondent] filed a Motion to Cancel Notice of Lis


Pendens. It argued that the notices of lis pendens are without basis
because [petitioners] action is a purely personal action to collect a sum of
money and recover damages and x x x does not directly affect title to, use
or possession of real property.

WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution AFFIRMED. Costs against petitioners

[Petitioner] filed a Motion for Reconsideration of the aforesaid July 30,


1998 Order to which [respondent] filed an Opposition.

ATLANTIC ERECTORS V. HERBAL COVE REALTY CORP


The Facts

In a November 4, 1998 Order, [Judge Ranada,] while finding no merit in


the grounds raised by [petitioner] in its Motion for Reconsideration,
reversed his July 30, 1998 Order and reinstated the notices of lis pendens,
as follows:

The factual antecedents of the case are summarized by the CA in this


wise:
On June 20, 1996, [respondent] and [petitioner] entered into a
Construction Contract whereby the former agreed to construct four (4)
units of [townhouses] designated as 16-A, 16-B, 17-A and 17-B and one
(1) single detached unit for an original contract price of P15,726,745.19
which was late[r] adjusted to P16,726,745.19 as a result of additional
works. The contract period is 180 days commencing [on] July 7, 1996 and
to terminate on January 7, 1997. [Petitioner] claimed that the said period
was not followed due to reasons attributable to [respondent], namely:
suspension orders, additional works, force majeure, and unjustifiable acts
of omission or delay on the part of said [respondent]. [Respondent],
however, denied such claim and instead pointed to [petitioner] as having
exceeded the 180 day contract period aggravated by defective
workmanship and utilization of materials which are not in compliance with
specifications.
xxxxxxxxx
On November 21, 1997, [petitioner] filed a complaint for sum of money
with damages (Civil Case No. 97-2707) with the Regional Trial Court of
Makati entitled Atlantic Erectors, Incorporated vs. Herbal Cove Realty
Corp. and Ernest C. Escal[e]r. This case was raffled to Branch 137, x x x
Judge Santiago J. Ranada presiding. In said initiatory pleading, [petitioner]
AEI asked for the following reliefs:
AFTER DUE NOTICE AND HEARING, to order x x x defendant to:
1. Pay plaintiff the sum of P4,854,229.94 for the unpaid construction
services already rendered;
2. To x x x pay plaintiff the sum of P1,595,551.00 for the construction
materials, equipment and tools of plaintiff held by defendant;
3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss] x x x of
expected income from the construction project;
4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of income by
way of rental from the equipment of plaintiff held by defendants;

In his July 30, 1998 Order, [Judge Ranada] granted [respondents] Motion
to Cancel Notice of Lis Pendens x x x:

1. The Court finds no merit in plaintiffs contention that in dismissing the


above-entitled case for lack of jurisdiction, and at the same time granting
defendant Herbal Coves motion to cancel notice of lis pendens, the Court
[took] an inconsistent posture. The Rules provide that prior to the
transmittal of the original record on appeal, the court may issue orders for
the protection and preservation of the rights of the parties which do not
involve any matter litigated by the appeal (3rd par., Sec. 10, Rule 41).
Even as it declared itself without jurisdiction, this Court still has power to
act on incidents in this case, such as acting on motions for
reconsideration, for correction, for lifting of lis pendens, or approving
appeals, etc.
As correctly argued by defendant Herbal Cove, a notice of lis pendens
serves only as a precautionary measure or warning to prospective buyers
of a property that there is a pending litigation involving the same.
The Court notes that when it issued the Order of 30 July 1998 lifting the
notice of lis pendens, there was as yet no appeal filed by plaintiff.
Subsequently, on 10 September 1998, after a notice of appeal was filed
by plaintiff on 4 September 1998, the Branch Clerk of Court was ordered
by the Court to elevate the entire records of the above-entitled case to
the Court of Appeals. It therefore results that the above-entitled case is
still pending. After a careful consideration of all matters relevant to the lis
pendens, the Court believes that justice will be better served by setting
aside the Order of 30 July 1998.
On November 27, 1998, [respondent] filed a Motion for Reconsideration of
the November 4, 1998 Order arguing that allowing the notice of lis
pendens to remain annotated on the titles would defeat, not serve, the
ends of justice and that equitable considerations cannot be resorted to
when there is an applicable provision of law.
xxxxxxxxx
On October 22, 1999, [Judge Ranada] issued an order denying
[respondents] Motion for Reconsideration of the November 4, 1998 Order
for lack of sufficient merit.[5]

5. To x x x pay plaintiff the sum of P5,000,000.00 for moral damages;

Thereafter, Respondent Herbal Cove filed with the CA a Petition for


Certiorari.

6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary damages;

Ruling of the Court of Appeals

Setting aside the Orders of the RTC dated November 4, 1998 and October
22, 1999, the CA reinstated the formers July 30, 1998 Order[6] granting
Herbal Coves Motion to Cancel the Notice of Lis Pendens. According to the
appellate court, the re-annotation of those notices was improper for want
of any legal basis. It specifically cited Section 76 of Presidential Decree
No. 1529 (the Property Registration Decree). The decree provides that the
registration of such notices is allowed only when court proceedings
directly affect the title to, or the use or the occupation of, the land or any
building thereon.
The CA opined that the Complaint filed by petitioner in Civil Case No. 972707 was intended purely to collect a sum of money and to recover
damages. The appellate court ruled that the Complaint did not aver any
ownership claim to the subject land or any right of possession over the
buildings constructed thereon. It further declared that absent any claim
on the title to the buildings or on the possession thereof, the notices of lis
pendens had no leg to stand on.
Likewise, the CA held that Judge Ranada should have maintained the
notice cancellations, which he had directed in his July 30, 1998 Order.
Those notices were no longer necessary to protect the rights of petitioner,
inasmuch as it could have procured protective relief from the Construction
Industry Arbitral Commission (CIAC), where provisional remedies were
available. The CA also mentioned petitioners admission that there was
already a pending case before the CIAC, which in fact rendered a decision
on March 11, 1999.
The appellate court further explained that the re-annotation of the Notice
of Lis Pendens was no longer warranted after the court a quo had ruled
that the latter had no jurisdiction over the case. The former held that the
rationale behind the principle of lis pendens -- to keep the subject matter
of the litigation within the power of the court until the entry of final
judgment -- was no longer applicable. The reason for such inapplicability
was that the Makati RTC already declared that it had no jurisdiction or
power over the subject matter of the case.
Finally, the CA opined that petitioners Complaint had not alleged or
claimed, as basis for the continued annotation of the Notice of Lis
Pendens, the lien of contractors and laborers under Article 2242 of the
New Civil Code. Moreover, petitioner had not even referred to any lien of
whatever nature. Verily, the CA ruled that the failure to allege and claim
the contractors lien did not warrant the continued annotation on the
property titles of Respondent Herbal Cove.
Hence, this Petition.[7]

to establish a right to, or an equitable estate or interest in, a specific real


property; or to enforce a lien, a charge or an encumbrance against it.[11]
Apparently, petitioner proceeds on the premise that its money claim
involves the enforcement of a lien. Since the money claim is for the
nonpayment of materials and labor used in the construction of
townhouses, the lien referred to would have to be that provided under
Article 2242 of the Civil Code. This provision describes a contractors lien
over an immovable property as follows:
Art. 2242. With reference to specific immovable property and real rights of
the debtor, the following claims, mortgages and liens shall be preferred,
and shall constitute an encumbrance on the immovable or real right:
xxxxxxxxx
(3) Claims of laborers, masons, mechanics and other workmen, as well as
of architects, engineers and contractors, engaged in the construction,
reconstruction or repair of buildings, canals or other works, upon said
buildings, canals or other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works, upon said
buildings, canals or other works[.] (Emphasis supplied)
However, a careful examination of petitioners Complaint, as well as the
reliefs it seeks, reveals that no such lien or interest over the property was
ever alleged. The Complaint merely asked for the payment of construction
services and materials plus damages, without mentioning -- much less
asserting -- a lien or an encumbrance over the property. Verily, it was a
purely personal action and a simple collection case. It did not contain any
material averment of any enforceable right, interest or lien in connection
with the subject property.
As it is, petitioners money claim cannot be characterized as an action that
involves the enforcement of a lien or an encumbrance, one that would
thus warrant the annotation of the Notice of Lis Pendens. Indeed, the
nature of an action is determined by the allegations of the complaint.[12]
Even assuming that petitioner had sufficiently alleged such lien or
encumbrance in its Complaint, the annotation of the Notice of Lis Pendens
would still be unjustified, because a complaint for collection and damages
is not the proper mode for the enforcement of a contractors lien.
In J.L. Bernardo Construction v. Court of Appeals,[13] the Court explained
the concept of a contractors lien under Article 2242 of the Civil Code and
the proper mode for its enforcement as follows:

The Issues
Petitioner raises the following issues for our consideration:
I. Whether or not money claims representing cost of materials [for] and
labor [on] the houses constructed on a property [are] a proper lien for
annotation of lis pendens on the property title[.]
II. Whether or not the trial court[,] after having declared itself without
jurisdiction to try the case[,] may still decide on [the] substantial issue of
the case.[8]

Articles 2241 and 2242 of the Civil Code enumerates certain credits which
enjoy preference with respect to specific personal or real property of the
debtor. Specifically, the contractors lien claimed by the petitioners is
granted under the third paragraph of Article 2242 which provides that the
claims of contractors engaged in the construction, reconstruction or repair
of buildings or other works shall be preferred with respect to the specific
building or other immovable property constructed.

First Issue:
Proper Basis for a
Notice of Lis Pendens

However, Article 2242 finds application when there is a concurrence of


credits, i.e., when the same specific property of the debtor is subjected to
the claims of several creditors and the value of such property of the
debtor is insufficient to pay in full all the creditors. In such a situation, the
question of preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others. Fundamental
tenets of due process will dictate that this statutory lien should then only
be enforced in the context of some kind of a proceeding where the claims
of all the preferred creditors may be bindingly adjudicated, such as
insolvency proceedings.[14] (Emphasis supplied)

Petitioner avers that its money claim on the cost of labor and materials for
the townhouses it constructed on the respondents land is a proper lien
that justifies the annotation of a notice of lis pendens on the land titles.
According to petitioner, the money claim constitutes a lien that can be
enforced to secure payment for the said obligations. It argues that, to
preserve the alleged improvement it had made on the subject land, such
annotation on the property titles of respondent is necessary.

Clearly then, neither Article 2242 of the Civil Code nor the enforcement of
the lien thereunder is applicable here, because petitioners Complaint
failed to satisfy the foregoing requirements. Nowhere does it show that
respondents property was subject to the claims of other creditors or was
insufficient to pay for all concurring debts. Moreover, the Complaint did
not pertain to insolvency proceedings or to any other action in which the
adjudication of claims of preferred creditors could be ascertained.

On the other hand, Respondent Herbal Cove argues that the annotation is
bereft of any factual or legal basis, because petitioners Complaint[9] does
not directly affect the title to the property, or the use or the possession
thereof. It also claims that petitioners Complaint did not assert ownership
of the property or any right to possess it. Moreover, respondent attacks as
baseless the annotation of the Notice of Lis Pendens through the
enforcement of a contractors lien under Article 2242 of the Civil Code. It
points out that the said provision applies only to cases in which there are
several creditors carrying on a legal action against an insolvent debtor.

Another factor negates the argument of petitioner that its money claim
involves the enforcement of a lien or the assertion of title to or possession
of the subject property: the fact that it filed its action with the RTC of
Makati, which is undisputedly bereft of any jurisdiction over respondents
property in Tagaytay City. Certainly, actions affecting title to or possession
of real property or the assertion of any interest therein should be
commenced and tried in the proper court that has jurisdiction over the
area, where the real property involved or a portion thereof is situated.[15]
If petitioner really intended to assert its claim or enforce its supposed lien,
interest or right over respondents subject properties, it would have
instituted the proper proceedings or filed a real action with the RTC of
Tagaytay City, which clearly had jurisdiction over those properties.[16]

This Courts Ruling


The Petition has no merit.

As a general rule, the only instances in which a notice of lis pendens may
be availed of are as follows: (a) an action to recover possession of real
estate; (b) an action for partition; and (c) any other court proceedings that
directly affect the title to the land or the building thereon or the use or the
occupation thereof.[10] Additionally, this Court has held that resorting to
lis pendens is not necessarily confined to cases that involve title to or
possession of real property. This annotation also applies to suits seeking

Narciso Pea, a leading authority on the subject of land titles and


registration, gives an explicit exposition on the inapplicability of the
doctrine of lis pendens to certain actions and proceedings that specifically
include money claims. He explains in this wise:

By express provision of law, the doctrine of lis pendens does not apply to
attachments, levies of execution, or to proceedings for the probate of
wills, or for administration of the estate of deceased persons in the Court
of First Instance. Also, it is held generally that the doctrine of lis pendens
has no application to a proceeding in which the only object sought is the
recovery of a money judgment, though the title or right of possession to
property be incidentally affected. It is essential that the property be
directly affected, as where the relief sought in the action or suit includes
the recovery of possession, or the enforcement of a lien, or an
adjudication between conflicting claims of title, possession, or the right of
possession to specific property, or requiring its transfer or sale[17]
(Emphasis supplied)
Pea adds that even if a party initially avails itself of a notice of lis pendens
upon the filing of a case in court, such notice is rendered nugatory if the
case turns out to be a purely personal action. We quote him as follows:
It may be possible also that the case when commenced may justify a
resort to lis pendens, but during the progress thereof, it develops to be
purely a personal action for damages or otherwise. In such event, the
notice of lis pendens has become functus officio.[18] (Emphasis supplied)
Thus, when a complaint or an action is determined by the courts to be in
personam, the rationale for or purpose of the notice of lis pendens ceases
to exist. To be sure, this Court has expressly and categorically declared
that the annotation of a notice of lis pendens on titles to properties is not
proper in cases wherein the proceedings instituted are actions in
personam.[19]
Second Issue:
Jurisdiction of the Trial Court
Petitioner argues that the RTC had no jurisdiction to issue the Order
canceling the Notice of Lis Pendens as well as the Order reinstating it.
Supposedly, since both Orders were issued by the trial court without
jurisdiction, the annotation made by the Register of Deeds of Tagaytay
City must remain in force.
Petitioner avers that the trial court finally declared that the latter had no
jurisdiction over the case on July 27, 1998, in an Order denying the
formers Motion for Reconsideration of the March 17, 1998 Order
dismissing the Complaint. Petitioner insists that the subsequent July 30,
1998 Order cancelling the subject Notice of Lis Pendens is void, because it
was issued by a court that had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from
regional trial courts, expressly provides that RTCs lose jurisdiction over a
case when an appeal is filed. The rule reads thus:
SEC. 9. Perfection of appeal; effect thereof. -- A partys appeal by notice of
appeal is deemed perfected as to him upon the filing of the notice of
appeal in due time.
xxxxxxxxx
In appeals by notice of appeal, the court loses jurisdiction over the case
upon the perfection of the appeals filed in due time and the expiration of
the time to appeal of the other parties. (Emphasis supplied)
On the basis of the foregoing rule, the trial court lost jurisdiction over the
case only on August 31, 1998, when petitioner filed its Notice of Appeal.
[20] Thus, any order issued by the RTC prior to that date should be
considered valid, because the court still had jurisdiction over the case.
Accordingly, it still had the authority or jurisdiction to issue the July 30,
1998 Order canceling the Notice of Lis Pendens. On the other hand, the
November 4, 1998 Order that set aside the July 30, 1998 Order and
reinstated that Notice should be considered without force and effect,
because it was issued by the trial court after it had already lost
jurisdiction.
In any case, even if we were to adopt petitioners theory that both the July
30, 1998 and the November 4, 1998 Orders were void for having been
issued without jurisdiction, the annotation is still improper for lack of
factual and legal bases.
As discussed previously, erroneously misplaced is the reliance of
petitioner on the premise that its money claim is an action for the
enforcement of a contractors lien. Verily, the annotation of the Notice of
Lis Pendens on the subject property titles should not have been made in
the first place. The Complaint filed before the Makati RTC -- for the
collection of a sum of money and for damages -- did not provide sufficient
legal basis for such annotation.
Finally, petitioner vehemently insists that the trial court had no jurisdiction
to cancel the Notice. Yet, the former filed before the CA an appeal,
docketed as CA-GR CV No. 65647,[21] questioning the RTCs dismissal of
the Complaint for lack of jurisdiction. Moreover, it must be remembered
that it was petitioner which had initially invoked the jurisdiction of the trial
court when the former sought a judgment for the recovery of money and
damages against respondent. Yet again, it was also petitioner which
assailed that same jurisdiction for issuing an order unfavorable to the

formers cause. Indeed, parties cannot invoke the jurisdiction of a court to


secure affirmative relief, then repudiate or question that same jurisdiction
after obtaining or failing to obtain such relief.[22]
DBP V. CA 2001
Marinduque Mining Industrial Corporation (Marinduque Mining), a
corporation engaged in the manufacture of pure and refined nickel, nickel
and cobalt in mixed sulfides, copper ore/concentrates, cement and pyrite
conc., obtained from the Philippine National Bank (PNB) various loan
accommodations. To secure the loans, Marinduque Mining executed on
October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in
favor of PNB. The mortgage covered all of Marinduque Minings real
properties, located at Surigao del Norte, Sipalay, Negros Occidental, and
at Antipolo, Rizal, including the improvements thereon. As of November
20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of
interest and charges.[1]
On July 13, 1981, Marinduque Mining executed in favor of PNB and the
Development Bank of the Philippines (DBP) a second Mortgage Trust
Agreement. In said agreement, Marinduque Mining mortgaged to PNB and
DBP all its real properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Minings chattels, as well as
assets of whatever kind, nature and description which Marinduque Mining
may subsequently acquire in substitution or replenishment or in addition
to the properties covered by the previous Deed of Real and Chattel
Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also
obtained loans totaling P2 Billion from DBP, exclusive of interest and
charges.[2]
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP
an Amendment to Mortgage Trust Agreement by virtue of which
Marinduque Mining mortgaged in favor of PNB and DBP all other real and
personal properties and other real rights subsequently acquired by
Marinduque Mining.[3]
For failure of Marinduque Mining to settle its loan obligations, PNB and
DBP instituted sometime on July and August 1984 extrajudicial foreclosure
proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as
follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and
DBP emerged and were declared the highest bidders over the foreclosed
real properties, buildings, mining claims, leasehold rights together with
the improvements thereon as well as machineries [sic] and equipments
[sic] of MMIC located at Nonoc Nickel Refinery Plant at Surigao del Norte
for a bid price of P14,238,048,150.00 [and] [o]ver the foreclosed chattels
of MMIC located at Nonoc Refinery Plant at Surigao del Norte, PNB and
DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to 5-A, 6, 7
to 7-AA- PNB/DBP). For the foreclosed real properties together with all the
buildings, major machineries & equipment and other improvements of
MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were
sold to PNB and DBP as highest bidders in the sum of P1,107,167,950.00
(Exhs. 10 to 10-X- PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the
foreclosed real properties, buildings, & machineries/equipment of MMIC
located at Sipalay, Negros Occidental were sold to PNB and DBP, as
highest bidders, in the amount of P2,383,534,000.00 and
P543,040,000.00 respectively (Exhs. 8 to 8-BB, 9 to 90GGGGGGPNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on
the foreclosed personal properties of MMIC, the same were sold to PNB
and DBP as the highest bidder in the sum of P678,772,000.00 (Exhs. 11
and12-QQQQQPNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984,
purposely, in order to ensure the continued operation of the Nickel
refinery plant and to prevent the deterioration of the assets foreclosed,
assigned and transferred to Nonoc Mining and Industrial Corporation all
their rights, interest and participation over the foreclosed properties of
MMIC located at Nonoc Island, Surigao del Norte for an initial
consideration of P14,361,000,000.00 (Exh. 13-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP
assigned and transferred in favor of Maricalum Mining Corp. all its rights,
interest and participation over the foreclosed properties of MMIC at
Sipalay, Negros Occidental for an initial consideration of P325,800,000.00
(Exh. 14PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National
Government thru [sic] the Asset Privatization Trust (APT) all its existing
rights and interest over the assets of MMIC, earlier assigned to Nonoc
Mining and Industrial Corporation, Maricalum Mining Corporation and
Island Cement Corporation (Exh. 15 & 15-APNB/DBP).[4]
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque
Mining purchased and caused to be delivered construction materials and

other merchandise from Remington Industrial Sales Corporation


(Remington) worth P921,755.95. The purchases remained unpaid as of
August 1, 1984 when Remington filed a complaint for a sum of money and
damages against Marinduque Mining for the value of the unpaid
construction materials and other merchandise purchased by Marinduque
Mining, as well as interest, attorneys fees and the costs of suit.
On September 7, 1984, Remingtons original complaint was amended to
include PNB and DBP as co-defendants in view of the foreclosure by the
latter of the real and chattel mortgages on the real and personal
properties, chattels, mining claims, machinery, equipment and other
assets of Marinduque Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to
include as additional defendant, the Nonoc Mining and Industrial
Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and
personal properties, chattels, machinery, equipment and all other assets
of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.[6]
On March 26, 1986, Remington filed a third amended complaint including
the Maricalum Mining Corporation (Maricalum Mining) and Island Cement
Corporation (Island Cement) as co-defendants. Remington asserted that
Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island
Cement must be treated in law as one and the same entity by
disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly
created entities are practically owned wholly by defendants PNB and DBP,
and managed by their officers, aside from the fact that the aforesaid codefendants NMIC, Maricalum and Island Cement were organized in such a
hurry and in such suspicious circumstances by co-defendants PNB and
DBP after the supposed extra-judicial foreclosure of MMICs assets as to
make their supposed projects assets, machineries and equipment which
were originally owned by co-defendant MMIC beyond the reach of
creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of
co-defendants NMIC, Maricalum and Island Cement creations of codefendants PNB and DBP were the personnel of co-defendant MMIC such
that x x x practically there has only been a change of name for all legal
purpose and intents.
3. The places of business not to mention the mining claims and project
premises of co-defendants NMIC, Maricalum and Island Cement likewise
used to be the places of business, mining claims and project premises of
co-defendant MMIC as to make the aforesaid co-defendants NMIC,
Maricalum and Island Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and
Island Cement being all corporations created by the government in the
pursuit of business ventures should not be allowed to ignore, x x x or
obliterate with impunity nay illegally, the financial obligations of x x x
MMIC whose operations co-defendants PNB and DBP had highly financed
before the alleged extrajudicial foreclosure of defendant MMICs assets,
machineries and equipment to the extent that major policies of codefendant MMIC were being decided upon by co-defendants PNB and DBP
as major financiers who were represented in its board of directors forming
part of the majority thereof which through the alleged extrajudicial
foreclosure culminated in a complete take-over by co-defendants PNB and
DBP bringing about the organization of their co-defendants NMIC,
Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its
nickel mining project in Surigao del Norte, copper mining operation in
Sipalay, Negros Occidental and cement factory in Antipolo, Rizal to the
prejudice of creditors of co-defendant MMIC such as plaintiff Remington
Industrial Sales Corporation whose stockholders, officers and rank-and-file
workers in the legitimate pursuit of its business activities, invested
considerable time, sweat and private money to supply, among others, codefendant MMIC with some of its vital needs for its operation, which codefendant MMIC during the time of the transactions material to this case
became x x x co-defendants PNB and DBPs instrumentality, business
conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by
virtue of which it becomes doubly necessary to disregard the corporation
fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island
Cement, six (6) distinct and separate entities, when in fact and in law,
they should be treated as one and the same at least as far as plaintiffs
transactions with co-defendant MMIC are concerned, so as not to defeat
public convenience, justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a fact which all
defendants were as (sic) still are aware of during all the time material to
the transactions subject of this case.[7]
On April 3, 1989, Remington filed a motion for leave to file a fourth
amended complaint impleading the Asset Privatization Trust (APT) as codefendant. Said fourth amended complaint was admitted by the lower
court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in
favor of Remington, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff,


ordering the defendants Marinduque Mining & Industrial Corporation,
Philippine National Bank, Development Bank of the Philippines, Nonoc
Mining and Industrial Corporation, Maricalum Mining Corporation, Island
Cement Corporation and Asset Privatization Trust to pay, jointly and
severally, the sum of P920,755.95, representing the principal obligation,
including the stipulated interest as of June 22, 1984, plus ten percent
(10%) surcharge per annum by way of penalty, until the amount is fully
paid; the sum equivalent to 10% of the amount due as and for attorneys
fees; and to pay the costs.[8]
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island
Cement and APT, the Court of Appeals, in its Decision dated October 6,
1995, affirmed the decision of the RTC. Petitioner filed a Motion for
Reconsideration, which was denied in the Resolution dated August 29,
1996.
Hence, this petition, DBP maintaining that Remington has no cause of
action against it or PNB, nor against their transferees, Nonoc Mining,
Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the
transfer of the properties was made in fraud of creditors. The presence of
fraud, according to Remington, warrants the piercing of the corporate veil
such that Marinduque Mining and its transferees could be considered as
one and the same corporation. The transferees, therefore, are also liable
for the value of Marinduque Minings purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of
Appeals in its decision,[10] this Court declared:
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the
notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons or in case of two corporations, merge them into
one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.)
xxx
In accordance with the foregoing rule, this Court has disregarded the
separate personality of the corporation where the corporate entity was
used to escape liability to third parties.[11] In this case, however, we do
not find any fraud on the part of Marinduque Mining and its transferees to
warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the
mortgage when the past due account had incurred arrearages of more
than 20% of the total outstanding obligation. Section 1 of Presidential
Decree No. 385 (The Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse
of sixty (60) days from the issuance of this decree, to foreclose the
collateral and/or securities for any loan, credit accommodation, and/or
guarantees granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at least twenty
percent (20%) of the total outstanding obligations, including interest and
other charges, as appearing in the books of account and/or related
records of the financial institution concerned. This shall be without
prejudice to the exercise by the government financial institution of such
rights and/or remedies available to them under their respective contracts
with their debtors, including the right to foreclose on loans, credits,
accomodations and/or guarantees on which the arrearages are less than
twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law,
to foreclose upon the subject properties. The banks had no choice but to
obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which
reasoned that under Article 19 of the Civil Code, Every person must, in the
exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith. The appellate
court, however, did not point to any fact evidencing bad faith on the part
of the Marinduque Mining and its transferees. Indeed, it skirted the issue
entirely by holding that the question of actual fraudulent intent on the
part of the interlocking directors of DBP and Marinduque Mining was
irrelevant because:
As aptly stated by the appellee in its brief, x x x where the corporations
have directors and officers in common, there may be circumstances under
which their interest as officers in one company may disqualify them in
equity from representing both corporations in transactions between the
two. Thus, where one corporation was insolvent and indebted to another,
it has been held that the directors of the creditor corporation were
disqualified, by reason of self-interest, from acting as directors of the
debtor corporation in the authorization of a mortgage or deed of trust to
the former to secure such indebtedness x x x (page 105 of the Appellees
Brief). In the same manner that x x x when the corporation is insolvent, its
directors who are its creditors can not secure to themselves any

advantage or preference over other creditors. They can not thus take
advantage of their fiduciary relation and deal directly with themselves, to
the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their
representatives, without reference to the question of any actual
fraudulent intent on the part of the directors, for the right of the creditors
does not depend upon fraud in fact, but upon the violation of the fiduciary
relation to the directors. xxx. (page 106 of the Appellees Brief.)
We also concede that x x x directors of insolvent corporation, who are
creditors of the company, can not secure to themselves any preference or
advantage over other creditors in the payment of their claims. It is not
good morals or good law. The governing body of officers thereof are
charged with the duty of conducting its affairs strictly in the interest of its
existing creditors, and it would be a breach of such trust for them to
undertake to give any one of its members any advantage over any other
creditors in securing the payment of his debts in preference to all others.
When validity of these mortgages, to secure debts upon which the
directors were indorsers, was questioned by other creditors of the
corporation, they should have been classed as instruments rendered void
by the legal principle which prevents directors of an insolvent corporation
from giving themselves a preference over outside creditors. x x x (page
106-107 of the Appellees Brief.)[12]
The Court of Appeals made reference to two principles in corporation law.
The first pertains to transactions between corporations with interlocking
directors resulting in the prejudice to one of the corporations. This rule
does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with
interlocking directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves directors who
are creditors which is also inapplicable herein. Here, the creditor of
Marinduque Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of
Nonoc Mining, Maricalum and Island Cement. As Remington itself
concedes, DBP is not authorized by its charter to engage in the mining
business.[13] The creation of the three corporations was necessary to
manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value. In the absence of any entity
willing to purchase these assets from the bank, what else would it do with
these properties in the meantime? Sound business practice required that
they be utilized for the purposes for which they were intended.

(4) Credits guaranteed with a pledge so long as the things pledged are in
the hands of the creditor, or those guaranteed by a chattel mortgage,
upon the things pledged or mortgaged, up to the value thereof;
xxx
In Barretto vs. Villanueva,[16] the Court had occasion to construe Article
2242, governing claims or liens over specific immovable property. The
facts that gave rise to the case were summarized by this Court in its
resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura L. Villanueva for
P19,000.00. The purchaser paid P1,500 in advance, and executed a
promissory note for the balance of P17,500.00. However, the buyer could
only pay P5,500 on account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the meantime, the buyer
Villanueva was able to secure a clean certificate of title (No. 32626), and
mortgaged the property to appellant Magdalena C. Barretto, married to
Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having
been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The
latter foreclosed the mortgage in her favor, obtained judgment, and upon
its becoming final asked for execution on 31 July 1958. On 14 August
1958, Cruzado filed a motion for recognition for her "vendor's lien" in the
amount of P12,000.00, plus legal interest, invoking Articles 2242, 2243,
and 2249 of the new Civil Code. After hearing, the court below ordered
the "lien" annotated on the back of Certificate of Title No. 32526, with the
proviso that in case of sale under the foreclousre decree the vendor's lien
and the mortgage credit of appellant Barretto should be paid pro rata
from the proceeds. Our original decision affirmed this order of the Court of
First Instance of Manila.
In its decision upholding the order of the lower court, the Court
ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and
liens that constitute an encumbrance on specific immovable property, and
among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold";
and
"(5) Mortgage credits recorded in the Registry of Property."

Remington also asserted in its third amended complaint that the use of
Nonoc Mining, Maricalum and Island Cement of the premises of
Marinduque Mining and the hiring of the latters officers and personnel
also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those
acquired by DBP in the foreclosure sale, convenience and practicality
dictated that the corporations so created occupy the premises where
these assets were found instead of relocating them. No doubt, many of
these assets are heavy equipment and it may have been impossible to
move them. The same reasons of convenience and practicality, not to
mention efficiency, justified the hiring by Nonoc Mining, Maricalum and
Island Cement of Marinduque Minings personnel to manage and operate
the properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies
only when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.[14] To disregard the separate
juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.[15] In this case, the
Court finds that Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage
and foreclosure of the subject properties to justify the piercing of the
corporate veil.

Article 2249 of the same Code provides that "if there are two or more
credits with respect to the same specific real property or real rights, they
shall be satisfied pro-rata, after the payment of the taxes and
assessments upon the immovable property or real rights."
Application of the above-quoted provisions to the case at bar would mean
that the herein appellee Rosario Cruzado as an unpaid vendor of the
property in question has the right to share pro-rata with the appellants
the proceeds of the foreclosure sale.
xxx
As to the point made that the articles of the Civil Code on concurrence
and preference of credits are applicable only to the insolvent debtor,
suffice it to say that nothing in the law shows any such limitation. If we
are to interpret this portion of the Code as intended only for insolvency
cases, then other creditor-debtor relationships where there are
concurrence of credits would be left without any rules to govern them,
and it would render purposeless the special laws on insolvency.[17]
Upon motion by appellants, however, the Court reconsidered its decision.
Justice J.B.L. Reyes, speaking for the Court, explained the reasons for the
reversal:

The Court of Appeals also held that there exists in Remingtons favor a lien
on the unpaid purchases of Marinduque Mining, and as transferee of these
purchases, DBP should be held liable for the value thereof.

A. The previous decision failed to take fully into account the radical
changes introduced by the Civil Code of the Philippines into the system of
priorities among creditors ordained by the Civil Code of 1889.

In the absence of liquidation proceedings, however, the claim of


Remington cannot be enforced against DBP. Article 2241 of the Civil Code
provides:

Pursuant to the former Code, conflicts among creditors entitled to


preference as to specific real property under Article 1923 were to be
resolved according to an order of priorities established by Article 1927,
whereby one class of creditors could exclude the creditors of lower order
until the claims of the former were fully satisfied out of the proceeds of
the sale of the real property subject of the preference, and could even
exhaust proceeds if necessary.

Article 2241. With reference to specific movable property of the debtor,


the following claims or liens shall be preferred:
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so
long as they are in the possession of the debtor, up to the value of the
same; and if the movable has been resold by the debtor and the price is
still unpaid, the lien may be enforced on the price; this right is not lost by
the immobilization of the thing by destination, provided it has not lost its
form, substance and identity, neither is the right lost by the sale of the
thing together with other property for a lump sum, when the price thereof
can be determined proportionally;

Under the system of the Civil Code of the Philippines, however, only taxes
enjoy a similar absolute preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no priority among
themselves, but must be paid pro rata, i.e., in proportion to the amount of
the respective credits. Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment
of the taxes and assessments upon the immovable property or real
rights."

But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have
credits outstanding) must necessarily be convened, and the import of
their claims ascertained. It is thus apparent that the full application of
Articles 2249 and 2242 demands that there must be first some
proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement of decedent's
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that "The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens
within the purview of legal provisions governing insolvency xxx (Italics
supplied).
And the rule is further clarified in the Report of the Code Commission, as
follows:
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in
Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in
accordance with the Insolvency Law." (Italics supplied)

representing 15% of the monetary value of his CSPI shares plus interest at
the legal rate from the time of their unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24,
1999 resolution. While it reiterated its earlier order to pay petitioner the
amount of P5,062,500, it deleted the award of legal interest. It clarified
that it never meant to award interest since this would be unfair to the
other claimants.
On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed
the owner of the CSPI shares but the recovery of such shares had become
impossible. It also declared that the clarificatory order merely harmonized
the dispositive portion with the body of the resolution. Petitioners motion
for reconsideration was denied.
Hence this petition raising the following issues:
1)
whether petitioner should be considered as a preferred (and
secured) creditor of Philfinance;
2)
whether petitioner can recover the full value of his CSPI
shares or merely 15% thereof like all other ordinary creditors of
Philfinance and
3)
whether petitioner is entitled to legal interest.[14]

Thus, it becomes evident that one preferred creditor's third-party claim to


the proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences
under Article 2242, unless the claimant were enforcing a credit for taxes
that enjoy absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain the pro rata
dividend corresponding to each, because the rights of the other creditors
likewise enjoying preference under Article 2242 can not be ascertained.
Wherefore, the order of the Court of First Instance of Manila now appealed
from, decreeing that the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect, and must be reversed.
[Underscoring supplied]

To resolve these issues, we first have to determine if petitioner was


indeed a creditor of Philfinance.

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin,
Jr., etc., et al.,[18] and in two cases both entitled Development Bank of
the Philippines vs. NLRC.[19]

The SEC, after holding that petitioner was the owner of the shares, stated:

Although Barretto involved specific immovable property, the ruling therein


should apply equally in this case where specific movable property is
involved. As the extra-judicial foreclosure instituted by PNB and DBP is not
the liquidation proceeding contemplated by the Civil Code, Remington
cannot claim its pro rata share from DBP.

There is no dispute that petitioner was the owner of the CSPI shares.
However, private respondents, as liquidators of Philfinance, illegally
withdrew said certificates of stock without the knowledge and consent of
petitioner and authority of the SEC.[15] After selling the CSPI shares,
private respondents added the proceeds of the sale to the assets of
Philfinance.[16] Under these circumstances, did the petitioner become a
creditor of Philfinance? We rule in the affirmative.

Petitioner is seeking the return of his CSPI shares which, for the present, is
no longer possible, considering that the same had already been sold by
the respondents, the proceeds of which are ADMITTEDLY commingled with
the assets of PHILFINANCE.

WHEREFORE, the petition is GRANTED

This being the case, [petitioner] is now but a claimant for the value of
those shares. As a claimant, he shall be treated as an ordinary creditor in
so far as the value of those certificates is concerned.[17]

CORDVA V. REYES DAWAY LIM BERNARDO LINDO ROSALES OFFICES 2007


Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from
Philippine Underwriters Finance Corporation (Philfinance) certificates of
stock of Celebrity Sports Plaza Incorporated (CSPI) and shares of stock of
various other corporations. He was issued a confirmation of sale.[4] The
CSPI shares were physically delivered by Philfinance to the former
Filmanbank[5] and Philtrust Bank, as custodian banks, to hold these
shares in behalf of and for the benefit of petitioner.[6]

The CA agreed with this and elaborated:

On June 18, 1981, Philfinance was placed under receivership by public


respondent Securities and Exchange Commission (SEC). Thereafter,
private respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices
and Atty. Wendell Coronel (private respondents) were appointed as
liquidators.[7] Sometime in 1991, without the knowledge and consent of
petitioner and without authority from the SEC, private respondents
withdrew the CSPI shares from the custodian banks.[8] On May 27, 1996,
they sold the shares to Northeast Corporation and included the proceeds
thereof in the funds of Philfinance. Petitioner learned about the
unauthorized sale of his shares only on September 10, 1996.[9] He lodged
a complaint with private respondents but the latter ignored it[10]
prompting him to file, on May 6, 1997,[11] a formal complaint against
private respondents in the receivership proceedings with the SEC, for the
return of the shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery
for Philfinances creditors and investors.[12] On May 13, 1997, the
liquidators began the process of settling the claims against Philfinance,
from its assets.[13]
On April 14, 1998, the SEC rendered judgment dismissing the petition.
However, it reconsidered this decision in a resolution dated September
24, 1999 and granted the claims of petitioner. It held that petitioner was
the owner of the CSPI shares by virtue of a confirmation of sale (which
was considered as a deed of assignment) issued to him by Philfinance. But
since the shares had already been sold and the proceeds commingled
with the other assets of Philfinance, petitioners status was converted into
that of an ordinary creditor for the value of such shares. Thus, it ordered
private respondents to pay petitioner the amount of P5,062,500

Much as we find both detestable and reprehensible the grossly abusive


and illicit contrivance employed by private respondents against petitioner,
we, nevertheless, concur with public respondent that the return of
petitioners CSPI shares is well-nigh impossible, if not already an utter
impossibility, inasmuch as the certificates of stocks have already been
alienated or transferred in favor of Northeast Corporation, as early as May
27, 1996, in consequence whereof the proceeds of the sale have been
transmuted into corporate assets of Philfinance, under custodia legis,
ready for distribution to its creditors and/or investors. Case law holds that
the assets of an institution under receivership or liquidation shall be
deemed in custodia legis in the hands of the receiver or liquidator, and
shall from the moment of such receivership or liquidation, be exempt from
any order, garnishment, levy, attachment, or execution.
Concomitantly, petitioners filing of his claim over the subject CSPI shares
before the SEC in the liquidation proceedings bound him to the terms and
conditions thereof. He cannot demand any special treatment [from] the
liquidator, for this flies in the face of, and will contravene, the Supreme
Court dictum that when a corporation threatened by bankruptcy is taken
over by a receiver, all the creditors shall stand on equal footing. Not one
of them should be given preference by paying one or some [of] them
ahead of the others. This is precisely the philosophy underlying the
suspension of all pending claims against the corporation under
receivership. The rule of thumb is equality in equity.[18]
We agree with both the SEC and the CA that petitioner had become an
ordinary creditor of Philfinance.
Certainly, petitioner had the right to demand the return of his CSPI shares.
[19] He in fact filed a complaint in the liquidation proceedings in the SEC
to get them back but was confronted by an impossible situation as they

had already been sold. Consequently, he sought instead to recover their


monetary value.
Petitioners CSPI shares were specific or determinate movable properties.
[20] But after they were sold, the money raised from the sale became
generic[21] and were commingled with the cash and other assets of
Philfinance. Unlike shares of stock, money is a generic thing. It is
designated merely by its class or genus without any particular designation
or physical segregation from all others of the same class.[22] This means
that once a certain amount is added to the cash balance, one can no
longer pinpoint the specific amount included which then becomes part of
a whole mass of money.
It thus became impossible to identify the exact proceeds of the sale of the
CSPI shares since they could no longer be particularly designated nor
distinctly segregated from the assets of Philfinance. Petitioners only
remedy was to file a claim on the whole mass of these assets, to which
unfortunately all of the other creditors and investors of Philfinance also
had a claim.

This being so, Article 2251 (2) states that:


Common credits referred to in Article 2245 shall be paid pro rata
regardless of dates.
Like all the other ordinary creditors or claimants against Philfinance, he
was entitled to a rate of recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner would have given
petitioner an unfair advantage or preference over the other creditors.[28]
Petitioner counters that he was entitled to 12% legal interest per annum
under Article 2209 of the Civil Code from the time he was deprived of the
shares until fully paid.
The guidelines for awarding interest were laid down in Eastern Shipping
Lines, Inc. v. CA:[29]

Petitioners right of action against Philfinance was a claim properly to be


litigated in the liquidation proceedings.[23] In Finasia Investments and
Finance Corporation v. CA,[24] we discussed the definition of claims in the
context of liquidation proceedings:

I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.

We agree with the public respondent that the word claim as used in Sec.
6(c) of P.D. 902-A,[25] as amended, refers to debts or demands of a
pecuniary nature. It means "the assertion of a right to have money paid. It
is used in special proceedings like those before [the administrative court]
on insolvency."

II. With regard particularly to an award of interest in the concept of actual


and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

The word "claim" is also defined as:


Right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured, or unsecured; or right to an
equitable remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy is
reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, unsecured.[26]

Undoubtedly, petitioner had a right to the payment of the value of his


shares. His demand was of a pecuniary nature since he was claiming the
monetary value of his shares. It was in this sense (i.e. as a claimant) that
he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are
applicable to the liquidation proceedings.[27] The next question is, was
petitioner a preferred or ordinary creditor under these provisions?
Petitioner argues that he was a preferred creditor because private
respondents illegally withdrew his CSPI shares from the custodian banks
and sold them without his knowledge and consent and without authority
from the SEC. He quotes Article 2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the following
claims or liens shall be preferred:

1. When the obligation is breached, and it consists in the payment of a


sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest
shall begin to run only from the date of the judgment of the court is made
(at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount of finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit.[30] (Emphasis supplied)

xxx xxx xxx


(2) Claims arising from misappropriation, breach of trust, or malfeasance
by public officials committed in the performance of their duties, on the
movables, money or securities obtained by them;
xxx xxx xxx
(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the entire
monetary value of his shares.
Petitioners argument is incorrect. Article 2241 refers only to specific
movable property. His claim was for the payment of money, which, as
already discussed, is generic property and not specific or determinate.
Considering that petitioner did not fall under any of the provisions
applicable to preferred creditors, he was deemed an ordinary creditor
under Article 2245:
Credits of any other kind or class, or by any other right or title not
comprised in the four preceding articles, shall enjoy no preference.

Under this ruling, petitioner was not entitled to legal interest of 12% per
annum (from demand) because the amount owing to him was not a
loan[31] or forbearance of money.[32]
Neither was he entitled to legal interest of 6% per annum under Article
2209 of the Civil Code[33] since this provision applies only when there is a
delay in the payment of a sum of money.[34] This was not the case here.
In fact, petitioner himself manifested before the CA that the SEC (as
liquidator) had already paid him P5,062,500 representing 15% of
P33,750,000.[35]
Accordingly, petitioner was not entitled to interest under the law and
current jurisprudence.
Considering that petitioner had already received the amount of
P5,062,500, the obligation of the SEC as liquidator of Philfinance was
totally extinguished.[36]
We note that there is an undisputed finding by the SEC and CA that
private respondents sold the subject shares without authority from the

SEC. Petitioner evidently has a cause of action against private


respondents for their bad faith and unauthorized acts, and the resulting
damage caused to him.[37]

WHEREFORE, the petition is hereby DENIED.