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ACT NO.

1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE REGISTRATION OF THE MORTGAGES SO EXECUTED

Section 1. The short title of this Act shall be "The Chattel Mortgage Law."

Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage.

Sec. 3. Chattel mortgage defined. A chattel mortgage is a conditional sale of personal property as 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. 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.

Sec. 4. Validity. A chattel mortgage shall not be valid against any person except the mortgagor, his executors or administrators, unless the possession of the property is delivered
to and retained by the mortgagee or unless the mortgage is recorded in the office of the register of deeds of the province in which the mortgagor resides at the time of making the
same, or, if he resides without the Philippine Islands, in the province in which the property is situated: Provided, however, That if the property is situated in a different province
from that in which the mortgagor resides, the mortgage shall be recorded in the office of the register of deeds of both the province in which the mortgagor resides and that in
which the property is situated, and for the purposes of this Act the city of Manila shall be deemed to be a province.

Sec. 5. Form. A chattel mortgage shall be deemed to be sufficient when made substantially in accordance with the following form, and shall be signed by the person or persons
executing the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the execution thereof, and each mortgagor and mortgagee, or, in the absence
of the mortgagee, his agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set forth, which affidavit, signed by the parties to the mortgage as above
stated, and the certificate of the oath signed by the authority administering the same, shall be appended to such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by _______________, a resident of the municipality of ______________, Province of ____________, Philippine Islands
mortgagor, to ____________, a resident of the municipality of ___________, Province of ______________, Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the following-described personal property situated in the municipality of ______________,
Province of ____________ and now in the possession of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

"This mortgage is given as security for the payment to the said ______, mortgagee, of promissory notes for the sum of ____________ pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per centum per annum, according to the terms of __________, certain promissory notes, dated _________, and in the words and
figures following (here insert copy of the note or notes secured).

"(If the mortgage is given for the performance of some other obligation aside from the payment of promissory notes, describe correctly but concisely the obligation to be
performed.)
"The conditions of this obligation are such that 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 obligation shall be null and void.

"Executed at the municipality of _________, in the Province of ________, this _____ day of 19_____

____________________
(Signature of mortgagor.)

"In the presence of

"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing 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."

FORM OF CERTIFICATE OF OATH.


"At ___________, in the Province of _________, personally appeared ____________, the parties who signed the foregoing affidavit and made oath to the truth thereof before me.

"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case may be.)

Sec. 6. Corporations. When a corporation is a party to such mortgage the affidavit required may be made and subscribed by a director, trustee, cashier, treasurer, or manager
thereof, or by a person authorized on the part of such corporation to make or to receive such mortgage. When a partnership is a party to the mortgage the affidavit may be made
and subscribed by one member thereof.

Sec. 7. Descriptions of property. The description of the mortgaged property shall be such as to enable the parties to the mortgage, or any other person, after reasonable inquiry
and investigation, to identify the same.

If the property mortgaged be large cattle," as defined by section one of Act Numbered Eleven and forty-seven, 2 and the amendments thereof, the description of said property in
the mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as remolinos, or cowlicks, and other marks of ownership as described and set forth
in the certificate of ownership of said animal or animals, together with the number and place of issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that the mortgagor binds himself properly to tend, care for and protect the crop while growing,
and faithfully and without delay to harvest the same, and that in default of the performance of such duties the mortgage may enter upon the premises, take all the necessary
measures for the protection of said crop, and retain possession thereof and sell the same, and from the proceeds of such sale pay all expenses incurred in caring for, harvesting,
and selling the crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus thereof, if any shall be paid to the mortgagor or those entitled to
the same.

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.

Sec. 8. Failure of mortgagee to discharge the mortgage. If the mortgagee, assign, administrator, executor, or either of them, after performance of the condition before or after
the breach thereof, or after tender of the performance of the condition, at or after the time fixed for the performance, does not within ten days after being requested thereto by
any person entitled to redeem, discharge the mortgage in the manner provided by law, the person entitled to redeem may recover of the person whose duty it is to discharge the
same twenty pesos for his neglect and all damages occasioned thereby in an action in any court having jurisdiction of the subject-matter thereof.

Sec. 9-12. (inclusive) 3

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem the same by
paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition before the sale thereof. An
attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner that the mortgagee could
foreclose it by the terms of this Act.

Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds. The mortgagee, his executor, administrator, or assign, may, after thirty days from the
time of condition broken, cause the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the
mortgagor resides, or where the property is situated, provided at least ten days' notice of the time, place, and purpose of such sale has been posted at two or more public places in
such municipality, and the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person holding under him and the persons holding subsequent
mortgages of the time and place of sale, either by notice in writing directed to him or left at his abode, if within the municipality, or sent by mail if he does not reside in such
municipality, at least ten days previous to the sale.

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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 register 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 in the case of sale on execution as provided in Act
Numbered One hundred and ninety, 4 and the amendments thereto, and the fees of the register of deeds for registering the officer's 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 mortgages, shall be paid to the mortgagor or person holding under him on demand.

If the sale includes any "large cattle," a certificate of transfer as required by section sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of
the municipality where the sale was held to the purchaser thereof.

Sec. 15. 6, 6a

Sec. 16. This Act shall take effect on August first, nineteen hundred and six.

Enacted, July 2, 1906.

Footnotes

1. Now Municipal judge.


2. Now section 511 of the Administrative Code.
3. Repealed by Act 3815, Article 367 approved December 8, 1930.
4. Now Rule 141, section 7 of the Rules of Court.
5. Now Section 523 of the Administrative Code.
6. Superseded by section 198 of the Administrative Code. The following is the present text of section 198 as amended by RA 2711, approved June 18, 1960.

"SECTION 198. Registration of chattel mortgages and fees collectible in connection therewith. Every register of deeds shall keep a primary entry book and a registration book for
the chattel mortgages; shall certify on each mortgage filed for record, as well as on its duplicate, the date, hour, and minute when the same was by him received; and shall record in
such books any chattel mortgage, assignment, or discharge thereof, and any other instruments relating to a recorded mortgage, and all such instruments shall be presented to him
in duplicate, the original to be filed and the duplicate to be returned to the person concerned.

"The recording of a mortgage shall be effected by making an entry, which shall be given a correlative number, setting forth the names of the mortgagee, and the mortgagor, the
sum or obligation guaranteed, date of the instrument, name of the notary before whom it was sworn to or acknowledged, and a note that the property mortgaged, as well as the
terms and conditions of the mortgage, is mentioned in detail in the instrument filed, giving the proper file number thereof. The recording of other instruments relating to a recorded
mortgage shall be effected by way of annotations on the space provided therefor in the registration book, after the same shall have been entered in the primary entry book.

"The register of deeds shall also certify the officer's return of sale upon any mortgage, making reference upon the record of such officer's return to the volume and page of the
record of the mortgage, and a reference of such return on the record of the mortgage itself, and give a certified copy thereof, when requested, upon payment of the lawful fees for
such copy; and certify upon each mortgage officer's return of sale or discharge of mortgage; and upon any other instrument relating to such a recorded mortgage, both on the
original and on the duplicate, the date, hour, and minute when the same is received for record and record such certificate with the return itself and keep an alphabetical index of
mortgagors and mortgagees, which record and index shall be open to public inspection.

"Duly certified copies of such records and of filed instruments shall be receivable as evidence in any court.

"The register of deeds shall collect the following fees for services rendered by him under this section:

"(a) For entry or presentation of any document in the primary entry book, one peso. Supporting papers presented together with the principal document need not be charged any
entry or presentation fee unless the party in interest desires that they be likewise entered.

"(b) For filing and recording each chattel mortgage, including the necessary certificates and affidavits, the fees established in the following schedule shall be collected:

"1. When the amount of the mortgage does not exceed six thousand pesos, three pesos and fifty centavos for the first five hundred pesos or fractional part thereof, and one peso
and fifty centavos for each additional five hundred pesos or fractional part thereof.

"2. When the amount of the mortgage is more than six thousand pesos but does not exceed thirty thousand pesos, twenty-four pesos for the initial amount not exceeding eight
thousand pesos, and four pesos for each additional two thousand pesos or fractional part thereof.

"3. When the amount of the mortgage is more than thirty thousand pesos but does not exceed one hundred thousand pesos, seventy-five pesos for the initial amount not exceeding
thirty-five thousand pesos, and seven pesos for each additional five thousand pesos or fractional part thereof.

"4. When the amount of the mortgage is more than one hundred thousand pesos but does not exceed five hundred thousand pesos, one hundred and seventy-six pesos for the initial
amount not exceeding one hundred ten thousand pesos, and ten pesos for each additional ten thousand pesos or fractional part thereof.

"5. When the amount of the mortgage is more than five hundred thousand pesos, five hundred eighty-one pesos for the initial amount not exceeding five hundred twenty thousand
pesos, and fifteen pesos for each additional twenty thousand pesos or fractional part thereof: Provided, however, That registration of the mortgage in the province where the
property is situated shall be sufficient registration: And provided, further, That if the mortgage is to be registered in more than one city or province, the register of deeds of the city
or province where the instrument is first presented for registration shall collect the full amount of the fees due in accordance with the schedule prescribed above, and the register of
deeds of the other city or province where the same instrument is also to be registered shall collect only a sum equivalent to twenty per centum of the amount of fees due and paid in
the first city or province, but in no case shall the fees payable in any registry be less than the minimum fixed in said schedule.

"(c) For recording each instrument of sale, conveyance, or transfer of the property which is subject of a recorded mortgage, or of the assignment of mortgage credit, the fees
established in the preceding schedule shall be collected on the basis of ten per centum of the amount of the mortgage or unpaid balance thereof: Provided, That the latter is stated
in the instrument.

"(d) For recording each notice of attachment, including the necessary index and annotations, four pesos.

"(e) For recording each release of mortgage, including the necessary index and references, the fees established in the schedule under paragraph (b) above shall be collected on the
basis of five per centum of the amount of the mortgage.

"(f) For recording each release of attachment, including the proper annotations, two pesos.

"(g) For recording each sheriff's return of sale, including the index and references, three pesos.

"(h) For recording a power of attorney, appointment of judicial guardian, administrator, or trustee, or any other instrument in which a person is given power to act in behalf of
another in connection with a mortgage, three pesos.

"(i) For recording each instrument or order relating to a recorded mortgage, including the necessary index and references, for which no specific fee is provided above, two pesos.

"(j) For certified copies of records, such fees as are allowed by law for copies kept by the register of deeds.

"(k) For issuing a certificate relative to, or showing the existence or non-existence of, an entry in the registration book, or a document on file, for each such certificate containing not
more than two hundred words, three pesos; if it exceeds that number, an additional fee of fifty centavos shall be collected for every one hundred words or fractional part thereof, in
excess of the first two hundred words."

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[G.R. No. L-40018. August 29, 1975.]

NORTHERN MOTORS, INC., Petitioner, v. THE HONORABLE JORGE R. COQUIA, Executive Judge of the Court of First Instance of Manila, HONESTO ONG, THE SHERIFF OF
MANILA, DOMINADOR Q. CACPAL, The Acting Executive Sheriff of Manila, and/or his duly authorized deputy sheriff or representative, FILINVEST CREDIT CORPORATION,
intervenor.

SYNOPSIS
To satisfy the judgment obtained by Tropical Commercial Co., Inc. against the Manila Yellow Taxicab Co., Inc., the sheriff levied upon and sold at public auction 20
taxicabs, 8 of which were mortgaged to Northern Motors Inc. Hence, the latter filed a third-party complaint. Tropical Commercial posted indemnity bonds which the
court, later canceled without notice to third-party claimant. An addition levy on 35 taxicabs, 7 of which were likewise mortgaged to Northern Motors, Inc. were made
and the auction sale was scheduled. By reason of the refusal of the lower court to reinstate the indemnity bonds, Northern Motor filed a petition for certiorari. The
Supreme Court denied the petition ruling that the mortgagees remedy is to vindicate its claim in a proper action. Hence, this motion for reconsideration, petitioner
raising anew the issue of whether its chattel mortgage lien levied by mortgagors unsecured creditor could be asserted in the case where the judgment was rendered.

The Supreme Court set aside and reconsidered its original and ruled that petitioner, as a chattel mortgagee and unpaid vendor, should not be required to vindicate in
a separate action its claim. Petition has a superior, preferential and paramount right to have possession of the mortgaged taxicabs and to claim the proceeds of the
execution sale over the levy of the mortgagors unsecured creditor. Decision reconsidered and set aside.

SYLLABUS
1. MORTGAGE; CHATTEL MORTGAGE; PREFERENTIAL RIGHT OF MORTGAGE. Where the condition of the chattel mortgage had already been broken by the
mortgagor by reason of which the mortgagee instituted an action for replevin to take possession of the mortgaged chattel, the mortgagee has a superior, preferential
and paramount right to have possession of the mortgaged chattel over the levy by the mortgagors unsecured judgment creditor.
2. ID.; ID.; LEVY UPON MORTGAGED CHATTEL REFERS ONLY TO THE RIGHT OR EQUITY OF REDEMPTION. The sheriff cannot levy upon and take possession of the
mortgaged chattel. He could levy only upon the right or equity of redemption of the chattel mortgagor and judgment debtor, because that is the only leviable or
attachable property right of the chattel mortgagor. After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption.
3. ID.; ID.; ID.; PHYSICAL POSSESSION NOT NECESSARY. To levy upon the mortgagors incorporeal right or equity of redemption, it is not necessary for the sheriff to
take physical possession of the mortgaged chattel. It is sufficient if he furnished the chattel mortgagor with a copy of the writ of execution and served upon it a notice
that its right or equity of redemption in the mortgaged chattel is being levied upon pursuant to that writ (Sec. 15, 2nd par., Rule 30 and Sec. 7(e), Rule 57 of the Rules
of Court). Levying upon the property itself is distinguishable from levying on the judgment debtors interest in it.
4. ID.; ID.; ID.; REGISTRATION AMOUNTS TO SYMBOLICAL POSSESSION. The sheriff and the judgment creditor are deemed to have constructive notice of the
registered chattel mortgages. As a consequence of the registration of the mortgages, the mortgagee has the symbolical possession of the mortgaged chattel.
5. ID.; ID.; ID.; JUDGMENT CREDITOR WHO BUYS MORTGAGORS EQUITY OF REDEMPTION AT AUCTION SALE STEPS INTO THE SHOES OF MORTGAGOR. If the
judgment creditor or assignee buys the mortgagors equity of redemption at the auction sale, then it would step into the shoes of the mortgagor and be able to
redeem the mortgaged chattel from the mortgagee, by paying the mortgage debt. The equity of redemption of the mortgagor passes to the purchaser at an execution
sale.
6. ID.; ID.; ID.; RIGHT OF ATTACHING CREDITOR IS SUBORDINATE TO THE LIEN OF MORTGAGEE. Inasmuch as what remains to the mortgagor is only the equity of
redemption, it follows that the right of the judgment or attaching creditor, who purchased the mortgaged chattel at an execution sale, is subordinate to the lien of the
mortgagee who has in his favor a valid chattel mortgage.
7. ID.; ID.; ID.; SOLIDARY LIABILITY OF JUDGMENT. The unsecured judgment creditor (of the chattel mortgagor) who bought the mortgaged chattels at the
execution sale should be held solidarily liable with the mortgagor to the chattel mortgagee for the mortgage obligation.
8. ID.; ID.; PURPOSE. The purpose of the Chattel Mortgage Law is to promote business and trade and to give impetus to the countrys economic development. In
the business world the chattel mortgage has greatly facilitated sales of goods and merchandise. Dealers of cars, trucks, appliances and machinery who resort to
installment sales, have relied on the chattel mortgage as an effective security. Sales of merchandise would be sluggish and insubstantial if the Chattel Mortgage Law
could not protect dealers against the defaults and delinquencies of their customers and if the mortgagees lien could be nullified by the maneuvers of an unsecured
judgment creditor of the chattel mortgagor. It is no right nor just that the lien of a secured creditor should be rendered nugatory by a wrongful execution engineered
by an unsecured creditor.
9, ID.; ID.; MORTGAGEES RIGHT TO NOTICE OF CANCELLATION OF INDEMNITY BOND. It is grave abuse of discretion to cancel the indemnity bonds without notice
to the third party claimant. A chattel mortgagee, as a third party claimant, comes within the purview of the provision of Rule 39, Sec. 17, of the Rules of Court.
10. ID.; ID.; CHATTEL MORTGAGEE IS A PROPER THIRD PARTY CLAIMANT. The chattel mortgagee may file a third-party claim even before there is a breach of the
mortgage because the recording of the mortgage gives him the symbolical possession of the mortgaged chattel which was construed as "equivalent to the actual
delivery of possession to the creditor" and because what a judgment creditor of the chattel mortgagor can attach is only the equity or right of redemption and, to
effectuate the attachment or levy, it is not requisite that the mortgaged chattel itself be seized by the sheriff.

AQUINO, J.:
Northern Motors, Inc., in its motion for the reconsideration of this Courts decision promulgated on March 21, 1975, raised anew the issue of whether its chattel
mortgage lien over certain taxicabs, which were levied upon by the mortgagors unsecured judgment creditor, could be asserted in the case where the judgment was
rendered or should be ventilated in an independent action, as held in that decision. It invoked the additional ground that it has an unpaid vendors lien on the
mortgaged taxicabs.

As set forth in the decision, the factual background of that issue is as follows:chanrob1es virtual 1aw library

Manila Yellow Taxicab Co., Inc. in May and June, 1974 purchased on the installment plan from Northern Motors, Inc. two hundred Holden Torana cars at the price of
P28,250 for each car. It made a downpayment of P1,000 on each car. It executed chattel mortgages on the cars in favor of Northern Motors, Inc. as security for the
promissory notes covering the balance of the price. The notes and the chattel mortgages for 112 cars were assigned to Filinvest Credit Corporation.

Tropical Commercial Co., Inc. obtained a judgment for P167,311.27 against Manila Yellow Taxicab Co., Inc. in Civil Case No. 71584 of the Court of First Instance of
Manila. Part of that judgment or the sum of P110,000 was eventually assigned to Honesto Ong for an unspecified valuable consideration.

To satisfy the judgment credit, the sheriff on December 12, 1974 levied upon twenty taxicabs of which eight were mortgaged to Northern Motors, Inc. and twelve to
Filinvest Credit Corporation under the assignment already mentioned.

Northern Motors, Inc. and Filinvest Credit Corporation filed the corresponding third-party claims with the sheriff. On December 18, 1974 Tropical Commercial Co., Inc.
posted indemnity bonds. On that same day, at two-thirty in the afternoon, the cars were sold at public auction although there was an alleged agreement that the cars
would be sold at four oclock. Later, the lower court cancelled the indemnity bonds without notice to the third-party claimants.

The sheriff made an additional levy on thirty-five mortgaged taxicabs to satisfy the unpaid balance of the judgment. Of those thirty-five taxicabs, seven were
mortgaged to Northern Motors, Inc. while twenty-eight were mortgaged to Filinvest Credit Corporation. Again, Northern Motors, Inc. and Filinvest Credit Corporation
filed third-party claims. The auction sale was scheduled on January 23, 1975.

The lower court in its resolution of January 17, 1975 refused to reinstate the indemnity bonds. It ruled that the chattel mortgagee was not entitled to the possession
of the mortgaged taxicabs by the mere fact of the execution of the mortgage and that the mortgage lien followed the chattel whoever might be its actual possessor.

On January 23, 1975 Northern Motors, Inc. filed its certiorari petition in this case to annul the resolution of January 17, 1975 and to stop the second auction sale. This
Court issued a restraining order against the scheduled auction sale, the writ of execution and the disposition of the proceeds of the first execution sale. Filinvest Credit
Corporation was allowed to intervene in the action.

In the decision sought to be reconsidered, the petition was denied and the restraining order was dissolved. We ruled that the mortgagees remedy is to vindicate its
claim in a proper action as provided in section 17, Rule 39 of the Rules of Court, and that its mortgage lien attached to the taxicabs wherever they might be.

Upon motion of Northern Motors, Inc. on the ground that the decision had not yet become final, the restraining order was maintained. (Filinvest Credit Corporation
did not file any motion for reconsideration because it had entered into a compromise with Ong. It agreed to pay Ong, through his counsel, P145,000 for the release of
twenty-eight taxicabs. It realized that an independent action would be illusory).

Northern Motors, Inc. contends in its motion for reconsideration that as chattel mortgagee and unpaid vendor it has the better right to the possession of the
mortgaged taxicabs and that its claims should be resolved in the case where the writ of execution was issued and not in a separate action which allegedly would be an
ineffective remedy. It further contends that the lower court gravely abused its discretion in cancelling the indemnity bonds posted by the judgment creditor of the
chattel mortgagor.

It insists that it is entitled to the possession of the taxicabs because the condition of the chattel mortgages had already been broken and, for that reason, the Serra

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ruling (infra) does not apply to this case. It alleges that some of the buyers at the auction sale were fictitious and that the cars valued at P28,250 each were sold for
less than P3,000 each.

The judgment creditor and the sheriff, in their opposition to the motion for reconsideration, reiterate their contention that the chattel mortgagees remedy is in an
independent action, as held in Serra v. Rodriguez, L-25546, April 22, 1974, 56 SCRA 538, per Makasiar, J. It was ruled in the Serra case that a chattel mortgagee could
not be regarded as a third-party claimant within the meaning of section 14, Rule 57 of the Rules of Court (similar to section 17, Rule 39, the rule involved in the instant
case) "because a chattel mortgage is merely a security for a loan and does not transfer title of the property mortgaged to the chattel mortgagee."

As a corollary, the judgment creditor and the sheriff argue that, since Northern Motors, Inc., the chattel mortgagee, was not a proper third-party claimant, there was
no necessity for an indemnity bond.

We hold, under the facts of this case, that Northern Motors, Inc., as chattel mortgagee and unpaid vendor, should not be required to vindicate in a separate action its
claims for the seven mortgaged taxicabs and for the proceeds of the execution sale of the other eight mortgaged taxicabs.

Inasmuch as the condition of the chattel mortgages had already been broken and Northern Motors, Inc. had in fact instituted an action for replevin so that it could
take possession of the mortgaged taxicabs (Civil Case No. 20536, Rizal CFI), it has a superior, preferential and paramount right to have possession of the mortgaged
taxicabs and to claim the proceeds of the execution sale (See Bachrach Motor Co. v. Summers, 42 Phil. 3; Northern Motors, Inc. v. Herrera, L-32674, February 22,
1973, 49 SCRA 392).

Respondent sheriff wrongfully levied upon the mortgaged taxicabs and erroneously took possession of them. He could have levied only upon the right or equity of
redemption pertaining to the Manila Yellow Taxicab Co., Inc. as chattel mortgagor and judgment debtor, because that was the only leviable or attachable property
right of the company in the mortgaged taxicabs (Manila Mercantile Co. v. Flores, 50 Phil. 759; Levy Hermanos, Inc. v. Ramirez and Casimiro, 60 Phil. 978, 981). "After a
chattel mortgage is executed, there remains in the mortgagor a mere right of redemption" (Tizon v. Valdez and Morales, 48 Phil. 910, 916).

To levy upon the mortgagors incorporeal right or equity of redemption, it was not necessary for the sheriff to have taken physical possession of the mortgaged
taxicabs. It would have sufficed if he furnished the chattel mortgagor, Manila Yellow Taxicab Co., Inc., with a copy of the writ of execution and served upon it a notice
that its right or equity of redemption in the mortgaged taxicabs was being levied upon pursuant to that writ (Sec. 15, 2nd par., Rule 39 and sec. 7[e] Rule 57 of the
Rules of Court). Levying upon the property itself is distinguishable from levying on the judgment debtors interest in it (McCullough & Co. v. Taylor, 25 Phil. 110, 115).

Justice Imperial, in a concurring opinion, noted that if the only attachable interest of a chattel mortgagor in a mortgaged car was his right of redemption and if the
purchaser at the execution sale could not acquire anything except such right of redemption, then the purchaser was "not entitled to the actual possession and
delivery of the automobile without first paying" the mortgage debt (Levy Hermanos, Inc. v. Ramirez and Casimiro, 60 Phil. 978, 984, 985).

In this case what the sheriff could have sold at public auction was merely the mortgagors right or equity of redemption. The sheriff and the judgment creditor are
deemed to have constructive notice of the chattel mortgages on the taxicabs (Ong Liong Tiak v. Luneta Motor Co., 66 Phil. 459). As a consequence of the registration
of the mortgages, Northern Motors, Inc. had the symbolical possession of the taxicabs (Meyers v. Thein, 15 Phil. 303).

If the judgment creditor, Tropical Commercial Co., Inc., or the assignee, Ong, bought the mortgagors equity of redemption at the auction sale, then it would step into
the shoes of the mortgagor, Manila Yellow Taxicab Co., Inc. and be able to redeem the vehicles from Northern Motors, Inc., the mortgagee, by paying the mortgage
debt. 1

Act No. 1508 provides:jgc:chanrobles.com.ph

"SEC. 13. When the condition of a chattel mortgage is broken a mortgagor or person holding a subsequent mortgage, or a subsequent attaching creditor may redeem
the same by paying or delivering to the mortgagee the amount due on such mortgage and the reasonable costs and expenses incurred by such breach of condition
before the sale thereof. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same
manner that the mortgagee could foreclose it by the terms of this Act."cralaw virtua1aw library

"The equity of redemption of the mortgagor will pass to the purchaser at an execution sale" (Tizon v. Valdez and Morales, 48 Phil. 910, 914).

Inasmuch as what remains to the mortgagor is only the equity of redemption, it follows that the right of the judgment or attaching creditor, who purchased the
mortgaged chattel at an execution sale, is subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage (Cabral v. Evangelista, L-26860, July
30, 1969, 28 SCRA 1000, 1006; Ong Liong Tiak v. Luneta Motor Co., 66 Phil. 459 462.

In the Cabral case the unsecured judgment creditor (of the chattel mortgagor) who bought the mortgaged chattels at the execution sale was held solidarily liable with
the mortgagor to the chattel mortgagee for the mortgage obligation. 2

Our ruling in this case is in consonance with the purpose of the Chattel Mortgage Law to promote business and trade and to give impetus to the countrys economic
development (Torres v. Limjap, 56 Phil. 141, 145). In the business world the chattel mortgage has greatly facilitated sales of goods and merchandise. Dealers of cars,
trucks, appliances and machinery, who resort to installment sales, have relied on the chattel mortgage as an effective security. Sales of merchandise would be sluggish
and insubstantial if the Chattel Mortgage Law could not protect dealers against the defaults and delinquencies of their customers and if the mortgagees lien could be
nullified by the maneuvers of an unsecured judgment creditor of the chattel mortgagor. It is not right nor just that the lien of a secured a creditor should be rendered
nugatory by a wrongful execution engineered by an unsecured creditor.

Northern Motors, Inc. prayed in its motion that the two indemnity bonds for P480,000 filed on December 18, 1974 by Filriters Guaranty Assurance Corporation for
Tropical Commercial Co., Inc. be reinstated. The lower court cancelled ex parte said bonds in its order of January 3, 1975 and reaffirmed the cancellation in its order of
January 17, 1975.

We hold that there was grave abuse of discretion in cancelling the said bonds without notice to Northern Motors, Inc. and Filinvest Credit Corporation. A chattel
mortgagee, as a third-party claimant, comes within the purview of the following provisions of Rule 39:jgc:chanrobles.com.ph

"SEC. 17. Proceedings where property claimed by third person. If property levied on be claimed by any other person than the judgment debtor or his agent, and
such person make an affidavit of his title thereto or right to the possession thereof, stating the grounds of such right or title, and serve the same upon the officer
making the levy, and a copy thereof upon the judgment creditor, the officer shall not be bound to keep the property, unless such judgment creditor or his agent, on
demand of the officer, indemnify the officer against such claim by a bond in a sum not greater than the value of the property levied on. In case of disagreement as to
such value, the same shall be determined by the court issuing the writ of execution.

"The officer is not liable for damages, for the taking or keeping of the property, to any third-party claimant unless a claim is made by the latter and unless an action for
damages is brought by him against the officer within one hundred twenty (120) days from the date of the filing of the bond. But nothing herein contained shall
prevent such claimant or any third person from vindicating his claim to the property by any proper action . . ."cralaw virtua1aw library

The chattel mortgagee may file a third-party claim, even before there is a breach of the mortgage because, as already noted, the recording of the mortgage gives him
the symbolical possession of the mortgaged chattel which was construed as "equivalent to the actual delivery of possession to the creditor" (Meyers v. Thein, supra
on page 306), and because what a judgment creditor of the chattel mortgagor can attach is only the equity or right of redemption and, to effectuate the attachment
levy, it is not requisite that the mortgaged chattel itself be seized by the sheriff. The Chattel Mortgage Law, in relation to article 319 of the Revised Penal Code,
contemplates that the mortgagor should always have the physical possession of the mortgaged chattel until there is a breach, in which case the mortgagee become
entitled to take possession of the chattel so that the mortgage can be foreclosed.

However, inasmuch as the one hundred twenty-day period for filing an action against the sheriff had already expired, and since Tropical Commercial Co., Inc. and the
surety have not been impleaded in this case, the propriety and justice of ordering them to re-file the indemnity bonds appear to be doubtful.

Northern Motors, Inc. is entitled to bring the appropriate action to recover the damages which it might have suffered in consequence of the wrongful execution.

WHEREFORE, the decision of March 21, 1975 is reconsidered and set aside. Respondent Sheriff is directed to deliver to Northern Motors, Inc. (a) the proceeds of the
execution sale held on December 18, 1974 for the eight taxicabs mortgaged to it less the expenses of execution an (b) the seven taxicabs which were levied upon by
him and which are also mortgaged to the corporation.

Following the ruling the Cabral case, respondent Honesto Ong is held solidarily liable with Manila Yellow Taxicab Co., Inc. for the mortgage obligations secured by the
eight mortgaged taxicabs which were sold at the execution sale, less the net proceeds of the sale. Costs against respondent Ong.

SO ORDERED.

4
G.R. No. 176381: December 15, 2010

PCI LEASING AND FINANCE, INC., Petitioner v. TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON, ELIZABETH DIZON, and JOHN DOE, Respondents.

CARPIO, J.:
The Case
This is a petition for review1 with application for the immediate issuance of a temporary restraining order and writ of preliminary injunction assailing the 5 October
2006 Decision2and the 23 January 2007 Resolution3 of the Court of Appeals in CA-G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002
Decision4 of the Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559, which granted petitioners complaint for recovery of sum of money and
personal property with prayer for the issuance of a writ of replevin. The 23 January 2007 Resolution denied petitioners motion for reconsideration.
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 sale 5 evidencing TMIs sale
to PCILF of the various equipment in consideration of the total amount of P 2,865,070.00.
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 USI-clearing 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 Vice-President, 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 complaint 13 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
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
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.


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-99-37559, 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
defendant-appellant Trojan Metal Industries, Inc., the net amount of Php 1,166,826.52.

SO ORDERED.18

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 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.

5
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 5980 19 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 owner-lessor 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 the lessee in exchange for the latters periodic
payment of a fixed amount of rental.

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.

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 P1,030,350.00.28Thus, 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.

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.

6
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.
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

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

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.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor 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.

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 the 5 October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in CA-
G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of refund, the excess amount
to be computed by the Regional Trial Court based on the formula specified above, with interest at 12% per annum from finality of this Decision until fully paid.

Costs against petitioner.


SO ORDERED.
FACTS;

Sometime in 1997, Trojan Metal Industries, Inc. (TMI) came to PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF offered to buy
various equipment TMI owned. Hard-pressed for money, TMI agreed. PCILF and TMI immediately executed deeds of sale evidencing TMIs sale to PCILF of the various
equipment.

PCILF and TMI then entered into a lease agreement , 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 lease agreement required TMI to give PCILF a guaranty deposit 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 Dizon, as TMIs
President and Vice-President, executed in favor of PCILF a Continuing Guaranty of Lease Obligations. 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, TMI used the leased equipment as temporary collateral. PCILF considered the second mortgage a violation
of the lease agreement. PCILF sent TMI a demand letter for the payment of the latters outstanding obligation. PCILFs demand remained unheeded.

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. On appeal, the CA reversed the RTCs decision.

ISSUES:

I. Whether the sale with lease agreement the parties entered into was a financial lease or a loan secured by chattel mortgage.

II. Whether PCILF should pay TMI, by way of refund

HELD: Petition DENIED.

First issue:

Civil Code

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.

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.

Second issue

7
Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the principal loan and costs.
Prevailing jurisprudence also holds that the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale proceeds.

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, the excess amount PCILF must refund to TMI is
subject to interest at 12% per annum from finality of this Decision until fully paid.

Makati Leasing and Finance Corp., vs Wearever Textile Mills, Inc., Author:
GR No. L-58469 May 16, 1983 Notes:
Topic:
Ponente:

FACTS:
1. Wearever Textile Mills, Inc. executed a chattel mortgage contract in favor of Makati Leasing and Finance Corporation covering certain raw materials and machinery. Upon default, Makati
Leasing fi led a petition for judicial foreclosure of the properties mortgaged.
2. Acting on Makati Leasings application for replevin, the lower court issued a writ of seizure. Pursuant thereto, the sheriff enforcing the seizure order seized the machinery subject matter of t
mortgage. In a petition for certiorari and prohibition, the Court of Appeals ordered the return of the machinery on the ground that the same can-not be the subject of replevin because it is a
real property pursuant to Article415 of the new Civil Code, the same being attached to the ground by means of bolts and the only way to remove it from Wearever textiles plant would be to
drill out or destroy the concrete floor.
3. When the motion for reconsideration of Makati Leasing was denied by the Court of Appeals, Makati Leasing elevated the matter to the Supreme Court.

ISSUE:
Whether the machinery in suit is real or personal property from the point of view of the parties.

HELD:
It should be treated as a personal property as agreed by the parties.

RATIO:

There is no logical justification to exclude the rule out the present case from the application of the pronouncement in Tumalad v Vicencio, 41 SCRA 143. If a house of strong materials, like wh
was involved in the 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 innocen
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 the denying the existence of the chattel mortgage.

In rejecting petitioners assertion on the applicability of the Tumalad doctrine, the CA 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 by the private respondent is indicative of the 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 a real
property as long as no interest of third parties would be prejudiced thereby.

The status of the subject matter as movable or immovable property was not raised as an issue before the lower court and the CA, except in a supplemental memorandum in support of the
petition filed in the appellate court. There is no record showing that the mortgage has been annulled, or that steps were taken to nullify the same. On the other hand, respondent has
benefited from the said contract.

DOCTRINE:

Equity dictates that one should not benefit at the expense of another.
As such, private respondent could no longer be allowed to impugn the efficacy of the chattel mortgage after it has benefited therefrom.
Therefore, the questioned machinery should be considered as personal property.

SEPARATE OPINION:

G.R. No. 120098 October 2, 2001


RUBY L. TSAI, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R VILLALUZ, respondents.
x---------------------------------------------------------x
[G.R. No. 120109. October 2, 2001.]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents.
QUISUMBING, J.:
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. 32986, affirming the decision2 of the Regional Trial Court of Manila, Branch 7,
in Civil Case No. 89-48265. Also assailed is respondent court's resolution denying petitioners' motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso (P3,000,000.00) loan from petitioner Philippine Bank of
Communications (PBCom). As security for the loan, EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot under TCT No. 372097,
where its factory stands, and the chattels located therein as enumerated in a schedule attached to the mortgage contract. The pertinent portions of the Real and
Chattel Mortgage are quoted below:
MORTGAGE
(REAL AND CHATTEL)
xxx xxx xxx
The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and
improvements now existing or which may hereafter exist thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications continued)
LIST OF MACHINERIES & EQUIPMENT
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:
Serial Numbers Size of Machines
xxx xxx xxx
B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.
xxx xxx xxx
C. Two (2) Circular Knitting Machines made in West Germany.

8
xxx xxx xxx
D. Four (4) Winding Machines.
xxx xxx xxx
SCHEDULE "A"
I. TCT # 372097 - RIZAL
xxx xxx xxx
II. Any and all buildings and improvements now existing or hereafter to exist on the above-mentioned lot.
III. MACHINERIES & EQUIPMENT situated, located and/or installed on the above-mentioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .
(c) Two (2) Circular Knitting Machines . . .
(d) Two (2) Winding Machines . . .
(e) Two (2) Winding Machines . . .
IV. Any and all replacements, substitutions, additions, increases and accretions to above properties.
xxx xxx xxx3
On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was secured by a Chattel Mortgage over personal properties enumerated in a
list attached thereto. These listed properties were similar to those listed in Annex A of the first mortgage deed.
After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed as SP Proc. No. LP-3091-P before the defunct Court of First Instance
of Pasay City, Branch XXVIII. The CFI issued an order on November 24, 1982 declaring the corporation insolvent. All its assets were taken into the custody of the
Insolvency Court, including the collateral, real and personal, securing the two mortgages as abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced extrajudicial foreclosure proceedings against EVERTEX under Act
3135, otherwise known as "An Act to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate Mortgages" and Act 1506 or "The
Chattel Mortgage Law". A Notice of Sheriff's Sale was issued on December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the highest bidder and a Certificate of Sale was issued in its favor on the
same date. On December 23, 1982, another public auction was held and again, PBCom was the highest bidder. The sheriff issued a Certificate of Sale on the same day.
On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In November 1986, it leased the entire factory premises to petitioner
Ruby L. Tsai for P50,000.00 a month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00, including the contested machineries.
On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the Regional Trial Court against PBCom, alleging inter alia that
the extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law. EVERTEX claimed that no rights having been transmitted to PBCom over the
assets of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and should reconvey the assets.
Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested properties, which were not included in the Real and Chattel
Mortgage of November 26, 1975 nor in the Chattel Mortgage of April 23, 1979, and neither were those properties included in the Notice of Sheriff's Sale dated
December 1, 1982 and Certificate of Sale . . . dated December 15, 1982.
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin
Equipment and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were irregular and illegal because they were not duly foreclosed nor sold at the December 15, 1982
auction sale since these were not included in the schedules attached to the mortgage contracts. The trial court decreed:
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the defendants:
1. Ordering the annulment of the sale executed by defendant Philippine Bank of Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it
affects the personal properties listed in par. 9 of the complaint, and their return to the plaintiff corporation through its assignee, plaintiff Mamerto R. Villaluz, for
disposition by the Insolvency Court, to be done within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P5,200,000.00 as compensation for the use and possession of the
properties in question from November 1986 to February 1991 and P100,000.00 every month thereafter, with interest thereon at the legal rate per annum until full
payment;
3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P50,000.00 as and for attorney's fees and expenses of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and reduction of the actual damages, from P100,000.00 to P20,000.00 per
month, from November 1986 until subject personal properties are restored to appellees, the judgment appealed from is hereby AFFIRMED, in all other respects. No
pronouncement as to costs.5
Motion for reconsideration of the above decision having been denied in the resolution of April 28, 1995, PBCom and Tsai filed their separate petitions for review with
this Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT MAKING A CONTRACT FOR THE PARTIES BY TREATING THE 1981 ACQUIRED MACHINERIES
AS CHATTELS INSTEAD OF REAL PROPERTIES WITHIN THEIR EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR 1979 DEED OF CHATTEL MORTGAGE.
II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED PART OF
THE MORTGAGE DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND APPLICABLE RULINGS OF THE SUPREME COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION
FOR WANT OF VALID FACTUAL AND LEGAL BASIS.
V
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION AND LACHES. 6
In G.R. No. 120098, PBCom raised the following issues:
I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE
1975 DEED OF REAL ESTATE MORTGAGE AND EXCLUDED THEM FROM THE REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY PBCOM DESPITE THE PROVISION IN
THE 1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THE MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED
FACT THAT SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE
ASSESSED FOR REAL ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982
TOTALLED P9,547,095.28, WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE DISPUTED MACHINERIES AND HAD TO PAY ALL THE BACK TAXES OF EVER
TEXTILE MILLS BE LEGALLY COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT
TO A CASE OF UNJUST ENRICHMENT?7
The principal issue, in our view, is whether or not the inclusion of the questioned properties in the foreclosed properties is proper. The secondary issue is whether or
not the sale of these properties to petitioner Ruby Tsai is valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating the 1981 acquired units of machinery as chattels instead of real
properties within their earlier 1975 deed of Real and Chattel Mortgage or 1979 deed of Chattel Mortgage.8 Additionally, Tsai argues that respondent court erred in
holding that the disputed 1981 machineries are not real properties.9 Finally, she contends that the Court of Appeals erred in holding against petitioner's arguments on
prescription and laches10 and in assessing petitioner actual damages, attorney's fees and expenses of litigation, for want of valid factual and legal basis.11

9
Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment decreeing that the pieces of machinery in dispute were not duly
foreclosed and could not be legally leased nor sold to Ruby Tsai. It further argued that the Court of Appeals' pronouncement that the pieces of machinery in question
were personal properties have no factual and legal basis. Finally, it asserts that the Court of Appeals erred in assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of machinery are not "real properties" but chattels, and, therefore, they were not part of the
foreclosed real properties, rendering the lease and the subsequent sale thereof to Tsai a nullity. 12
Considering the assigned errors and the arguments of the parties, we find the petitions devoid of merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari under Rule 45 of the Revised Rules of Court is limited to
reviewing only errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence on record or the assailed judgment is based
on misapprehension of facts.13 This rule is applied more stringently when the findings of fact of the RTC is affirmed by the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of Appeals that are decisive of the issues: (1) the "controverted machineries" are not
covered by, or included in, either of the two mortgages, the Real Estate and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said machineries were not
included in the list of properties appended to the Notice of Sale, and neither were they included in the Sheriff's Notice of Sale of the foreclosed properties.15
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or cemented on the real property mortgaged by EVERTEX to
PBCom, make them ipso facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does not settle the issue. Mere nuts and bolts
do not foreclose the controversy. We have to look at the parties' intent.
While it is true that the controverted properties appear to be immobile, a perusal of the contract of Real and Chattel Mortgage executed by the parties herein gives us
a contrary indication. In the case at bar, both the trial and the appellate courts reached the same finding that the true intention of PBCOM and the owner, EVERTEX, is
to treat machinery and equipment as chattels. The pertinent portion of respondent appellate court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as chattels; never as real properties. Indeed, the 1975 mortgage contract, which was actually
real and chattel mortgage, militates against appellants' posture. It should be noted that the printed form used by appellant bank was mainly for real estate mortgages.
But reflective of the true intention of appellant PBCOM and appellee EVERTEX was the typing in capital letters, immediately following the printed caption of mortgage,
of the phrase "real and chattel." So also, the "machineries and equipment" in the printed form of the bank had to be inserted in the blank space of the printed
contract and connected with the word "building" by typewritten slash marks. Now, then, if the machineries in question were contemplated to be included in the real
estate mortgage, there would have been no necessity to ink a chattel mortgage specifically mentioning as part III of Schedule A a listing of the machineries covered
thereby. It would have sufficed to list them as immovables in the Deed of Real Estate Mortgage of the land and building involved.
As regards the 1979 contract, the intention of the parties is clear and beyond question. It refers solely to chattels. The inventory list of the mortgaged properties is an
itemization of sixty-three (63) individually described machineries while the schedule listed only machines and 2,996,880.50 worth of finished cotton fabrics and
natural cotton fabrics.16
In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the evidence on record, we find no compelling reason to depart
therefrom.
Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from treating it as chattels to secure an obligation
under the principle of estoppel. As far back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal property if there is a stipulation as
when it is used as security in the payment of an obligation where a chattel mortgage is executed over it, as in the case at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed
their intention is to treat all properties included therein as immovable, and (2) attached to the said contract a separate "LIST OF MACHINERIES & EQUIPMENT". These
facts, taken together, evince the conclusion that the parties' intention is to treat these units of machinery as chattels. A fortiori, the contested after-acquired
properties, which are of the same description as the units enumerated under the title "LIST OF MACHINERIES & EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as the subject mortgages were intended by the parties to involve
chattels, insofar as equipment and machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof that: "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."
And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979 chattel mortgages, it was consequently an error on
the part of the Sheriff to include subject machineries with the properties enumerated in said chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the sale thereof to Tsai is also a nullity under the
elementary principle of nemo dat quod non habet, one cannot give what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a nullity, she is nevertheless a purchaser in good faith and for value who
now has a better right than EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial court that she is not a purchaser in good faith. Well-settled is the rule that the person
who asserts the status of a purchaser in good faith and for value has the burden of proving such assertion. 18 Petitioner Tsai failed to discharge this burden
persuasively.
Moreover, a purchaser in good faith and for value is one who buys the property of another without notice that some other person has a right to or interest in such
property and pays a full and fair price for the same, at the time of purchase, or before he has notice of the claims or interest of some other person in the
property.19 Records reveal, however, that when Tsai purchased the controverted properties, she knew of respondent's claim thereon. As borne out by the records,
she received the letter of respondent's counsel, apprising her of respondent's claim, dated February 27, 1987. 20 She replied thereto on March 9, 1987.21 Despite her
knowledge of respondent's claim, she proceeded to buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in finding that she was not a
purchaser in good faith.
Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are located is equally unavailing. This defense refers to sale of lands
and not to sale of properties situated therein. Likewise, the mere fact that the lot where the factory and the disputed properties stand is in PBCom's name does not
automatically make PBCom the owner of everything found therein, especially in view of EVERTEX's letter to Tsai enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent reason to disturb the consistent findings of both courts below that
the case for the reconveyance of the disputed properties was filed within the reglementary period. Here, in our view, the doctrine of laches does not apply. Note that
upon petitioners' adamant refusal to heed EVERTEX's claim, respondent company immediately filed an action to recover possession and ownership of the disputed
properties. There is no evidence showing any failure or neglect on its part, for an unreasonable and unexplained length of time, to do that which, by exercising due
diligence, could or should have been done earlier. The doctrine of stale demands would apply only where by reason of the lapse of time, it would be inequitable to
allow a party to enforce his legal rights. Moreover, except for very strong reasons, this Court is not disposed to apply the doctrine of laches to prejudice or defeat the
rights of an owner.22
As to the award of damages, the contested damages are the actual compensation, representing rentals for the contested units of machinery, the exemplary damages,
and attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid rentals of the contested properties based on the testimony of John
Chua, who testified that the P100,000.00 was based on the accepted practice in banking and finance, business and investments that the rental price must take into
account the cost of money used to buy them. The Court of Appeals did not give full credence to Chua's projection and reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of
certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof.23 However, the allegations of respondent company as to the
amount of unrealized rentals due them as actual damages remain mere assertions unsupported by documents and other competent evidence. In determining actual
damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best evidence
obtainable regarding the actual amount of loss.24 However, we are not prepared to disregard the following dispositions of the respondent appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on record warranting the said award of P5,200,000.00, representing monthly rental income of
P100,000.00 from November 1986 to February 1991, and the additional award of P100,000.00 per month thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh (sic) Chua and Mamerto Villaluz, is shy of what is necessary to
substantiate the actual damages allegedly sustained by appellees, by way of unrealized rental income of subject machineries and equipments.
The testimony of John Cua (sic) is nothing but an opinion or projection based on what is claimed to be a practice in business and industry. But such a testimony cannot
serve as the sole basis for assessing the actual damages complained of. What is more, there is no showing that had appellant Tsai not taken possession of the
machineries and equipments in question, somebody was willing and ready to rent the same for P100,000.00 a month.
xxx xxx xxx
Then, too, even assuming arguendo that the said machineries and equipments could have generated a rental income of P30,000.00 a month, as projected by witness
Mamerto Villaluz, the same would have been a gross income. Therefrom should be deducted or removed, expenses for maintenance and repairs . . . Therefore, in the
determination of the actual damages or unrealized rental income sued upon, there is a good basis to calculate that at least four months in a year, the machineries in
dispute would have been idle due to absence of a lessee or while being repaired. In the light of the foregoing rationalization and computation, We believe that a net
unrealized rental income of P20,000.00 a month, since November 1986, is more realistic and fair.25
As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals deleted. But according to the CA, there was no clear showing that
petitioners acted malevolently, wantonly and oppressively. The evidence, however, shows otherwise.It is a requisite to award exemplary damages that the wrongful
act must be accompanied by bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive, reckless or malevolent manner. 27 As previously stressed, petitioner
Tsai's act of purchasing the controverted properties despite her knowledge of EVERTEX's claim was oppressive and subjected the already insolvent respondent to
gross disadvantage. Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on March 24, 1987.28 Thus, PBCom's act of taking all the

10
properties found in the factory of the financially handicapped respondent, including those properties not covered by or included in the mortgages, is equally
oppressive and tainted with bad faith. Thus, we are in agreement with the RTC that an award of exemplary damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil Code provides that no proof of pecuniary loss is necessary for the
adjudication of exemplary damages, their assessment being left to the discretion of the court in accordance with the circumstances of each case.29 While the
imposition of exemplary damages is justified in this case, equity calls for its reduction. In Inhelder Corporation v. Court of Appeals, G.R. No. L-52358, 122 SCRA 576,
585, (May 30, 1983), we laid down the rule that judicial discretion granted to the courts in the assessment of damages must always be exercised with balanced
restraint and measured objectivity. Thus, here the award of exemplary damages by way of example for the public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered when exemplary damages are awarded.30 In our view, RTC's award of
P50,000.00 as attorney's fees and expenses of litigation is reasonable, given the circumstances in these cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS.
Petitioners Philippine Bank of Communications and Ruby L. Tsai are hereby ordered to pay jointly and severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per
month, as compensation for the use and possession of the properties in question from November 1986 31 until subject personal properties are restored to respondent
corporation; (2) P100,000.00 by way of exemplary damages, and (3) P50,000.00 as attorney's fees and litigation expenses. Costs against petitioners.
SO ORDERED.
Facts: Ever Textile Mills, Inc. (EVERTEX) obtained a loan from petitioner Philippine Bank of Communications (PBCom). As security for the loan, EVERTEX executed in
favor of PBCom, a deed of Real and Chattel Mortgage over the lot where its factory stands, and the chattels located therein as enumerated in a schedule attached to
the mortgage contract. PBCom granted a second loan to EVERTEX. The loan was secured by a Chattel Mortgage over personal properties enumerated in a list
attached thereto. The listed properties were similar to those listed in the first mortgage deed. Due to business reverses, EVERTEX filed insolvency proceedings
docketed. The CFI issued an order on declaring the corporation insolvent. All its assets were taken into the custody of the Insolvency Court, including the collateral,
real and personal, securing the two mortgages as abovementioned.
Upon EVERTEXs failure to meet its obligation to PBCom, the latter commenced extrajudicial foreclosure proceedings against EVERTEX. PBCom was the highest
bidder. Thus, PBCom consolidated its ownership over the lot and all the properties in it and leased the entire factory premises to petitioner Ruby L. Tsai. PBCom sold
the factory, lock, stock and barrel to Tsai, including the contested machineries. EVERTEX filed a complaint for annulment of sale, reconveyance, and damages with the
Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of subject mortgage was in violation of the Insolvency Law. EVERTEX claimed
that no rights having been transmitted to PBCom over the assets of insolvent EVERTEX, therefore Tsai acquired no rights over such assets sold to her, and should
reconvey the assets. EVERTEX averred that PBCom, without any legal or factual basis, appropriated the contested properties, which were not included in the Real and
Chattel Mortgages.
Issue: Whether or not the foreclosure on after acquired properties of EVERTEX is valid.
Held: Inasmuch as the subject mortgages were intended by the parties to involve chattels, insofar as equipment and machinery were concerned, the Chattel
Mortgage Law applies, which provides in Section 7 thereof that: 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. And, since the disputed machineries were acquired in 1981 and could not have been involved in the 1975 or 1979 chattel mortgages, it
was consequently an error on the part of the Sheriff to include subject machineries with the properties enumerated in said chattel mortgages. As the auction sale of
the subject properties to PBCom is void, no valid title passed in its favor. Consequently, the sale thereof to Tsai is also a nullity under the elementary principle
of nemo dat quod non habet, one cannot give what one does not have
Assuming arguendo that the properties in question are immovable by nature, nothing detracts the parties from treating it as chattels to secure an obligation under
the principle of estoppel. An immovable may be considered a personal property if there is a stipulation as when it is used as security in the payment of an obligation
where a chattel mortgage is executed over it, as in the case at bar.
G.R. No. 34385 September 21, 1931
ALEJANDRA TORRES, ET AL., plaintiff-appellees,
vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B. Henson, defendant-appellant.
x---------------------------------------------------------x
G.R. No. 34386 September 21, 1931
SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,
vs.
FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B. Henson, defendant-appellant.
Duran, Lim and Tuason for appellant.
Guevara, Francisco and Recto for appellees.
JOHNSON, J.:
These two actions were commenced in the Court of First Instance of Manila on April 16, 1930, for the purpose of securing from the defendant the possession of two
drug stores located in the City of Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle
Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000.
In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in favor of Don
Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to secure a loan
of P50,000, which was later reduced to P26,000, and for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of the parties.
In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in consequence thereof they became entitled to the possession of
the chattels and to foreclose their mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary bonds, the court issued in each case an
order directing the sheriff of the City of Manila to take immediate possession of said drug stores.
The defendant filed practically the same answer to both complaints. He denied generally and specifically the plaintiffs' allegations, and set up the following special
defenses:
(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in the description of
the property mortgaged; and
(2) That the chattels which the plaintiffs sought to recover were not the same property described in the mortgage.
The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and P100,000 in the second case.
Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of the parties. After hearing the evidence adduced during the trial and
on July 17, 1930, the Honorable Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion (a) that the defendant defaulted in the payment
of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the
plaintiffs, as mortgagees, were entitled to the possession of the drug stores Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73
Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores by the sheriff of the
City of Manila and the delivery thereof to the plaintiffs. The dispositive part of the decision reads as follows:
En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas
Nos. 37096 y 37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el Sheriff de Manila de las boticas en cuestion. Se condena en
costas al demandado en ambas causas.
From the judgment the defendant appealed, and now makes the following assignments of error:
I. The lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattels mortgaged and in failing to hold that the chattel
mortgages were null and void for lack of particularity in the description of the chattels mortgaged.
II. The lower court erred in refusing to allow the defendant to introduce evidence tending to show that the stock of merchandise found in the two drug stores was not
in existence or owned by the mortgagor at the time of the execution of the mortgages in question.
III. The lower court erred in holding that the administrator of the deceased is now estopped from contesting the validity of the mortgages in question.
IV. The lower court erred in failing to make a finding on the counterclaims of the defendant.
With reference to the first assignment of error, we deem it unnecessary to discuss the question therein raised, inasmuch as according to our view on the question of
estoppel, as we shall hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped from questioning the validity of these chattel
mortgages.
In his second assignment of error the appellant attacks the validity of the stipulation in said mortgages authorizing the mortgagor to sell the goods covered thereby
and to replace them with other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution of the chattels mortgaged does not
operate to extend the mortgage to after-acquired property, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act
No. 1508, which reads as follows:
A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and
placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding.

11
In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must first be
ascertained. When said Act was placed on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of that law-making body was
undoubtedly to promote business and trade in these Islands and to give impetus to the economic development of the country. Bearing this in mind, it could not have
been the intention of the Philippine Commission to apply the provision of section 7 above quoted to stores open to the public for retail business, where the goods are
constantly sold and substituted with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to apply to this class of
business, it would be practically impossible to constitute a mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade and
business, would restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to wit, the promotion of business and the economic
development of the country.
In the interpretation and construction of a statute the intent of the law-maker should always be ascertained and given effect, and courts will not follow the letter of a
statute when it leads away from the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the Act. On this subject, Sutherland,
the foremost authority on statutory construction, says:
The Intent of Statute is the Law. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker. The intent is the vital part, the essence
of the law, and the primary rule of construction is to ascertain and give effect to that intent. The intention of the legislature in enacting a law is the law itself, and must
be enforced when ascertained, although it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a statute when it leads away
from the true intent and purpose of the legislature and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives life to a
legislative enactment. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes
best with the content and promotes in the fullest manner the apparent policy and objects of the legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.)
A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding
. . . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of
the sale of such goods, etc. (11 C.J., p. 436.)
Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and substituted chattels. His views are based
on the decisions of the supreme courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn to cover goods put in stock in
place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the
mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture,
and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and
covered by the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by
the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp.
474, 475.)
In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars
and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-
acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the 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.
G.R. No. L-17500 May 16, 1967
PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION and CONNELL BROS. CO. (PHIL.), defendants-appellants.
Angel S. Gamboa for defendants-appellants.
Laurel Law Offices for plaintiffs-appellants.
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia corporation licensed to do business in the Philippines hereinafter referred to as
ATLANTIC sold and assigned all its rights in the Dahican Lumber concession to Dahican Lumber Company hereinafter referred to as DALCO for the total sum of
$500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop the concession, DALCO obtained various loans from the People's Bank & Trust
Company hereinafter referred to as the BANK amounting, as of July 13, 1950, to P200,000.00. In addition, DALCO obtained, through the BANK, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, executed by both
DALCO and the Dahican America Lumber Corporation, a foreign corporation and a stockholder of DALCO, hereinafter referred to as DAMCO, all payable to the
BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO executed in favor of the BANK the latter acting for itself and as trustee for the
Export-Import Bank of Washington D.C. a deed of mortgage covering five parcels of land situated in the province of Camarines Norte together with all the buildings
and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business in the municipalities of Mambulao and
Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a second mortgage on the same properties in favor of ATLANTIC to secure payment of
the unpaid balance of the sale price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both deeds contained the following provision
extending the mortgage lien to properties to be subsequently acquired referred to hereafter as "after acquired properties" by the mortgagor:
All property of every nature and description taken in exchange or replacement, and all buildings, machinery, fixtures, tools equipment and other property which the
Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon, or in connection with the premises, shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included therein, and the Mortgagor shall from time to time during the existence of this
mortgage furnish the Mortgagee with an accurate inventory of such substituted and subsequently acquired property.
Both mortgages were registered in the Office of the Register of Deeds of Camarines Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares
of stock of DALCO and 9,286 shares of DAMCO to secure the same obligations.
Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C., and
the latter assigned to the former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue
promissory note.
After July 13, 1950 the date of execution of the mortgages mentioned above DALCO purchased various machineries, equipment, spare parts and supplies in
addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the provision of the mortgage deeds quoted
theretofore regarding "after acquired properties," the BANK requested DALCO to submit complete lists of said properties but the latter failed to do so. In connection
with these purchases, there appeared in the books of DALCO as due to Connell Bros. Company (Philippines) a domestic corporation who was acting as the general
purchasing agent of DALCO thereinafter called CONNELL the sum of P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO, in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of
equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding agreements of rescission of sale were executed between DALCO
and DAMCO, on the one hand and between DALCO and CONNELL, on the other.
On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953; ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte application for the appointment of a Receiver and/or for the issuance of a writ of preliminary injunction to restrain
DALCO from removing its properties. The court granted both remedies and appointed George H. Evans as Receiver. Upon defendants' motion, however, the court, in
its order of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of the complaint and alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it was the owner and possessor of some of the equipments, spare parts and
supplies which DALCO had acquired subsequent to the execution of the mortgages sought to be foreclosed and which plaintiffs claimed were covered by the lien. In
its order of March 18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order discharging the Receiver. Consequently, Evans was
reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averment of the complaint, and asserting affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order transferring the venue of the action to the Court of First Instance of Manila where it
was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the machineries, equipment and supplies of DALCO, and the same were
subsequently sold for a total consideration of P175,000.00 which was deposited in court pending final determination of the action. By a similar agreement one-half
(P87,500.00) of this amount was considered as representing the proceeds obtained from the sale of the "undebated properties" (those not claimed by DAMCO and
CONNELL), and the other half as representing those obtained from the sale of the "after acquired properties".

12
After due trial, the Court, on July 15, 1960, rendered judgment as follows:
IN VIEW WHEREFORE, the Court:
1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of P200,000,00 with 7% interest per annum from July 13, 1950, Plus another sum of P100,000.00
with 5% interest per annum from July 13, 1950; plus 10% on both principal sums as attorney's fees;
2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of P900,000.00 with 4% interest per annum from July 3, 1950, plus 10% on both principal as
attorney's fees;
3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of P425,860.55, and to pay unto Dahican American Lumber Co. the sum of P2,151,678.24 both
with legal interest from the date of the filing of the respective answers of those parties, 10% of the principals as attorney's fees;
4. Orders that of the sum realized from the sale of the properties of P175,000.00, after deducting the recognized expenses, one-half thereof be adjudicated unto
plaintiffs, the court no longer specifying the share of each because of that announced intention under the stipulation of facts to "pool their resources"; as to the other
one-half, the same should be adjudicated unto both plaintiffs, and defendant Dahican American and Connell Bros. in the proportion already set forth on page 9, lines
21, 22 and 23 of the body of this decision; but with the understanding that whatever plaintiffs and Dahican American and Connell Bros. should receive from the
P175,000.00 deposited in the Court shall be applied to the judgments particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the debated properties shall be borne by People's Bank, Atlantic Gulf, Connell Bros.,
and Dahican American Lumber Co., pro-rata.
On the following day, the Court issued the following supplementary decision:
IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order to add the following paragraph 6:
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days, the Court orders the sale at public auction of the lands object of the mortgages to
satisfy the said mortgages and costs of foreclosure.
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after acquired properties" were subject to the deeds of mortgage mentioned heretofore; that
said properties were acquired from suppliers other than DAMCO and CONNELL; that even granting that DAMCO and CONNELL were the real suppliers, the rescission
of the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering the foregoing, the proceeds obtained from the sale of the "after
acquired properties" as well as those obtained from the sale of the "undebated properties" in the total sum of P175,000.00 should have been awarded exclusively to
plaintiffs by reason of the mortgage lien they had thereon; that damages should have been awarded to plaintiffs against defendants, all of them being guilty of an
attempt to defraud the former when they sought to rescind the sales already mentioned for the purpose of defeating their mortgage lien, and finally, that defendants
should have been made to bear all the expenses of the receivership, costs and attorney's fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly, in not holding that plaintiffs had no cause of action against them because the
promissory note sued upon was not yet due when the action to foreclose the mortgages was commenced; secondly, in not holding that the mortgages aforesaid were
null and void as regards the "after acquired properties" of DALCO because they were not registered in accordance with the Chattel Mortgage Law, the court erring, as
a consequence, in holding that said properties were subject to the mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the fourth paragraph
of each of said mortgages did not automatically make subject to such mortgages the "after acquired properties", the only meaning thereof being that the mortgagor
was willing to constitute a lien over such properties; fourthly, in not ruling that said stipulation was void as against DAMCO and CONNELL and in not awarding the
proceeds obtained from the sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a Receiver and in holding that the damages suffered
by DAMCO and CONNELL by reason of the depreciation or loss in value of the "after acquired properties" placed under receivership was damnum absque injuria and,
consequently, in not awarding, to said parties the corresponding damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to pay attorney's
fees and in requiring DAMCO and CONNELL to pay the costs of the Receivership, instead of sentencing plaintiffs to pay attorney's fees.
Plaintiffs' brief as appellants submit six assignments of error, while that of defendants also as appellants submit a total of seventeen. However, the multifarious issues
thus before Us may be resolved, directly or indirectly, by deciding the following issues:
Firstly, are the so-called "after acquired properties" covered by and subject to the deeds of mortgage subject of foreclosure?; secondly, assuming that they are subject
thereto, are the mortgages valid and binding on the properties aforesaid inspite of the fact that they were not registered in accordance with the provisions of the
Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after acquired properties", what is the effect thereon, if any, of
the rescission of sales entered into, on the one hand, between DAMCO and DALCO, and between DALCO and CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and description taken in exchange or replacement, as well
as all buildings, machineries, fixtures, tools, equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon, or in
connection with the premises that is, its lumber concession "shall immediately be and become subject to the lien" of both mortgages in the same manner and to
the same extent as if already included therein at the time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties, We
see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to is common, and We might say logical, in all cases where the
properties given as collateral are perishable or subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they shall be replaced with others to be thereafter acquired by the mortgagor.
Such stipulation is neither unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the properties
given as security. Indeed, if such properties were of the nature already referred to, it would be poor judgment on the part of the creditor who does not see to it that a
similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of mortgage in question cover the "after acquired properties" of DALCO, the same are void
and ineffectual because they were not registered in accordance with the Chattel Mortgage Law. In support of this and of the proposition that, even if said mortgages
were valid, they should not prejudice them, the defendants argue (1) that the deeds do not describe the mortgaged chattels specifically, nor were they registered in
accordance with the Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof constitutes "mere executory agreements to give a lien"
over the "after acquired properties" upon their acquisition; and (3) that any mortgage stipulation concerning "after acquired properties" should not prejudice
creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants contention. As adverted to hereinbefore, it states that all property of every nature, building, machinery
etc. taken in exchange or replacement by the mortgagor "shall immediately be and become subject to the lien of this mortgage in the same manner and to the same
extent as if now included therein". No clearer language could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third persons, a chattel mortgage must be registered and must describe the
mortgaged chattels or personal properties sufficiently to enable the parties and any other person to identify them, We say that such law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code still in force, there can be no doubt that the provisions of said code must govern
their interpretation and the question of their validity. It happens however, that Articles 334 and 1877 of the old Civil Code are substantially reproduced in Articles 415
and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we take the former or the latter as guide in deciding the point under
consideration.
Article 415 does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or replacements
intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet the needs of
the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs,
they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil Code".
We find the above ruling in agreement with our decisions on the subject:
(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5 of the Civil Code (old) gives the character of real property to machinery, liquid
containers, instruments or replacements intended by the owner of any building or land for use in connection with any industry or trade being carried on therein and
which are expressly adapted to meet the requirements of such trade or industry.
(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a mortgage constituted on a sugar central includes not only the land on which it is built
but also the buildings, machinery and accessories installed at the time the mortgage was constituted as well as the buildings, machinery and accessories belonging to
the mortgagor, installed after the constitution thereof .
It is not disputed in the case at bar that the "after acquired properties" were purchased by DALCO in connection with, and for use in the development of its lumber
concession and that they were purchased in addition to, or in replacement of those already existing in the premises on July 13, 1950. In Law, therefore, they must be
deemed to have been immobilized, with the result that the real estate mortgages involved herein which were registered as such did not have to be registered a
second time as chattel mortgages in order to bind the "after acquired properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709, claim that the "after acquired properties" did not become immobilized because
DALCO did not own the whole area of its lumber concession all over which said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones obtaining in the present. In the former, the Davao Sawmill Company, Inc., had
repeatedly treated the machinery therein involved as personal property by executing chattel mortgages thereon in favor of third parties, while in the present case the
parties had treated the "after acquired properties" as real properties by expressly and unequivocally agreeing that they shall automatically become subject to the lien
of the real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact, stated that "the characterization of the property as chattels by the
appellant is indicative of intention and impresses upon the property the character determined by the parties" (61 Phil. 112, emphasis supplied). In the present case, the
characterization of the "after acquired properties" as real property was made not only by one but by both interested parties. There is, therefore, more reason to hold
that such consensus impresses upon the properties the character determined by the parties who must now be held in estoppel to question it.

13
Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia, Inc. (225 U.S. 58) where it was held that while under the general law of Puerto
Rico, machinery placed on property by a tenant does not become immobilized, yet, when the tenant places it there pursuant to contract that it shall belong to the
owner, it then becomes immobilized as to that tenant and even as against his assignees and creditors who had sufficient notice of such stipulation. In the case at bar it
is not disputed that DALCO purchased the "after acquired properties" to be placed on, and be used in the development of its lumber concession, and agreed further
that the same shall become immediately subject to the lien constituted by the questioned mortgages. There is also abundant evidence in the record that DAMCO and
CONNELL had full notice of such stipulation and had never thought of disputed validity until the present case was filed. Consequently all of them must be deemed
barred from denying that the properties in question had become immobilized.
What We have said heretofore sufficiently disposes all the arguments adduced by defendants in support their contention that the mortgages under foreclosure are
void, and, that, even if valid, are ineffectual as against DAMCO and CONNELL.
Now to the question of whether or not DAMCO CONNELL have rights over the "after acquired properties" superior to the mortgage lien constituted thereon in favor
of plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid sellers"; that as such they had not only a superior lien on the "after
acquired properties" but also the right to rescind the sales thereof to DALCO.
This contention it is obvious would have validity only if it were true that DAMCO and CONNELL were the suppliers or vendors of the "after acquired properties".
According to the record, plaintiffs did not know their exact identity and description prior to the filing of the case bar because DALCO, in violation of its obligation
under the mortgages, had failed and refused theretofore to submit a complete list thereof. In the course of the proceedings, however, when defendants moved to
dissolve the order of receivership and the writ of preliminary injunction issued by the lower court, they attached to their motion the lists marked as Exhibits 1, 2 and 3
describing the properties aforesaid. Later on, the parties agreed to consider said lists as identifying and describing the "after acquire properties," and engaged the
services of auditors to examine the books of DALCO so as to bring out the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 V4) show that
neither DAMCO nor CONNELL had supplied any of the goods of which they respective claimed to be the unpaid seller; that all items were supplied by different parties,
neither of whom appeared to be DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on the net value of all items it claims to have sold to DALCO
and which, in truth, it had purchased for DALCO as the latter's general agent; that CONNELL had to issue its own invoices in addition to those o f the real suppliers in
order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO was a stockholder and CONNELL was not only a stockholder but the general agent of
DALCO, their claim to be the suppliers of the "after acquired required properties" would seem to be preposterous. The most that can be claimed on the basis of the
evidence is that DAMCO and CONNELL probably financed some of the purchases. But if DALCO still owes them any amount in this connection, it is clear that,
as financiers, they can not claim any right over the "after acquired properties" superior to the lien constituted thereon by virtue of the deeds of mortgage under
foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore appears to be but a desperate attempt to better or improve DAMCO and
CONNELL's position by enabling them to assume the role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired properties". The attempt, of
course, is utterly ineffectual, not only because they are not the "unpaid sellers" they claim to be but also because there is abundant evidence in the record showing
that both DAMCO and CONNELL had known and admitted from the beginning that the "after acquired properties" of DALCO were meant to be included in the first
and second mortgages under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly or otherwise, is of no consequence and does not make the rescission valid and
legally effective. It must be stated clearly, however, in justice to Belden, that, as a member of the Board of Directors of DALCO, he opposed the resolution of
December 15, 1952 passed by said Board and the subsequent rescission of the sales.
Finally, defendants claim that the action to foreclose the mortgages filed on February 12, 1953 was premature because the promissory note sued upon did not fall
due until April 1 of the same year, concluding from this that, when the action was commenced, the plaintiffs had no cause of action. Upon this question the lower
court says the following in the appealed judgment;
The other is the defense of prematurity of the causes of action in that plaintiffs, as a matter of grace, conceded an extension of time to pay up to 1 April, 1953 while
the action was filed on 12 February, 1953, but, as to this, the Court taking it that there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date
of the filing of the complaint, it should follow that the debtor thereby lost the benefit to the period.
x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in the aggregate, P1,200,000 excluding interest while the aggregate price of the "after-
acquired" chattels claimed by Connell under the rescission contracts was P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all the
properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the Court understanding that when the law permits the debtor to enjoy the benefits of the
period notwithstanding that he is insolvent by his giving a guaranty for the debt, that must mean a new and efficient guaranty, must concede that the causes of action
for collection of the notes were not premature.
Very little need be added to the above. Defendants, however, contend that the lower court had no basis for finding that, when the action was commenced, DALCO
was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find, however, that the finding of the trial court is sufficiently supported by the
evidence particularly the resolution marked as Exhibit K, which shows that on December 16, 1952 in the words of the Chairman of the Board DALCO was
"without funds, neither does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale of the "after acquired properties" should have been awarded exclusively to the
plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed among said parties, whether or not the distribution should be pro-rata or otherwise;
whether or not plaintiffs are entitled to damages; and, lastly, whether or not the expenses incidental to the Receivership should be borne by all the parties on a pro-
rata basis or exclusively by one or some of them are of a secondary nature as they are already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the of after acquired properties" and the "undebated properties", it is clear, in view of our opinion sustaining the
validity of the mortgages in relation thereto, that said proceeds should be awarded exclusively to the plaintiffs in payment of the money obligations secured by the
mortgages under foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law (Articles 1313 and 1314 of the New Civil Code) provides that creditors are
protected in cases of contracts intended to defraud them; and that any third person who induces another to violate his contract shall be liable for damages to the
other contracting party. Similar liability is demandable under Arts. 20 and 21 which may be given retroactive effect (Arts. 225253) or under Arts. 1902 and 2176
of the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO, after failing to pay the fifth promissory note upon its maturity, conspired jointly with
CONNELL to violate the provisions of the fourth paragraph of the mortgages under foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired
properties". As a result, the plaintiffs had to go to court to protect their rights thus jeopardized. Defendants' liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the latter claim, namely, the difference between the alleged total obligation secured by
the mortgages amounting to around P1,200,000.00, plus the stipulated interest and attorney's fees, on the one hand, and the proceeds obtained from the sale of
"after acquired properties", and of those that were not claimed neither by DAMCO nor CONNELL, on the other. Considering that the sale of the real properties subject
to the mortgages under foreclosure has not been effected, and considering further the lack of evidence showing that the true value of all the properties already sold
was not realized because their sale was under stress, We feel that We do not have before Us the true elements or factors that should determine the amount of
damages that plaintiffs are entitled recover from defendants. It is, however, our considered opinion that, upon the facts established, all the expenses of the
Receivership, which was deemed necessary to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and severally, in the same manner that
all of them should pay to the plaintiffs, jointly a severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the plaintiffs are entitled to recover from the defendants, the record of this case shall be
remanded below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other respects. With costs.
Facts:

Dahican Lumber Co. (DALCO) obtained a loan from People's Bank and Trust Co. (Bank) secured by a deed of mortgage covering 5 parcels of land together with all the
buildings and other improvements existing thereon and all the personal properties of DALCO located in its place of business.

After the day of the execution of the mortgage, DALCO purchased various machinery, equipment, spare parts and supplies.

Pursuant to the provision of the mortgage deeds regarding "after acquired properties", the Bank requested DALCO to submit complete list of the said properties but
DALCO refused to do so.

Issue: Whether or not the "after acquired properties" were subject to the deed of mortgage.

Held:
Yes, they are subject to the deeds of mortgage.

Article 415 of the Civil Code does not define real property but enumerates what are considered as such, among them being machinery, receptacles, instruments or
replacements intended by owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and shall tend directly to meet
the needs of the said industry or works.

The chattels or the "after acquired properties" were placed in the real properties mortgaged to the Bank. They came within the operation of Article 145.

14
Hence, the "after acquired properties" were subject to the deed of mortgage.

[G.R. No. 103576. August 22, 1996]


ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
DECISION
VITUG, J.:
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]
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank additional financial
accommodations totalling P2,700,000.00.[2] These borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory
notes for P250,000.00 each. Due to financial constraints, the loan was not settled at maturity.[3] Respondent bank thereupon applied for an 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.
Petitioner corporation appealed to the Court of Appeals[4] which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for
reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially 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]
Except in criminal cases where the penalty of reclusion perpetua or death is imposed[6] which the Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements
are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural
rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the
prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the
rules in order to give way to and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation
by the principal 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 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 -
"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]
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 -
"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]
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with the full payment of the
P3,000,000.00 loan,[16]there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages
it has sustained "as a result of the unlawful action taken by respondent bank against it."[17] This prayer is not reflected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of Appeals,[19] we have said:
"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore, it cannot experience physical suffering and mental anguish.Mental suffering can be experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent bank as an artificial person." [20]
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely
disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable
Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one
positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate jurisdiction."[21] (Italics
supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor;[22] thus:
"(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.

15
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.
FACTS:

Chua Pac, president and general manager of Acme Shoe, Rubber and Plastic Corporation, executed a chattel mortgage in favor of Producers Bank of the Philippines, as
a security for a corporate loan in the amount of P3M. The chattel mortgage contained a clause that provided for the mortgage to stand as security for all other
obligations contracted before, during and after the constitution of the mortgage.

The P3M was paid. Subsequently, the corporation obtained additional financial accommodations totalling P2.7M. This was also paid on the due date. Again, the bank
extended another loan to the corporation in the amount of P1M, covered by four promissory notes. However, the corporation was unable to pay this at maturity.
Thereupon, the bank applied for an extra-judicial foreclosure of mortgage.

For its part, the corporation filed an action for injunction with prayer for damages. The lower court ultimately dismissed the case and ordered the extra-judicial
foreclosure of mortgage. Hence, this appeal.

ISSUEs:

o W/N extra-judicial foreclosure of the chattel mortgage is proper


o If not proper, W/N the corporation is entitled to damages as a result of the extra-judicial foreclosure

HELD:

Contracts of Security

Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or 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 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 and substantially in teh form prescribed by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable
property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit -- upon the essential condition that if
the obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the payment of the obligation, but that should the obligation
be duly paid, then the contract is automatically extinguished proceeding from the accessory character 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.

After-incurred Obligations

While a pledge, real estate mortgage, or antichresis may exceptionaly secure after-incurred obligations so long as these future debts are accurately described, a
chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until
after a chattel mortgage agreement covered the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the Chattel Mortgage Law. Refusal on the part of borrower to execute the agreement so as to cover the after-incurred obligation can constitute as
an act of default on the part of the borrower of the financing agreement wherein 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.

In the case at bar, the chattel mortgage was terminated when payment for the P3M loan was made so there was no chattel mortgage to even foreclose at the time
the bank instituted the extra-judicial foreclosure.

Damages

In its complaint, the corporation asked for moral damages sustained "as a result of the unlawful action taken by the respondent bank against it." The court said --

"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock,
social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no
senses; therefore it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows
from real ills and sorrows and griefs of life -- all of which cannot be suffered by respondent bank as an artificial person.

"Although Chua Pac was included in the case, he was only so named as a party in representation of the corporation."

G.R. No. 92989 July 8, 1991


PERFECTO DY, JR. petitioner,
vs.
COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of the Court of Appeals which ruled that the petitioner's purchase of a
farm tractor was not validly consummated and ordered a complaint for its recovery dismissed.
The facts as established by the records are as follows:
The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy purchased a truck and a farm tractor through financing extended by Libra
Finance and Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for the loan.
The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter to Libra requesting that he be allowed to purchase from Wilfredo
Dy the said tractor and assume the mortgage debt of the latter.
In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's request.
Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the petitioner over the tractor in question.
At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's failure to pay the amortizations.
Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release could not be effected because Wilfredo Dy had obtained financing
not only for said tractor but also for a truck and Libra insisted on full payment for both.
The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full payment could be made for both. On November 22, 1979, a PNB check
was issued in the amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy with the financing firm. Payment having been effected
through an out-of-town check, Libra insisted that it be cleared first before Libra could release the chattels in question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to recover the sum of P12,269.80 was pending in another court in
Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff was able to seize and levy on the tractor which was in the premises of
Libra in Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder. Later, Gelac sold the tractor to one of its
stockholders, Antonio Gonzales.
It was only when the check was cleared on January 17, 1980 that the petitioner learned about GELAC having already taken custody of the subject tractor.
Consequently, the petitioner filed an action to recover the subject tractor against GELAC Trading with the Regional Trial Court of Cebu City.
On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion of the decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter
of this case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to return the same to the plaintiff herein; directing the defendants jointly
and severally to pay to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral damages; P50,000 for exemplary damages; and to pay
the cost. (Rollo, pp. 35-36)
On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint with costs against the petitioner. The Court of Appeals held that the
tractor in question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ of execution issued in Civil Case No. R-16646.

16
The petitioner now comes to the Court raising the following questions:
A.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT TO
AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF RESPONDENT GELAC TRADING INC.
B.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR
TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE TRIAL COURT.
C.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT THE
SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 AT WHICH TIME BOTH RESPONDENTS
ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND RENDERED THEM LIABLE FOR
THE MORAL AND EXEMPLARY DAMAGES SLAPPED AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)
The respondents claim that at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon
the clearance and encashment of the check which was issued in payment of the subject tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80 [1989]), we stated that:
xxx xxx xxx
The rule is settled that the chattel mortgagor continues to be the owner of the property, and therefore, has the power to alienate the same; however, he is obliged
under pain of penal liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules of Court in the Philippines, (1972), Volume IV-B
Part 1, p. 525). Thus, the instruments of mortgage are binding, while they subsist, not only upon the parties executing them but also upon those who later, by
purchase or otherwise, acquire the properties referred to therein.
The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third person, therefore, affects not the validity of the sale but
only the penal liability of the mortgagor under the Revised Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.
xxx xxx xxx
The mortgagor who gave the property as security under a chattel mortgage did not part with the ownership over the same. He had the right to sell it although he was
under the obligation to secure the written consent of the mortgagee or he lays himself open to criminal prosecution under the provision of Article 319 par. 2 of the
Revised Penal Code. And even if no consent was obtained from the mortgagee, the validity of the sale would still not be affected.
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor. There is no dispute that the consent of Libra Finance was obtained
in the instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume the mortgage debt of his brother. The sale
between the brothers was therefore valid and binding as between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee from the moment it is delivered to him in any of the ways specified
in Articles 1497 to 1501 or in any other manner signing an agreement that the possession is transferred from the vendor to the vendee. We agree with the petitioner
that Articles 1498 and 1499 are applicable in the case at bar.
Article 1498 states:
Art. 1498. When the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the
contract, if from the deed the contrary does not appear or cannot clearly be inferred.
xxx xxx xxx
Article 1499 provides:
Article 1499. The delivery of movable property may likewise be made by the mere consent or agreement of the contracting parties, if the thing sold cannot be
transferred to the possession of the vendee at the time of the sale, or if the latter already had it in his possession for any other reason. (1463a)
In the instant case, actual delivery of the subject tractor could not be made. However, there was constructive delivery already upon the execution of the public
instrument pursuant to Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be immediately transferred to the possession of
the vendee. (Art. 1499)
The respondent court avers that the vendor must first have control and possession of the thing before he could transfer ownership by constructive delivery. Here, it
was Libra Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a preliminary step to foreclosure. As mortgagee,
he has the right of foreclosure upon default by the mortgagor in the performance of the conditions mentioned in the contract of mortgage. The law implies that the
mortgagee is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his right of ownership was not divested from him upon his default.
Neither could it be said that Libra was the owner of the subject tractor because the mortgagee can not become the owner of or convert and appropriate to himself
the property mortgaged. (Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only remedy given to the mortgagee is to have said
property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765,
767 [1953]) There is no showing that Libra Finance has already foreclosed the mortgage and that it was the new owner of the subject tractor. Undeniably, Libra gave
its consent to the sale of the subject tractor to the petitioner. It was aware of the transfer of rights to the petitioner.
Where a third person purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177
SCRA 521 [1989]). His right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner was fully aware of the existing
mortgage of the subject tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage
debt of Wilfredo Dy which Libra undeniably agreed to.
The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be released to the petitioner. It was never intended
nor could it be considered as payment of the purchase price because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The
clearing or encashment of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel
mortgage. It was not determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra
and the petitioner. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable.
The sale of the subject tractor was consummated upon the execution of the public instrument on September 4, 1979. At this time constructive delivery was already
effected. Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in December, 1979. Well settled is the rule that only
properties unquestionably owned by the judgment debtor and which are not exempt by law from execution should be levied upon or sought to be levied upon. For
the power of the court in the execution of its judgment extends only over properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v. Court of
Appeals, G.R. No. 78771, January 23, 1991).
The respondents further claim that at that time the sheriff levied on the tractor and took legal custody thereof no one ever protested or filed a third party claim.
It is inconsequential whether a third party claim has been filed or not by the petitioner during the time the sheriff levied on the subject tractor. A person other than
the judgment debtor who claims ownership or right over levied properties is not precluded, however, from taking other legal remedies to prosecute his claim.
(Consolidated Bank and Trust Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed the action for replevin with the RTC.
Anent the second and third issues raised, the Court accords great respect and weight to the findings of fact of the trial court.1wphi1 There is no sufficient evidence
to show that the sale of the tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and Perfecto are brothers, this fact alone does not give rise to
the presumption that the sale was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be presumed; it
must be established by clear convincing evidence.
We agree with the trial court's findings that the actuations of GELAC Trading were indeed violative of the provisions on human relations. As found by the trial court,
GELAC knew very well of the transfer of the property to the petitioners on July 14, 1980 when it received summons based on the complaint for replevin filed with the
RTC by the petitioner. Notwithstanding said summons, it continued to sell the subject tractor to one of its stockholders on August 2, 1980.
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial
Court dated April 8, 1988 is REINSTATED.
SO ORDERED.
FACTS:

Wilfredo Dy purchased a truck and a farm tractor through LIBRA which was also mortgaged with the latter, as a security to the loan.

Petitioner, expresses his desire to purchased his brothers tractor in a letter to LIBRA which also includes his intention to shoulder its mortgaged. LIBRA approved the
request. At the time that Wilfredo Dy executed a deed of absolute sale in favor of petitioner, the tractor and truck were in the possession of LIBRA for his failure to
pay the amortization.

17
When petitioner finally fulfilled its obligation to pay the tractor, LIBRA would only release the same only if he would also pay for the truck. In order to fulfill LIBRAs
condition, petitioner convinced his sister to pay for the remaining truck, to which she released a check amounting to P22,000. LIBRA however, insisted that the check
must be first cleared before it delivers the truck and tractor.

Meanwhile, another case penned Gelac Trading Inc vs. Wilfredo Dy was pending in Cebu as a case to recover for a sum of money (P12,269.80). By a writ of
execution the court in Cebu ordered to seize and levy the tractor which was in the premise of LIBRA, it was sold in a public auction to which it was purchased by
GELAC. The latter then sold the tractor to Antonio Gonzales.

RTC rendered in favor of petitioner.

CA dismissed the case, alleging that it still belongs to Wilfredo Dy.

ISSUE:
Whether or not there was a consummated sale between Petitioner and LIBRA?

HELD:

NO.

The payment of the check was actually intended to extinguish the mortgage obligation so that the tractor could be released to the petitioner. It was never intended
nor could it be considered as payment of the purchase price because the relationship between Libra and the petitioner is not one of sale but still a mortgage. The
clearing or encashment of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel
mortgage. It was not determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra
and the petitioner. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable.

[G.R. No. 116363. December 10, 1999]


SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS, JESUS PONCE, and ELIZABETH PONCE, respondents.
DECISION
YNARES-SANTIAGO, J.:
This controversy is between a mortgagor who alienated the mortgaged property without the consent of the mortgagee, on the one hand, and the assignee of
the mortgagee to whom the latter assigned his credit without notice to the mortgagor, on the other hand.
Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on installment a Holden Torana vehicle from C. R. Tecson Enterprises. They
executed a promissory note and a chattel mortgage on the vehicle dated December 24, 1975 in favor of the C. R. Tecson Enterprises to secure payment of the
note. The mortgage was registered both in the Registry of Deeds and the Land Transportation Office. On the same date, C.R. Tecson Enterprises, in turn, executed a
deed of assignment of said promissory note and chattel mortgage in favor of Filinvest Credit Corporation with the conformity of respondent spouses. The latter were
aware of the endorsement of the note and the mortgage to Filinvest as they in fact availed of its financing services to pay for the car. In 1976, respondent spouses
transferred and delivered the vehicle to Conrado R. Tecson by way of sale with assumption of mortgage. Subsequently, in 1978, Filinvest assigned all its rights and
interest over the same promissory note and chattel mortgage to petitioner Servicewide Specialists Inc. without notice to respondent spouses. Due to the failure of
respondent spouses to pay the installments under the promissory note from October 1977 to March 1978, and despite demands to pay the same or to return the
vehicle, petitioner was constrained to file before the Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages against them, docketed as
Civil Case No. 115567. In their answer, respondent spouses denied any liability claiming they had already returned the car to Conrado Tecson pursuant to the Deed of
Sale with Assumption of Mortgage. Thus, they filed a third party complaint against Conrado Tecson praying that in case they are adjudged liable to petitioner, Conrado
Tecson should reimburse them.
After trial, the lower court found respondent spouses jointly and solidarily liable to petitioner, however, the third party defendant Conrado Tecson was
ordered to reimburse the respondent spouses for the sum that they would pay to petitioner.[1] On appeal, the Court of Appeals reversed and set aside the judgment
of the court a quo on the principal ground that respondent spouses were not notified of the assignment of the promissory note and chattel mortgage to
petitioner.[2] Hence, this petition for review.
The resolution of the petition hinges on whether the assignment of a credit requires notice to the debtor in order to bind him. More specifically, is the debtor-
mortgagor who sold the property to another entitled to notice of the assignment of credit made by the creditor to another party such that if the debtor was not
notified of the assignment, he can no longer be held liable since he already alienated the property? Conversely, is the consent of the creditor-mortgagee necessary
when the debtor-mortgagor alienates the property to a third person?
Only notice to the debtor of the assignment of credit is required. His consent is not required. In contrast, consent of the creditor-mortgagee to the alienation
of the mortgaged property is necessary in order to bind said creditor. To evade liability, respondent spouses invoked Article 1626 of the Civil Code which provides that
the debtor who, before having knowledge of the assignment, pays his creditor shall be released from the obligation. They argue that they were not notified of the
assignment made to petitioner. This provision, however, is applicable only where the debtor pays the creditor prior to acquiring knowledge of the latters assignment
of his credit. It does not apply, nor is it relevant, to cases of non-payment after the debtor came to know of the assignment of credit. This is precisely so since the
debtor did not make any payment after the assignment.
In the case at bar, what is relevant is not the assignment of credit between petitioner and its assignor, but the knowledge or consent of the creditors assignee
to the debtor-mortgagors sale of the property to another.
When the credit was assigned to petitioner, only notice to but not the consent of the debtor- mortgagor was necessary to bind the latter. Applying Article
1627 of the Civil Code,[3] the assignment made to petitioner includes the accessory rights such as the mortgage. Article 2141, on the other hand, states that the
provisions concerning a contract of pledge shall be applicable to a chattel mortgage, such as the one at bar, insofar as there is no conflict with Act No. 1508, the
Chattel Mortgage Law. As provided in Article 2096 in relation to Article 2141 of the Civil Code, [4] a thing pledged may be alienated by the pledgor or owner with the
consent of the pledgee. This provision is in accordance with Act No. 1508 which provides that a mortgagor of personal property shall not sell or pledge such property,
or any part thereof, mortgaged by him without the consent of the mortgagee in writing on the back of the mortgage and on the margin of the record thereof in the
office where such mortgage is recorded.[5] Although this provision in the chattel mortgage has been expressly repealed by Article 367 of the Revised Penal Code, yet
under Article 319 (2) of the same Code, the sale of the thing mortgaged may be made provided that the mortgagee gives his consent and that the same is
recorded.[6] In any case, applying by analogy Article 2128 of the Civil Code[7] to a chattel mortgage, it appears that a mortgage credit may be alienated or assigned to a
third person. Since the assignee of the credit steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignees consent
is necessary in order to bind him of the alienation of the mortgaged thing by the debtor-mortgagor. This is tantamount to a novation. As the new assignee, petitioners
consent is necessary before respondent spouses alienation of the vehicle can be considered as binding against third persons. Petitioner is considered a third person
with respect to the sale with mortgage between respondent spouses and third party defendant Conrado Tecson.
In this case, however, since the alienation by the respondent spouses of the vehicle occurred prior to the assignment of credit to petitioner, it follows that the
former were not bound to obtain the consent of the latter as it was not yet an assignee of the credit at the time of the alienation of the mortgaged vehicle.
The next question is whether respondent spouses needed to notify or secure the consent of petitioners predecessor to the alienation of the vehicle. The sale
with assumption of mortgage made by respondent spouses is tantamount to a substitution of debtors. In such case, mere notice to the creditor is not enough, his
consent is always necessary as provided in Article 1293 of the Civil Code. [8]Without such consent by the creditor, the alienation made by respondent spouses is not
binding on the former. On the other hand, Articles 1625,[9] 1626[10] and 1627 of the Civil Code on assignment of credits do not require the debtors consent for the
validity thereof and so as to render him liable to the assignee. The law speaks not of consent but of notice to the debtor, the purpose of which is to inform the latter
that from the date of assignment he should make payment to the assignee and not to the original creditor. Notice is thus for the protection of the assignee because
before said date, payment to the original creditor is valid.
When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was made with respondent spouses tacit approval. When
Filinvest in turn, as assignee, assigned it further to petitioner, the latter should have notified the respondent spouses of the assignment in order to bind them. This,
they failed to do. The testimony of petitioners witness that notice of assignment was sent to respondent spouses was stricken off the record. Having asserted the
affirmative on the issue of notice, petitioner should have substantiated its allegations in order to obtain a favorable judgment. In civil cases, the burden is on the party
who would be defeated if no evidence is given on either side.[11] Being the plaintiff in the trial below, petitioner must establish its case, relying on the strength of its
own evidence and not upon the weakness of that of its opponent.[12] The consent to the assignment given by respondent spouses to Filinvest cannot be construed as
the spouses knowledge of the assignment to petitioner precisely because at the time of the assignment to the latter, the spouses had earlier sold the vehicle to
another.
One thing, however, that militates against the posture of respondent spouses is that although they are not bound to obtain the consent of the petitioner
before alienating the property, they should have obtained the consent of Filinvest since they were already aware of the assignment to the latter. So that, insofar as
Filinvest is concerned, the debtor is still respondent spouses because of the absence of its consent to the sale. Worse, Filinvest was not even notified of such
sale. Having subsequently stepped into the shoes of Filinvest, petitioner acquired the same rights as the former had against respondent spouses. The defenses that

18
could have been invoked by Filinvest against the spouses can be successfully raised by petitioner. Therefore, for failure of respondent spouses to obtain the consent
of Filinvest thereto, the sale of the vehicle to Conrado R. Tecson was not binding on the former. When the credit was assigned by Filinvest to petitioner, respondent
spouses stood on record as the debtor-mortgagor.
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE. The decision of the Regional Trial Court is AFFIRMED and
REINSTATED. Respondents Jesus Ponce and Elizabeth Ponce are ORDERED to pay petitioner, jointly and severally, the following sums:
a) P26,633,09, plus interest at 14% per annum from April 26, 1978 until fully paid;
b) 25% of the above sum in item (a) as liquidated damages;
c) P5,000.00 as attorneys fees; and
d) costs of suit.
In connection with the Third Party Complaint of the respondents, the third party defendant Conrado Tecson is hereby ordered to reimburse respondents
Ponce for all the sums the latter would pay to petitioner, and attorneys fees of P3,000.00.
SO ORDERED.
Facts:
In 1975, Spouses Ponce (respondents) bought on installment a Holden Torana vehicle from CR Tecson Enterprises. They executed a promissory note and a
chattel mortgage in favor of the latter to secure payment of the note. The mortgage was registered in the Registry of Deeds and Land Transportation Office.
Then, CR Tecson executed a deed of assignment of said promissory note and chattel mortgage in favor of Filinvest Credit Corp. with the conformity of
respondent spouses. The spouses were aware of the endorsement of the note and mortgage to Filinvest as they availed of its financing services to pay the
vehicle.
In 1976, the spouses transferred and delivered the vehicle to Conrado Tecson by way of sale with assumption of mortgage.
However, in 1978, Filinvest assigned all its rights and interest over the same promissory note and chattel mortgage to Servicewide Specialists Inc.
(petitioner) without notice to the spouses.
Due to the failure of payment of installments by the spouses and despite demands to pay the installments or return the vehicle, Servicewide filed a
complaint for replevin with damages in the RTC. The spouses in their answer, denied any liability claiming that they had already returned the car to Conrado
Tecson pursuant to the Deed of Sale with Assumption of Mortgage.
The RTC ruled in favor of Servicewide as it found out that the spouses are jointly and solidarily liable to the latter. However, on appeal, the CA reversed the
judgment of the RTC on the ground that the spouses were not notified of the assignment of the promissory note and chattel mortgage to Servicewide.

Issue:
1. Whether or not the assignment of a credit requires notice of the debtor in order to bind him. (NO)
2. Whether or not the consent of the creditors assignee to the debtor-mortgagors sale of the property to another. (YES)
2. Whether or not the consent of the creditor-mortgagee (Servicewides predecessor) is necessary when the debtor-mortgagor alienates the property to a third person.
(YES)

Held:
1.
Only notice to the debtor of the assignment of credit is required and his consent is not required.
The law speaks not of consent but notice to the debtor, the purpose of which is to inform the latter that from the date of assignment, he should make
payment to the assignee and not to the original creditor. Notice is thus for the protection of assignee because before said date, payment to the original
creditor is valid.
2.
Applying Art. 2128 of the Civil Code to a chattel mortgage, it appears that a mortgage credit may be alienated or assigned to a third person. Since the assignee
of the credit steps into the shoes of the creditor-mortgagee to whom the chattel was mortgaged, it follows that the assignees consent is necessary in order
to bind him of the alienation of the mortgaged thing by the debtor-mortgagor.
As the new assignee, Servicewides consent is necessary before the spouses alienation of the vehicle can be considered against third persons. Servicewide
is considered a third person with respect to the sale with mortgage between the spouses and third party defendant, Conrado Tecson.
In the case at bar, since the alienation by the spouses of the vehicle occurred prior to the assignment of credit to Servicewide, it follows that the spouses were
not bound to obtain the consent of Servicewide as it was not yet an assignee of the credit at the time of the alienation of the mortgaged vehicle.
3.
Mere notice of the creditor is not enough as his consent is always necessary as provided in Art. 1293 of the Civil Code. Without such consent of by the
creditor, the alienation made by the spouses is not binding on the former.
4.
When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it was made with the spouses tacit approval. When Filinvest
in turn, as assignee, assigned it further to petitioner, Filinvest should have notified the spouses of the assignment on order to bind them. This, they failed
to do.
The consent to the assignment given by the spouses to Filinvest cannot be construed as the spouses knowledge of the assignment to Servicewide because
at the time of the assignment to Servicewide, the spouses had earlier sold the vehicle to another.
For the spouses, although they are not bound to obtain the consent of Servicewide before alienating the property, they should have obtained the consent
of Filinvest since they were already aware of the assignment to the latter. So that, insofar as Filinvest is concerned, the debtor is still the spouses because
of the absence of its consent to the sale. Filinvest was not even notified of such sale.
Servicewide acquired the same rights of Filinvest and the defenses that could have been invoked by Filinvest against the spouses can be successfully raised
by petitioner. Thus, for the failure of the spouses to obtain the consent of Filinvest, the sale of the vehicle to Conrado Tecson was not binding on the former.
When the credit was assigned by Filinvest to Servicewide, the spouses stood on record as the debtor-mortgagor.

OCA Circular No. 7-2002


Section 1
All applications for extra-judicial foreclosure of mortgage, whether under the direction of the Sheriff or a notary public pursuant to Art.No. 3135, as amended, and Act
1508, as amended, shall be filed with the Executive Judge, through the Clerk of Court, who is also the Ex-Officio Sheriff (A.M. No. 99-10-05-0, as amended, March 1,
2001).
Section 2
Upon receipt of the application, the Clerk of Court shall:
a. Examine the same to ensure that the special power of attorney authorizing the extra-judicial foreclosure of the real property is either inserted into or
attached to the deed of real estate mortgage (Act No. 3135, Sec. 1, as amended);
b. Give a file number to the application and endorse the date and time of its filing and thereafter docket the same, keeping, in this connection, separate
docket books for extra-judicial foreclosure sales conducted by the Sheriff and those conducted by notaries public;
c. For the conduct of extra-judicial foreclosure of real estate or chattel mortgage under the direction of the sheriff, collect the appropriate filing fees and
issues the corresponding official receipt pursuant to the following schedule:
If the amount of the indebtedness or the mortgagees claim is:

(1) Less than P50,000.00 ..... P275.00

(2) P50,000.00 or more but less than P100,000.00 ..... 400.00

(3) P100,000.00 or more but less than P150,000.00 ..... 500.00

(4) P150,000.00 or more but less than P200,000.00 ..... 650.00

(5) P200,000.00 or more but less than P250,000.00 ..... 1,000.00

19
(6) P250,000.00 or more but less than P300,000.00 ..... 1,250.00

(7) P300,000.00 or more but less than P400,000.00 ..... 1,500.00

(8) P400,000 or more but less than P500,000.00 ..... 1,750.00

(9) P500,000.00 or more but not more than P100,000,000.00 ..... 2,000.00

(10) For each P1,000.00 in excess of P1,000,000.00 ..... 10.00

(Section 7 (c), Rule 141, Rules of Court, as amended by A.M. No. 00-2-01-SC, February 1, 2000).
Cooperatives, thrift banks, and rural banks are not exempt from the payment of filing fees and other fees under these guidelines (A.M. No. 98-9-280-RTC,
September 29, 1998; A.M. No. 99-3-93-RTC, April 20, 1999; and A.M. No. 92-9-408-0).
d. In case the application is for the extra-judicial foreclosure of mortgages of real estates and/or chattels in different locations covering one indebtedness,
issue, apart from the official receipt for the fees, a certificate of payment indicating the amount of indebtedness, the filing fees collected, the mortgages
sought to be foreclosed, the real estates and/or chattels mortgaged and their respective locations, for purposes of having the application docketed with
the Clerks of Court in the places where the other properties are located and of allowing the extra-judicial foreclosure to proceed thereat. (A.M. No. 99-
10-05-0, par. 2(e)).
Section 3
The application for extra-judicial foreclosure shall be raffled under the supervision of the Executive Judge, with the assistance of the Clerk of Court and Ex-Oficio
Sheriff, among all Sheriffs including those assigned to the Office of the Clerk of court and Sheriffs assigned in the branches of the court. A Sheriff to whom the case has
been raffled shall be excluded in the succeeding raffles and shall participate again only after all other Sheriffs shall have been assigned a case by raffle (Administrative
Circular No. 3-98, Feb. 5, 1998).
Section 4
The Sheriff to whom the application for extra-judicial foreclosure of mortgage was raffled shall do the following:
a. Prepare a Notice of Extra-judicial Sale using the following form:
NOTICE OF EXTRA-JUDICIAL SALE
Upon extra-judicial petition for sale under Act 3135 / 1508 filed __________________ against (name and address of Mortgator/s) to satisfy the
mortgage indebtedness which as of ___________ amounts to P _________________, excluding penalties, charges, attorneys fees and expenses of
foreclosure, the undersigned or his duly authorized deputy will sell at public auction on (date of sale) _______________ at 10:00 A.M. or soon thereafter
at the main entrance of the ___________ (place of sale) to the highest bidder, for cash or managers check and in Philippine Currency, the following
property with all its improvements, to wit:
(Description of Property)
All sealed bids must be submitted to the undersigned on the above stated time and date.
In the event the public auction should not take place on the said date, it shall be held on _______________, _______________ without further notice.
________________ (date)
SHERIFF
b. (1) In case of foreclosure of real estate mortgage, cause the publication of the notice of sale by posting it for not less than twenty (20) days in at least
three (3) public places in the municipality or city where the property is situated and if such property is worth more than four hundred (P400.00) pesos, by
having such notice published once a week for at least three (3) consecutive weeks in a newspaper of general circulation in the municipality or city (Sec. 3,
Act No. 3135, as amended). The Executive Judge shall designate a regular working day and definite time each week during which said notice shall be
distributed personally by him for publication to qualified newspapers or periodicals as defined in Sec. 1 of P.D. No. 1079, which distribution shall be
effected by raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001). Unless otherwise stipulated by the parties to the mortgage contract, the debtor-mortgagor need
not be personally served a copy of the notice of the extra-judicial foreclosure.
For real estate mortgages covering loans not exceeding P100,000.00, exclusive of interests due and unpaid, granted by rural banks (RA No. 7353, Sec. 6)
or thrift banks (RA No. 7906, Sec. 18),publication in a newspaper shall be dispensed with, it being sufficient that the notices of foreclosure are posted for
a period of sixty (60) days immediately preceding the public auction in the most conspicuous areas of the municipal building, the municipal public market,
the rural bank, the barangay hall, and the barangay public market, if any, where the land mortgaged is situated. Proof of publication shall be
accomplished by an affidavit of the Sheriff and shall be attached to the records of the case.
(2) In case of foreclosure of a chattel mortgage, post the notice for at least ten (10) days in two (2) or more public places in the municipality where the
mortgagor resides or where the property is situated (Sec. 14, Act No. 1508, as amended).
Section 5
Conduct of the extra-judicial foreclosure sale
a. The bidding shall be made through sealed bids which must be submitted to the Sheriff who shall conduct the sale between the hours of 9 a.m. and 4 p.m.
of the date of the auction (Act 3135, Sec. 4). The property mortgaged shall be awarded to the party submitting the highest bid and, in case of a tie, an
open bidding shall be conducted between the highest bidders. Payments of the winning bid shall be made either in cash or in managers check, in
Philippine currency, within five (5) days from notice.
b. The sale must be made in the province in which the real property is situated and, in case the place within the said province in which the sale is to be
made is the subject of stipulation, such sale shall be made in said place in the municipal building of the municipality in which the property or part thereof
is situated (Act No. 3135, as amended, Sec. 2); in case of a chattel mortgage, the sale shall be made at a place in the municipality where the mortgagor
resides or where the property is situated (Sec. 14, Act No. 1508, as amended).
Section 6
After the sale, the Clerk of Courts shall collect the appropriate fees pursuant to Sec. 9(1), Rule 141, as amended by A.M No. 00-2-01-SC, computed on the basis of the
amount actually collected by him, which fee shall not exceed P100,000.00 (A.M. No. 99-10-05-0, March 1, 2001, 2[d]). The amount paid shall not be subject to a
refund even if the foreclosed property is subsequently redeemed.
Section 7
In case of foreclosure under Act No. 1508, the Sheriff shall, within thirty (30) days from the sale, prepare a return and file the same in the Office of the Registry of
Deeds where the mortgage is recorded.
Section 8
The Sheriff or the notary public who conducted the sale shall report the name/s of the bidder/s to the Clerk of Court.
Section 9
Upon presentation of the appropriate receipts, the Clerk of Court shall issue and sign the Certificate of Sale, subject to the approval of the Executive Judge or, in the
latters absence, the Vice-Executive Judge. Prior to the issuance of the certificate of Sale, the Clerk of court shall, in extra-judicial foreclosure conducted under the
direction of the sheriff, collect P300.00 as provided in Section 20(d), Rule 141, as amended, and in extra-judicial foreclosure sales conducted under the direction of a
notary public, collect the appropriate fees pursuant to Rule 141, 20(e), which amount shall not exceed P100,000.00 (Minute Res., A.M. No. 99-10-05-0, August 7,
2001).
Section 10
After the Certificate of Sale has been issued, the Clerk of Court shall keep the complete records for a period of one (1) year from the date of registration of the
certificate of sale with the Register of Deeds, after which the records shall be archived. Notwithstanding the foregoing, juridical persons whose property is sold
pursuant to an extra-judicial foreclosure shall have the right to redeem the property until, but not later than, the registration of the certificate of foreclosure sale
which in no case shall be more than three (3) months after foreclosure, whichever is earlier (R.A. 8791, Section 47). In case the property is redeemed, the Clerk of
Court shall assess the redemptioners fee as provided in Section 7 (k), Rule 141, as amended. If the property is not redeemed, the Clerk of Court shall, as a requisite
for the issuance of the final Deed of Sale, assess the highest bidder the amount of P300.00 as provided in Section 20(d), Rule 141, as amended.
Section 11
These guidelines shall take effect on April 22, 2002.

RCBC V. ROYAL CARGO CORPORATION, (GR 179756, October 20, 2009)


CARPIO MORALES, J.:

20
Terrymanila, Inc.[1] (Terrymanila) filed a petition for voluntary insolvency with the Regional Trial Court (RTC) of Bataan on February 13, 1991.[2] One of its
creditors was Rizal Commercial Banking Corporation (petitioner) with which it had an obligation of P3 Million that was secured by a chattel mortgage executed
on February 16, 1989.The chattel mortgage was duly recorded in the notarial register of Amado Castano, a notary public for and in the Province of Bataan.[3]
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an action before the RTC of Manila for collection of sum of money and
preliminarily attached some of Terrymanilas personal properties on March 5, 1991 to secure the satisfaction of a judgment award of P296,662.16, exclusive of interests
and attorneys fees.[4]

On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.

On June 11, 1991,[5] the Manila RTC, by Decision of even date, rendered judgment in the collection case in favor of respondent.

In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC permission to extrajudicially foreclose the chattel mortgage which was
granted by Order of February 3, 1992.[6] It appears that respondent, together with its employees union, moved to have this Order reconsidered but the motion was
denied by Order of March 20, 1992 Order.[7]

The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale of the mortgaged personal properties at the Municipal
Building of Mariveles, Bataan. At the auction sale, petitioner, the sole bidder of the properties, purchased them for P1.5 Million. Eventually, petitioner sold the properties
to Domingo Bondoc and Victoriano See.[8]

Respondent later filed on July 30, 1992 a petition before the RTC of Manila, docketed as Civil Case No. 92-62106, against the Provincial Sheriff of the RTC
Bataan and petitioner, for annulment of the auction sale (annulment of sale case). Apart from questioning the inclusion in the auction sale [9] of some of the properties
which it had attached, respondent questioned the failure to duly notify it of the sale at least 10 days before the sale, citing Section 14 of Act No. 1508 or the Chattel
Mortgage Law which reads:

Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days, from the time of condition broken, cause
the mortgaged property, or any part thereof, to be sold at public auction by a public officer at a public place in the municipality where the
mortgagor resides, or where the property is situated, provided at least ten days notice of the time, place, and purpose of such sale has been
posted at two or more public places in such municipality, and the mortgagee, his executor, administrator or assignee shall notify the mortgagor
or person holding under him and the persons holding subsequent mortgages of the time and place of sale, either by notice in writing directed to
him or left at his abode, if within the municipality, or sent by mail if he does not reside in such municipality, at least ten days previous to the
date. (Emphasis and underscoring supplied),

it claiming that its counsel received a notice only on the day of the sale. [10]

Petitioner, alleging that the annulment of sale case filed by respondent stated no cause of action, filed on December 3, 1992 a Motion to Dismiss[11] which
was, however, denied by Branch 16 of the Manila RTC.[12]

Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of Appeals, docketed as CA-G.R. SP No. 31125. The appellate court
dismissed the petition, by Decision of February 21, 1994, it holding that respondents petition for annulment prima facie states a sufficient cause of action and that the
[trial court] in denying [herein petitioner RCBCs] motion to dismiss, had acted advisedly and well within its powers and authority.[13]

Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante Cautelam[14] in the annulment of sale case in which it lodged a Compulsory
Counterclaim by seeking P1 Million for moral damages, P500,000 for exemplary damages, and P250,000 for attorneys fees. It thereafter elevated the case to this Court
via petition for review on certiorari, docketed as G.R. 115662. This Court by minute Resolution of November 7, 1994,[15] denied the petition for failure to show that a
reversible error was committed by the appellate court.[16]

Trial on the merits of the annulment of sale case thereupon ensued. By Decision[17] of October 15, 1997, Branch 16 of the Manila RTC rendered judgment
in favor of respondent, disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount of P296,662.16 and P8,000.00 as reasonable attorneys fees.

2. No pronouncement as to costs.

3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan RTC;

SO ORDERED.

Both parties appealed to the Court of Appeals which, by Decision[18] of April 17, 2007, denied herein petitioners appeal and partly granted herein
respondents by increasing to P50,000 the attorneys fees awarded to it and additionally awarding it exemplary damages and imposing interest on the principal amount
payable to it. Thus it disposed:

WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is hereby DENIED for lack of merit while the
appeal of appellant Royal Cargo is PARTLY GRANTED in that the amount of attorneys fees awarded by the RTC is increased to P50,000.00.

In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00 as exemplary damages. The principal amount of
P296,662.18 [sic] to be paid by RCBC to Royal Cargo shall likewise earn 12% interest per annum from the time the petition was filed in the
court a quo until fully paid. The rest of the decision is AFFIRMED.

SO ORDERED. (Emphasis and underscoring supplied)

In partly granting respondents appeal from the Decision of Br. 16 of RTC Manila, the appellate court ratiocinated that respondent had a right to be timely
informed of the foreclosure sale.

RCBCs citations [sic] of numerous rulings on the matter more than supports the fact that as mortgagee, it had preferential right
over the chattels subject of the foreclosure sale. This however is not at issue in this case. What is being contested is the right of Royal Cargo
to be timely informed of the foreclosure sale as it too had interests over the mortgagee Terrymanila, Inc.s assets. We note that this matter
had already been passed upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125 as well as by the Supreme Court on November 7,
1994 in G.R. No. [1]15662. RCBC, by arguing about its preferential right as mortgagee in the instant appeal merely reiterates what had already
been considered and ruled upon in earlier proceedings.

xxxx

Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the foreclosure of chattel mortgages
provides, to wit:

21
xxxx

The above-quoted provision clearly requires that the mortgagee should notify in writing the mortgagor or person holding under
him of the time and place of the sale by personal delivery of the notice. Thus, RCBCs failure to comply with this requirement warranted a ruling
against it by the RTC. (Italics in the original; emphasis partly in the original; underscoring supplied)

Its motion for reconsideration having been denied by the appellate court, [19] petitioner lodged the present petition for review which raises the following
issues:

WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-DAY PRIOR NOTICE OF THE JUNE 16, 1992 FORECLOSURE SALE

II

WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY ERRED IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE
FRAUD IN FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR NOTICE OF THE FORECLOSURE SALE.

III

WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY
DAMAGES AND ATTORNEYS FEES.

IV

WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEYS FEES.[20] (Underscoring supplied)

Petitioner faults the appellate court in applying res judicata by holding that respondents entitlement to notice of the auction sale had already been settled
in its Decision in CA G.R. SP No. 31125 and in this Courts Decision in G.R. No. 115662. For, so it contends, the decisions in these cases dealt
on interlocutory issues, viz: the issue of whether respondents petition for annulment of the sale stated a cause of action, and the issue of whether petitioners motion
to dismiss was properly denied.[21]

Arguing against respondents position that it was entitled to notice of the auction sale, petitioner cites the Chattel Mortgage Law which enumerates who
are entitled to be notified under Section 14 thereof. It posits that [h]ad the law intended to include in said Section an attaching creditor or a judgment creditor [like
herein respondent], it could have so specifically stated therein, since in the preceding section, Section 13, it already mentioned that a subsequent attaching creditor
may redeem.[22]

Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No. 31125 that Sections 13[23] and 14 of the Chattel Mortgage Law should
be read in tandem since the right given to the attaching creditor under Section 13 would not serve its purpose if we were to exclude the subsequent attaching creditor
from those who under Section 14 need to be notified of the foreclosure sale ten days before it is held. [24]

Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to redeem the mortgage only before the holding of the auction sale,
drawing attention to Paray v. Rodriguez[25] which instructs that no right of redemption exists over personal property as the Chattel Mortgage Law is silent thereon.[26]

Even assuming arguendo, petitioner contends, that there exists an obligation to furnish respondent a notice of the auction sale 10 days prior thereto,
respondents judgment award of P296,662.16 with interest thereon at the legal rate from the date of filing of the [c]omplaint and P10,000.00 as reasonable attorneys
fees is very much less than the P1.5 [m]illion bid of petitioner [27]
As for the issue of constructive fraud-basis of the award of damages to respondent, petitioner maintains that both the trial and appellate courts erred in
concluding that it (petitioner) was the one which sent the notice of sheriffs sale to, which was received on the day of the sale by, the counsel for respondent for, so it
contends, it had absolutely no participation in the preparation and sending of such notice. [28]

In its Comment,[29] respondent reiterates that the respective decisions of the appellate court and this Court in CA G.R. SP No. 31125 and G.R. No.
115662 are conclusive between the parties, hence, the right of [respondent] to a [ten-day] notice has a binding effect and must be adopted in any other controversy
between the same parties in which the very same question is raised.[30]

And respondent maintains that the obligation to notify the mortgagor or person holding under him and the persons holding subsequent mortgages falls
upon petitioner as the mortgagee.

The petition is MERITORIOUS.

The respective decisions of the appellate court in CA G.R. SP No. 31125 and this Court in G.R. No. 115662 did not conclusively settle the issue on the need
to give a 10-day notice to respondent of the holding of the public auction sale of the chattels.

The elements of res judicata are: (1) the judgment sought to bar the new action must be final; (2) the decision must have been rendered by a court having
jurisdiction over the subject matter and the parties; (3) the disposition of the case must be a judgment on the merits; and (4) there must be as between the first and
second action, identity of parties, subject matter, and causes of action.[31]

Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39, Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness
of judgmentin Rule 39, Section 47 (c).[32]

There is bar by prior judgment when, as between the first case where the judgment was rendered, and the second case that is sought to be barred, there
is identity of parties, subject matter, and causes of action. Where there is identity of parties and subject matter in the first and second cases, but no identity of causes
of action, there is conclusiveness of judgment.[33] The first judgment is conclusive only as to those matters actually and directly controverted and determined, not as to
matters merelyinvolved therein.

The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory issue of whether the trial courts Order of April 12, 1993 denying petitioners
motion to dismiss respondents petition for annulment was attended by grave abuse of discretion. The appellate court did not rule on the merits of the petition as to
establish a controlling legal rule which has to be subsequently followed by the parties in the same case. It merely held that respondents petition in the trial court stated
a sufficient cause of action. Its determination of respondents entitlement to notice of the public auction sale was at best prima facie. Thus, the appellate court held:

In view of the above, We are of the considered view that the private respondents petition in the court a quo prima facie states a
sufficient cause of action and that the public respondent in denying the petitioners motion to dismiss, had acted advisedly and well within its
powers and authority. We, therefore, find no cause to annul the challenged order issued by the respondent court in Civil Case No. 92-
62106. (Underscoring in the original; emphasis and italics supplied)[34]

22
An order denying a motion to dismiss is merely interlocutory and cannot give rise to res judicata, hence, it is subject to amendments until the rendition of
the final judgment.[35]

On respondents contention that petitioner, as mortgagee, had the duty to notify it of the public auction sale, the Court finds the same immaterial to the
case.

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged property only before its sale. Consider
the following pronouncement in Paray: [36]

[T]here is no law in our statute books which vests the right of redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal property,
since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely silent on the point. And Section 39 of
the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of redemption applies
to real properties, not personal properties, sold on execution. (Emphasis, italics and underscoring supplied)

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption, which is the right of the mortgagor to redeem the mortgaged
property after his default in the performance of the conditions of the mortgage but before the sale of the property[37] to clear it from the encumbrance of the
mortgage.[38] It is not the same as right of redemption which is the right of the mortgagor to redeem the mortgaged property after registration of the foreclosure
sale,[39] and even after confirmation of the sale.[40]

While respondent had attached some of Terrymanilas assets to secure the satisfaction of a P296,662.16 judgment rendered in another case, what it
effectively attached was Terrymanilas equity of redemption. That respondents claim is much lower than the P1.5 million actual bid of petitioner at the auction sale does
not defeat respondents equity of redemption. Top Rate International Services, Inc. v. IAC[41] enlightens:

It is, therefore, error on the part of the petitioner to say that since private respondents lien is only a total of P343,227.40, they
cannot be entitled to the equity of redemption because the exercise of such right would require the payment of an amount which cannot be less
than P40,000,000.00.

When herein private respondents prayed for the attachment of the properties to secure their respective claims against
Consolidated Mines, Inc., the properties had already been mortgaged to the consortium of twelve banks to secure an obligation of
US$62,062,720.66. Thus, like subsequent mortgagees, the respondents liens on such properties became inferior to that of banks, which claims
in the event of foreclosure proceedings, must first be satisfied. The appellate court, therefore, was correct in holding that in reality, what was
attached by the respondents was merely Consolidated Mines . . . equity of redemption. x x x x

xxxx

We, therefore, hold that the appellate court did not commit any error in ruling that there was no over-levy on the disputed
properties. What was actually attached by respondents was Consolidated Mines right or equity of redemption, an incorporeal and intangible
right, the value of which can neither be quantified nor equated with the actual value of the properties upon which it may be
exercised.[42] (Emphasis, italics and underscoring supplied)

Having thus attached Terrymanilas equity of redemption, respondent had to be informed of the date of sale of the mortgaged assets for it to exercise such
equity of redemption over some of those foreclosed properties, as provided for in Section 13.

Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order of the RTC Bataan-insolvency court which granted leave to
petitioner to foreclose the chattel mortgage, which motion was denied. Notably, respondent failed to allege this incident in his annulment of sale case before the RTC
of Manila.

Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the auction sale itself on June 16, 1992, respondent was
already put on notice of the impending foreclosure sale of the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the earliest
when it received the insolvency courts Order of March 20, 1992 denying its Motion for Reconsideration of the February 3, 1992 Order.

Despite its window of opportunity to exercise its equity of redemption, however, respondent chose to be technically shrewd about its chances, preferring
instead to seek annulment of the auction sale, which was the result of the foreclosure of the mortgage, permission to conduct which it had early on opposed before the
insolvency court. Its negligence or omission to exercise its equity of redemption within a reasonable time, or even on the day of the auction sale, warrants a presumption
that it had either abandoned it or opted not to assert it.[43] Equitable considerations thus sway against it.

It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been judicially declared insolvent. Respondents recourse was thus to demand
the satisfaction of its judgment award before the insolvency court as its judgment award is a preferred credit under Article 2244[44] of the Civil Code. To now allow
respondent have its way in annulling the auction sale and at the same time let it proceed with its claims before the insolvency court would neither rhyme with reason
nor with justice.

Parenthetically, respondent has not shown that it was prejudiced by the auction sale since the insolvency court already determined that even if the
mortgaged properties were foreclosed, there were still sufficient, unencumbered assets of Terrymanila to cover the obligations owing to other creditors, including that
of respondents.[45]

In any event, even if respondent would have participated in the auction sale and matched petitioners bid, the superiority of petitioners lien over the
mortgaged assets would preclude respondent from recovering the chattels.
It has long been settled by this Court that the right of those who acquire said properties should not and can not be superior to that
of the creditor who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and without the least
indication of fraud. x x x. In purchasing it, with full knowledge that such circumstances existed, it should be presumed that he did so, very much
willing to respect the lien existing thereon, since he should not have expected that with the purchase, he would acquire a better right than
that which the vendor then had. (Emphasis and underscoring supplied)[46]

It bears noting that the chattel mortgage in favor of petitioner was registered more than two years before the issuance of a writ of attachment over some
of Terrymanilas chattels in favor of respondent. This is significant in determining who between petitioner and respondent should be given preference over the subject
properties. Since the registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien that follows
the property wherever it may be,[47] the right of respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged chattel at the auction sale, is
subordinate to the lien of the mortgagee who has in his favor a valid chattel mortgage. [48]

Contrary then to the appellate courts ruling, petitioner is not liable for constructive fraud for proceeding with the auction sale. Nor for subsequently selling
the chattel.For foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtained from the insolvency court [49] as what
petitioner did.

The appellate courts award of exemplary damages and attorneys fees for respondent, given petitioners good faith, is thus not warranted.

23
As for petitioners prayer for attorneys fees in its Compulsory Counterclaim, the same is in order, the dismissal of respondents Complaint
nowithstanding.[50] Perkin Elmer Singapore v. Dakila Trading,[51] citing Pinga v. Heirs of German Santiago,[52] enlightens:

It bears to emphasize that petitioners counterclaim against respondent is for damages and attorneys fees arising from the unfounded
suit. While respondents Complaint against petitioner is already dismissed, petitioner may have very well incurred damages and litigation
expenses such as attorneys fees since it was forced to engage legal representation in the Philippines to protect its rights and to assert lack of
jurisdiction of the courts over its person by virtue of the improper service of summons upon it. Hence, the cause of action of petitioners
counterclaim is not eliminated by the mere dismissal of respondents complaint.[53] (Underscoring supplied)

To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is just and equitable, given the nature and extent of legal services employed in
controverting respondents unfounded claim.

WHEREFORE, the petition for review is GRANTED. The challenged Decision and Resolution of the Court of Appeals are REVERSED and SET ASIDE. Civil Case
No. 92-62106 lodged before the Regional Trial Court of Manila, Branch 16, is DISMISSED for lack of merit.

Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal Commercial Banking Corporation, P250,000 as and for attorneys fees.

No costs. SO ORDERED.

Facts
Terrymanila, Inc: Debtor of both RCBC and Royal Cargo (Royal)
o Owes RCBC P3M secured by a chattel mortgage executed on 1989
o Owes Royal P296k
Royal Collection of Sum of Money + Preliminary Attachment of Terrymanila personal property to secure satisfaction of judgment award P296k 1991
Terrymanila declared insolvent
RCBC Foreclosure of Chattel Mortgage
Royal Petition: Annulment of Auction Sale
o Failure of RCBC to notify Royal: 10-day notice right since it had interests over the mortgagor Terrymanilas assets
o Section 14, Chattel Mortgage Law
Requires that the mortgagee should notify in writing the mortgagor or person holding under him of the time and place of the
sale at least 10 days prior to sale

Issue

W/N foreclosure sale of chattel mortgaged properties was valid YES. Annulment petition denied.

Ruling
Section 13, CM Law
o Allows would-be redemptioner to redeem the mortgaged property only before its sale
o Redemption partakes of an equity of redemption the right of the mortgagor (the borrower) to redeem the mortgaged property after his
default in the performance of the conditions of the mortgage but before the sale of the property to clear it from encumbrance of the mortgage
Equity redemption not the same as right of redemption (the right of the mortgagor to redeem the mortgaged property after registration of the
foreclosure sale)
While Royal had attached some of Terrymanilas assets to secure the satisfaction of P296k obligation, what if effectively attached was Terrymanilas
equity of redemption
o The value of which can neither be quantified nor equated with the actual value of the properties upon which it may be exercised
Having thus attached Terrymanilas equity of redemption, Royal had to be informed of the date of sale of mortgaged assets for it to exercise such equity of
redemption over some of the foreclosed properties
HOWEVER It turns out that Royal already knew about the impending foreclosure sale when it filed MR over court order allowing RCBC to foreclose the
chattel mortgage
o Royals negligence to exercise its equity of redemption within a reasonable time, or even on the day of the sale, warrants a presumption that
it had opted not to assert it
ALSO Royal not prejudiced by auction sale since the insolvency court already determined that Terrymanila had other assets sufficient to cover
obligations to Royal, even if the said properties were foreclosed
RCBCs chattel mortgage was registered two years prior to writ of attachment in favor of Royal
o Since the registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates a real right or lien
that follow the property wherever it may be, the right of Royal, as an attaching creditor is subordinate to the lien of the mortgagee who has in
his favor a valid chattel mortgage

[G.R. No. 110048. November 19, 1999]


SERVICEWIDE SPECIALISTS, INC. petitioner, vs. COURT OF APPEALS, HILDA TEE, & ALBERTO M. VILLAFRANCA, respondents.
DECISION
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of the Decision of the Court of Appeals[1] in CA-G.R. CV No. 19571, affirming the judgment of the Regional
Trial Court of Manila, Branch XX, dismissing Civil Case No. 84-25763 for replevin and damages.
The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan automobile, with Motor No. 2E-08927, Serial No. A112A-5297, Model No. 1976.
The appellate court culled the facts that matter as follows:[2]
"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.

24
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 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.
Upon motion of the plaintiff below, Alberto Villafranca was substituted as defendant. Summons was served upon him. (pp. 55-56, ibid).
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.
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 defendant-appellee 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 and the Decision of the Court of Appeals in CA-G.R. CV No. 19571 AFFIRMED. No pronouncement as to costs.
SO ORDERED.

FACTS:
1. Leticia Laus purchased on credit a Colt Galant xxx from Fortune Motors (Phils.) Corporation and executed a promissory note for the amount of P56,028.00, inclusive
of 12% annual interest, payable within a period of 48 months. In case of default in the payment of any installment, the total principal sum, together with the interest,
shall become immediately due and payable.
2. As a security for the promissory note, a chattel mortgage was constituted over the said motor vehicle, 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 Laus.
3. Filinvest in turn assigned the credit in favor of Servicewide Specialists, Inc.
4. Laus failed to pay the monthly installment for April 1977 and the succeeding 17 months. Servicewide demanded payment of the entire outstanding balance
with interests but Laus failed to pay despite formal demands.
5. As a result of Laus failure to settle her obligation, or at least to surrender possession of the motor vehicle for 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. Plaintiff alleged, among others, that it
had superior lien over the mortgaged vehicle. The court approved the replevin bond.
6. Alberto Villafranca filed a third party claim contending that he is the absolute owner of the subject motor vehicle after purchasing it from a certain Remedios Yang
free from all lien and emcumbrances; and that on July 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.
7. Upon motion of the plaintiff below, Villafranca was substituted as defendant and summons was served upon him. Villafranca moved for the dismissal of the
complaint on the ground that there is another action pending between the same parties before the Makati RTC. The court granted the the motion but subsequently
set aside the order of dismissal. For failure to file his Answer as required by the court a quo, Villafranca was declared in default and plaintiffs evidence was
received ex parte.

25
8. The lower court later on dismissed the complaint for insufficiency of evidence. Its motion for reconsideration having been denied, petitioner appealed to CA on the
ground 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.
9. CA affirmed the RTC decision. It also denied petitioners MR, hence, the present petition for review on certiorari under Rule 45.

ISSUE:
W/N a case for replevin may be pursued against the defendant, Alberto Villafranca, without impleading the absconding debtor-mortgagor

HELD:
No. 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. 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.
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.
In a suit for replevin, a clear right of possession must be established. The conditions essential for foreclosure of chattel mortgage would be to show, firstly, the
existence of the chattel mortgage and, secondly, the default of the mortgagor. 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. 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. Petition DENIED.

[G.R. No. 106435. July 14, 1999]


PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

SYNOPSIS
This is a review on certiorari of a judgment of the Court of Appeals affirming in toto the decision of the Regional Trial Court of Makati to award respondent banks
deficiency claim, arising from a loan secured by a chattel mortgage.
The Court denied the petition. It held that 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 to petitioners contention that the public auction sale is void on ground of fraud and inadequacy of price, the Court ruled that parties may not bring on appeal
issues that were not raised on trial. 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. Moreover, fraud is a serious allegation that requires full and convincing evidence and may not be inferred from the lone circumstance that it was only
respondent bank that bid in the sale of the foreclosed properties.
SYLLABUS
1. CIVIL LAW; CHATTEL MORTGAGE LAW (ACT NO. 1508, AS AMENDED); DEBTOR-MORTGAGOR BARRED FROM RETAINING EXCESS OF SALE PROCEEDS AND OBLIGED TO
PAY DEFICIENCY IN CASE OF REDUCTION IN PRICE AT PUBLIC AUCTION. -- It is clear from Section 14 of Act No. 1508, as amended 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. (Manila Trading and Supply Co. vs. Tamaraw Plantation Co., cited in Ablaza
vs. Ignacio, G.R. No. L-11466, May 23, 1958 [unpublished]). We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it.
2. ID.; CIVIL CODE; ARTICLE 1484 CLEARLY APPLIES TO SALE OF PERSONAL PROPERTY IN INSTALLMENT BASIS. -- 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 vendee's failure to pay cover two or more
installments, this provision is specifically applicable to a sale on installments.
3. ID.; EQUITY; APPLIED ONLY IN ABSENCE OF STATUTORY LAW OR JUDICIAL RULES OF PROCEDURE. -- 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.
4. REMEDIAL LAW; APPEAL; PARTIES MAY NOT BRING ON APPEAL ISSUES NOT RAISED ON TRIAL. -- 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. 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.
5. ID.; EVIDENCE; PRESUMPTION OF REGULARITY IN CONDUCT OF PUBLIC SALE; CASE AT BAR. -- 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, 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.
6. ID.; ID.; FINDINGS OF FACT OF TRIAL COURT ON JOINT AND SOLIDARY LIABILITY OF PETITIONER CORPORATION IN LOAN AFFIRMED ON APPEAL; CASE AT BAR. -- 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. 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.
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA G.R. CV No. 27861, promulgated on April 23, 1992, [1] affirming in
toto the decision of the Regional Trial Court of Makati[2] to award respondent banks deficiency claim, arising from a loan secured by chattel mortgage.
The antecedents of the case are as follows:
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.

26
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.
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.
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]
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. 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

27
"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
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
(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 and the Decision of the Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby
AFFIRMED. Costs against petitioners. SO ORDERED.
Facts:
PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from DBP.
PAMECA, through its President, Herminio C. Teves, executed a promissory note - to pay the loan by installment. As security, a chattel mortgage was
executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to cover the whole value of the loan.
Upon PAMECA's 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.
DBP filed a complaint for the collection of the balance of P4,366,332.46 with RTC Makati City against petitioner PAMECA and private petitioners, as
solidary debtors with PAMECA under the promissory note.
RTC & CA ordered PAMECA et al to pay deficiency.

Issue: 1. W/N deficiency should be paid by PAMECA? Yes.

Ruling:
Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

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 officer's
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.

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.

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.

We find no reason to disturb the ruling in Ablaza vs Ignacio, and the cases reiterating it.

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.

Held: DENIED

PHILIPPINE NATIONAL BANK, petitioner-appellee, vs. PRIMITIVA MALLORCA, oppositor-appellant. G.R. No. L-22538 October 31, 1967
SANCHEZ, J.:
Disputed by appellant Primitiva Mallorca is the correctness of the order of the Court of First Instance of Iloilo, sitting as a Cadastral Court,1 directing her to surrender
to the Register of Deeds her co-owner's copy of Transfer Certificate of Title No. T-24256. This is necessary to enable Philippine National Bank 2 to secure in its name
Torrens title to the property involved which it acquired in a foreclosure sale upon mortgage executed in its favor.
The background facts may be recited as follows:
Way back in 1950, Ruperta Lavilles mortgaged a 48.965 square meter-parcel of land situated in Passi, Iloilo (Lot 1504, Passi Cadastral Survey) to the PNB as security for
a loan of P1,800.00. The lot was covered by Transfer Certificate of Title 27070 in the name of Ruperta Lavilles. The mortgage was duly recorded.

28
On January 12, 1958, while the mortgage above-described was in full force and effect, and without PNB's knowledge and consent, Ruperta Lavilles sold the appellant
Primitiva Mallorca 20,000 square meters of the mortgaged land.
On January 17, 1958, Mallorca moved the Iloilo cadastral court to have the sale to her duly annotated on the title, 3and, for the purpose, to require PNB to surrender
the owner's copy of TCT 27070 to the Register of Deeds.
The court order of February 3, 1958 directed PNB to deliver said TCT 27070 to the Register of Deeds, and warned that "[t]he mortgage in favor of the Philippine
National Bank is duly registered in the Office of the Register of Deeds and to whomsoever the land is sold the vendee will assume the responsibility of complying with
the provisions of the mortgage."
The Register of Deeds then cancelled TCT 27070, issued a new one, TCT 24256, making two co-owner's copies of the title one each for Ruperta Lavilles and for
Primitiva Mallorca. PNB's mortgage lien was annotated on both copies.
Ruperta Lavilles failed to pay her mortgage debt. PNB, on April 16, 1958 foreclosed the mortgage extrajudicially. On May 12, 1958, a certificate of sale was issued to
PNB as the highest bidder in the foreclosure sale. This certificate of sale was registered with the Register of Deeds of Iloilo.
In March, 1959 Mallorca sued PNB to enforce her right of redemption with damages.4
On February 9, 1960, judgment was rendered in the case just stated, dismissing the claim for damages but declaring Mallorca "entitled to exercise her right of
redemption with respect to the 20,000 square meters sold to her by Ruperta Lavilles within the period specified by law."
Mallorca's appeal from this judgment was, on June 18, 1960, denied by the lower court it was filed out of time. Her move to reconsider was rejected. She then
went to the Court of Appeals on mandamus. On January 14, 1961, the appellate court denied the same for lack of merit.5
Primitiva Mallorca failed to exercise her right of redemption as decreed by the court.
Thus, the final deed of sale in favor of PNB, dated February 19, 1962, was presented to the Register of Deeds on April 10, for registration. The latter refused to register
without Mallorca's co-owner's copy of TCT 24256. By letter of May 18, 1962, the Register of Deeds required Mallorca to surrender said copy. She did not comply.
And so, PNB lodged the present petition for consolidation of title in the cadastral court. The bank prayed that Mallorca's co-owner's copy of TCT 24256 be declared
null and void, and that the Register of Deeds be directed to cancel the same and to issue a new title in the name of PNB, upon payment of the legal fees.
By order of August 18, 1962, the court a quo required Mallorca "to deliver the co-owner's duplicate copy of TCT 24256 to the Register of Deeds within a period of five
(5) days."
Mallorca appealed this order to the Court of Appeals.6 The latter, however, in its resolution of February 18, 1964, certified the case to this Court, as the issues present
questions of law.
1. Appellant's stand is that her undivided interest consisting of 20,000 square meters of the mortgaged lot, remained unaffected by the foreclosure and subsequent
sale to PNB. Because, so she argues, she was not a party to the real estate mortgage in favor of PNB, and she "neither secured nor contracted a loan" with said bank.
What PNB foreclosed, she maintains, "was that portion belonging to Ruperta Lavilles only," not the part belonging to her.
Appellant's position clashes with precepts well-entrenched in law. By Article 2126 of the Civil Code,7 a "mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted." Sale or transfer cannot affect or release
the mortgage. A purchaser is necessarily bound to acknowledge and respect the encumbrance to which is subjected the purchased thing and which is at the disposal
of the creditor "in order that he, under the terms of the contract, may recover the amount of his credit therefrom." 8 For, a recorded real estate is a right in rem, a lien
on the property whoever its owner may be. 9 Because the personality of the owner is disregarded; the mortgage subsists notwithstanding changes of ownership; the
last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee.10 So it is, that a
mortgage lien is inseparable from the property mortgaged. All subsequent purchasers thereof, must respect the mortgage, whether the transfer to them be with or
without the consent of the mortgagee. For, the mortgage, until discharge, follows the property.11
And then, militating against appellant's cause is one other special feature of a real mortgage its indivisibility.12This Court has understood mortgage indivisibility in
the sense that each and every parcel under mortgage answers for the totality of the debt.13
It does not really matter that the mortgagee, as in this case, did not oppose the subsequent sale. Naturally, because the sale was without PNB's knowledge. Even if
such knowledge is chargeable to PNB, its failure to object to the sale could not have any impairing effect upon its rights as mortgagee. After all, a real mortgage is
merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose a principal attribute of ownership is not thereby lost.14 And, on the
assumption that PNB recognized the efficaciousness of the sale by Ruperta Lavilles of a portion of the mortgaged land to Primitiva Mallorca, which Lavilles "had the
right to make" and which anyway PNB "cannot oppose", PNB cannot be prejudiced thereby, for, at all events, "such sale could not affect the mortgage, as the latter
follows the property whoever the possessor may be."15
On Primitiva Mallorca's part, she cannot rightfully deny the mortgage lien on the portion of the land she purchased. First. Registration of the mortgage in the Register
of Deeds is notice to all persons of the existence thereof.16Second. By express provision of Section 39 of the Land Registration Act, "every subsequent purchaser of
registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrance except those noted on said certificate."17 Clear
implication exists that if an encumbrance is so noted, that purchaser is bound thereby. Third. Mallorca herself petitioned the court to order PNB to deliver the owner's
copy of TCT 27070 to the Register of Deeds for annotation of Mallorca's interest, as heretofore adverted to. And the court, in giving its stamp of approval to the
petition, expressly directed that "to whomsoever the land is sold the vendee will assume the responsibility of complying with the provisions of the mortgage." Fourth.
Mallorca's own co-owner's copy of the title issued to her carried PNB's mortgage lien. Fifth. The fact that Mallorca failed to exercise her right of redemption, which
she sought to enforce in a judicial court, ends her interest to the land she claims, and, doubtless, estops her from denying PNB's mortgage lien thereon.
We, accordingly, rule that PNB has the right to consolidate its title on the entire lot mortgaged by Ruperta Lavilles in its favor, including the 20,000 square meter-
undivided interest of Primitiva Mallorca. And this, by virtue of the foreclosure sale and the expiry of Mallorca's right of redemption.
2. In a final effort to overturn the order under review, appellant espouses the thesis that the lower court, acting as a cadastral court, is without jurisdiction in the
premises. Her syllogism is this: she is questioning the right of PNB to declare TCT 24256 as null and void insofar as the 20,000 square meter-undivided portion is
concerned; the issue is thus raised to the level of "contentious litigation"; and, going by jurisprudence, 18 a cadastral court is devoid of power to act thereon.
The precedents appellant depends on cannot serve as authority in her case. For, those cases involved unresolvedissues. Here, the question she presents whether
her undivided share in the lot is encumbered or unencumbered has been definitely passed upon in the redemption case she brought against PNB (Civil Case 5149,
Court of First Instance of Iloilo). Mallorca herself acknowledge the validity of that encumbrance when she commenced said civil case. Given the facts, PNB's petition to
consolidate title falls under the rule that a cadastral court has jurisdiction to entertain a petition for the cancellation of an outstanding certificate of title where
registered owner has been lawfully divested of his title thereof.19 For, the truth is that this case presents no substantial controversy. As held in the case of Castillo vs.
Ramos, supra, pp. 814-815
where a petition concerning the cancellation of any encumbrance noted on a Torrens certificate of title is filed within the record of the land registration
case in which the basic decree was entered and there is no substantial controversy in regard thereto between the petitioner and any other interested
party, such petition may be considered as a mere incidental matter in such land registration case and may therein be acted upon the proper court.20
Upon the record as it stands, the lower court order of August 18, 1962 is, as it is hereby, affirmed.
Costs against oppositor-appellant. So ordered.
Prudential Bank v. Don and Georgia Alviar (GR 150197, 28 July 2005)
TINGA, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank seeks the reversal of the Decision[1] of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of
Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to secure
the payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of TCT No. 438157. On 4 August 1975, respondents executed the corresponding
promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2%
service charge, and that the note is secured by a real estate mortgage as aforementioned. [3] Significantly, the real estate mortgage contained the following clause:

That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the Mortgagor
and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same and those that
may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine
Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of
land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the
absolute owner free from all liens and incumbrances. . . .[4]

29
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured
by a hold-out on the mortgagors foreign currency savings account with the bank under Account No. 129, and that the mortgagors passbook is to be surrendered to the
bank until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in the note, the loan is secured by Clean-Phase out TOD CA 3923, which means that the
temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted into an ordinary loan in compliance with a Centr al Bank circular directing the
discontinuance of overdrafts.[7]

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan of P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various heavy and transportation
equipment.[8]

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar Realty and Development, Inc. and for the release of the
real estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The
payment was acknowledged by petitioner who accordingly released the mortgage over the two properties.[9]

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered by TCT No. 438157. Per petitioners computation,
respondents had the total obligation of P1,608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345
for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges. The public auction sale of the mortgaged property was
set on 15 January 1980.[10]
Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction with the RTC of Pasig,[11]claiming that they have paid their
principal loan secured by the mortgaged property, and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00
made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and Development Inc., which has a separate loan with the bank secured by
a separate mortgage.[12]
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extra-judicial foreclosure.[13]Respondents sought reconsideration
of the decision.[14] On 24 August 1994, the trial court issued an Order setting aside its earlier decision and awarded attorneys fees to respondents. [15] It found that only
the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other hand, the P382,680.83 loan is secured by the foreign currency
deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc.
in compliance with a Central Bank circular. According to the trial court, the blanket mortgage clause relied upon by petitioner applies only to future loans obtained by
the mortgagors, and not by parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only the promissory note BD#75/C-252 for the
sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding
principal balance) is not covered by the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered by the real estate
mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees for P20,000.00.[16]
The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees.[17] It ruled that while a continuing loan or credit
accommodation based on only one security or mortgage is a common practice in financial and commercial institutions, such agreement must be clear and unequivocal.
In the instant case, the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the appellate court ruled that the extrajudicial
foreclosure sale of the property for the three loans is improper.[18]
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty and Development, Inc.[19]
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of Appeals as grounds herein.
Petitioner maintains that the blanket mortgage clause or the dragnet clause in the real estate mortgage expressly covers not only the P250,000.00 under
PN BD#75/C-252, but also the two other promissory notes included in the application for extrajudicial foreclosure of real estate mortgage.[20] Thus, it claims that it acted
within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v.
Lutero,[21] Tad-Y v. Philippine National Bank,[22] Quimson v. Philippine National Bank,[23] C & C Commercial v. Philippine National Bank,[24] Mojica v. Court of
Appeals,[25] and China Banking Corporation v. Court of Appeals,[26] all of which upheld the validity of mortgage contracts securing future advancements.
Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C-345 in the real estate mortgage because the same was
specifically secured by a foreign currency deposit account, petitioner states that there is no law or rule which prohibits an obligation from being covered by more than
one security.[27] Besides, respondents even continued to withdraw from the same foreign currency account even while the promissory note was still outstanding,
strengthening the belief that it was the real estate mortgage that principally secured all of respondents promissory notes. [28] As for PN BD#76/C-345, which the Court
of Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security is not exclusive, as the dragnet clause of the real estate
mortgage covers all the obligations of the respondents.[29]

Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the promissory notes were executed by them not in their
personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states
that there is a need to pierce the veil of corporate fiction.[30]

Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and understanding of the dragnet clause, being highly educated
individuals, seasoned businesspersons, and political personalities. [31] There was no oppressive use of superior bargaining power in the execution of the promissory notes
and the real estate mortgage.[32]

For their part, respondents claim that the dragnet clause cannot be applied to the subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans
are covered by separate promissory notes that expressly provide for a different form of security. [33] They reiterate the holding of the trial court that the blanket mortgage
clause would apply only to loans obtained jointly by respondents, and not to loans obtained by other parties. [34] Respondents also place a premium on the finding of the
lower courts that the real estate mortgage clause is a contract of adhesion and must be strictly construed against petitioner bank.[35]

The instant case thus poses the following issues pertaining to: (i) the validity of the blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket
mortgage clause; and consequently, (iii) the propriety of seeking foreclosure of the mortgaged property for the non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the blanket mortgage clause was obtained by respondents for Donalco Trading, Inc.
Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil
of corporate fiction and hold respondents liable even for obligations they incurred for the corporation. The mortgage contract states that the mortgage covers as well
as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary. Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders.
Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. [36] However, the legal fiction
that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.[37] PN BD#76/C-430, being an obligation of
Donalco Trading, Inc., and not of the respondents, is not within the contemplation of the blanket mortgage clause. Moreover, petitioner is unable to show that
respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the notation in the promissory note that the loan was for house
construction and personal consumption, there is no proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner agreed to the
terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, well-established institution of long standing that it is, should
have insisted that the note be made in the name of respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity and
not as officers of the corporation.
Now on the main issues.

A blanket mortgage clause, also known as a dragnet clause in American jurisprudence, is one which is specifically phrased to subsume all debts of past or future origins.
Such clauses are carefully scrutinized and strictly construed.[38] Mortgages of this character enable the parties to provide continuous dealings, the nature or extent of

30
which may not be known or anticipated at the time, and they avoid the expense and inconvenience of executing a new security on each new transaction. [39] A dragnet
clause operates as a convenience and accommodation to the borrowers as it makes available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording fees, et cetera.[40] Indeed, it has been settled in a long line of decisions
that mortgages given to secure future advancements are valid and legal contracts,[41] and the amounts named as consideration in said contracts do not limit the amount
for which the mortgage may stand as security if from the four corners of the instrument the intent to secure future and other indebtedness can be gathered.[42]

The blanket mortgage clause in the instant case states:


That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the Mortgagee by the
Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as DEBTOR, and to secure the payment of the same
and those that may hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos,
Philippine Currency, as well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or any
other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books and records of
the Mortgagee, the Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels
of land which are described in the list inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor declares that he/it is the
absolute owner free from all liens and incumbrances. . . .[43] (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate mortgage to secure not only the P250,000.00 loan from the
petitioner, but also future credit facilities and advancements that may be obtained by the respondents. The terms of the above provision being clear and unambiguous,
there is neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of dragnet clauses or blanket mortgage clauses, are of a different factual milieu from the instant
case. There, the subsequent loans were not covered by any security other than that for the mortgage deeds which uniformly contained the dragnet clause.

In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was
secured by a hold-out on his foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by Clean-Phase
out TOD CA 3923 and eventually by a deed of assignment on two promissory notes executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various heavy and transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the
critical issue is whether the blanket mortgage clause applies even to subsequent advancements for which other securities were intended, or particularly, to PN BD#76/C-
345.

Under American jurisprudence, two schools of thought have emerged on this question. One school advocates that a dragnet clause so worded as to be
broad enough to cover all other debts in addition to the one specifically secured will be construed to cover a different debt, although such other debt is secured by
another mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will not secure a note that expresses on its face that it is otherwise secured as
to its entirety, at least to anything other than a deficiency after exhausting the security specified therein,[45] such deficiency being an indebtedness within the meaning
of the mortgage, in the absence of a special contract excluding it from the arrangement.[46]

The latter school represents the better position. The parties having conformed to the blanket mortgage clause or dragnet clause, it is reasonable to conclude that they
also agreed to an implied understanding that subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage.
In other words, the sufficiency of the first security is a corollary component of the dragnet clause. But of course, there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given it
could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather, on the new security given. This is the reliance
on the security test.

Hence, based on the reliance on the security test, the California court in the cited case made an inquiry whether the second loan was made in reliance on the original
security containing a dragnet clause. Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the security of the first
loan could be inferred, so it was held. The rationale involved, the court said, was that the dragnet clause in the first security instrument constituted a continuing offer
by the borrower to secure further loans under the security of the first security instrument, and that when the lender accepted a different security he did not accept the
offer.[47]
In another case, it was held that a mortgage with a dragnet clause is an offer by the mortgagor to the bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was concluded that the offer was not accepted by the bank when a subsequent advance was made because (1) the
second note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there was no
reference in the second note or chattel mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real estate
mortgage by her name alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business under an assumed name; and (4) there was
no allegation by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making the advance.[48]

Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary intention, a mortgage containing a dragnet clause will not be
extended to cover future advances unless the document evidencing the subsequent advance refers to the mortgage as providing security therefor.[49]

It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of non-payment of all the three promissory
notes. While the existence and validity of the dragnet clause cannot be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345.
The foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the security for
the second promissory note. As held in one case, where deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently
become due, a balance due on a note, after exhausting the special security given for the payment of such note, was in the absence of a special agreement to the
contrary, within the protection of the mortgage, notwithstanding the giving of the special security.[50] This is recognition that while the dragnet clause subsists, the
security specifically executed for subsequent loans must first be exhausted before the mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a contract of adhesion, to which respondents only participation
was the affixing of their signatures or adhesion thereto.[51] A contract of adhesion is one in which a party imposes a ready-made form of contract which the other party
may accept or reject, but which the latter cannot modify.[52]

The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and which, according to jurisprudence must be
strictly construed against the party responsible for its preparation. [53] If the parties intended that the blanket mortgage clause shall cover subsequent advancement
secured by separate securities, then the same should have been indicated in the mortgage contract. Consequently, any ambiguity is to be taken contra proferentum,
that is, construed against the party who caused the ambiguity which could have avoided it by the exercise of a little more care. [54] To be more emphatic, any ambiguity
in a contract whose terms are susceptible of different interpretations must be read against the party who drafted it,[55] which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are likewise contracts of adhesion. Being of such
nature, the same should be interpreted strictly against petitioner and with even more reason since having been accomplished by respondents in the presence of
petitioners personnel and approved by its manager, they could not have been unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that respondents have not yet paid the P250,000.00, and gave no
credence to their claim that they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly subjected to
foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been
exhausted, subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is AFFIRMED. Costs against petitioner. SO ORDERED.

[G.R. No. 118552. February 5, 1996]


PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COURT OF APPEALS and THE SPOUSES ALEJANDRO and AMPARO CASAFRANCA, respondents.
SYLLABUS
1. CIVIL LAW; CONTRACTS; SPECIAL CON-TRACTS; MORTGAGE; AN ACTION TO FORECLOSE A MORTGAGE MUST BE LIMITED TO THE AMOUNT MENTIONED IN THE
MORTGAGE. - The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first laid down in Lim Julian vs. Lutero (49 Phil.
703 [1926]) pertains only to mortgages securing future advancements. The petitioner would not have been misled into thinking otherwise had it properly
quoted Mojica in its petition. The following explanation is helpful to distinguish future advancements from the loan in the case at bench: It is not uncommon

31
that persons enter into a contract whereby they draw sums of money from their creditors, usually banks, from time to time, and as security therefor execute a
mortgage on their property. Such contracts are sometimes executed for an account smaller or larger than that actually borrowed. Thus, it may appear in the
contract that the loan secured by the mortgage is only for P 10,000 when by reason of advancements made by the creditor to the debtor the amount ultimately
drawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that the mortgage can be foreclosed only for the amount of P10,000.
Indeed, no bank or creditor would be willing to make such advancements which are in excess of the amount stipulated if the payment thereof is not secured.. .
. The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. Thus,
the inapplicability of Lim Julian. Instead, what applies here is the general rule that an action to foreclose a mortgage must be limited to the amount mentioned
in the mortgage.
2. ID.; ID.; ID.; DRAGNET CLAUSE; DEFINED. - The mortgage provision relied upon by the petitioner is known in American jurisprudence as a dragnet clause, which is
specifically phrased to subsume all debts of past or future origin. Such clauses are carefully scrutinized and strictly construed.
3. ID.; ID.; ID.; A CONTRACT OF ADHESION SUCH AS THE MORTGAGE CONTRACT IN CASE AT BAR SHOULD BE STRICTLY CONSTRUED AGAINST THE PARTY WHO PREPARED
THE AGREEMENT. - The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was
the affixing of his signature or adhesion thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which
prepared the agreement.
4. ID.; ID.; ID.; ANY AMBIGUITY IN A CONTRACT WHOSE TERMS ARE SUSCEPTIBLE OF DIFFERENT INTERPRETATIONS MUST BE READ AGAINST THE PARTY WHO DRAFTED IT.
- There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the
party who drafted it. A mortgage and a note secured by it are deemed parts of one transaction and are construed together, thus, an ambiguity is created when
the notes provide for the payment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty
was intended to be covered by the mortgage. The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included
provisions for interest and attorneys fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly,
the petitioner can be as specific as it wants to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by
the mortgage. This can then only be interpreted to mean that the petitioner had no design of including the penalty in the amount secured.
5. RULES OF STATUTORY CONSTRUCTION; EJUSDEM GENERIS; APPLICATION IN CASE AT BAR. - A reading, not only of the earlier quoted provision, but of the entire
mortgage contract yields no mention of penalty charges. Construing this silence strictly against the petitioner, it can fairly be concluded that the petitioner did
not intend to include the penalties on the promissory notes in the secured amount. This explains the finding by the trial court, as affirmed by the Court of
Appeals, that penalties and charges are not due for want of stipulation in the mortgage contract. Indeed, a mortgage must sufficiently describe the debt sought
to be secured, which description must not be such as to mislead or deceive, and an obligation is not secured by a mortgage unless is comes fairly within the
terms of the mortgage. In this case, the mortgage contract provides that it secures notes and other evidences of indebtedness. Under the rule
of ejusdem generis, where a description of things of a particular class or kind is accompanied by words of a generic character, the generic words will usually be
limited to things of a kindred nature with those particularly enumerated. x x x A penalty charge does not belong to the species of obligations enumerated in
the mortgage, hence, the said contract cannot be understood to secure the penalty.

DAVIDE, JR., J:
This petition for review on certiorari seeks: (1) a modification of the decision of 29 April 1994 of the Court of Appeals in CA-G.R. CV No. 38332[1] affirming in toto the
20 April 1992 ruling of the Regional Trial Court (RTC) of Cebu, Branch 16, in Civil Case No. CEB-6779;[2] and (2) a review of the appellate courts resolution of 4 January
1995[3] denying the petitioners Motion for Partial reconsideration[4] of the aforementioned decision.
The sole issue in this case is whether, in the foreclosure of a real estate mortgage, the penalties stipulated in two promissory notes secured by the mortgage
may be charged against the mortgagors as part of the sums secured, although the mortgage contract does not mention the said penalties.
The Court of Appeals adopted the trial courts findings of facts, to wit:
The following antecedental facts are supported by the pleadings and evidence on record: Plaintiff spouses Alejandro and Amparo Casafranca, used to be the owners
of Lot 802-B-2-B-2-F-1 of the subdivision plan Psd-698545, located in Cebu City and covered by TCT No. 32769 (Exh A). On 3 December 1976 they sold the lot to Carlos
Po who paid part of the agreed price. The latter, after securing a title in his name (TCT No. 66446), mortgaged the lot to the Philippine Bank of Communications
(PBCom for short) to secure a loan of P330,000 (Exh B). It appears that in a civil action that ensued between them, plaintiff spouses obtained a favorable judgment
against Carlos Po (Exh C). Later, in an auction sale to satisfy Carlos Pos judgment obligation, plaintiff spouses acquired the aforesaid lot and a Certificate of Sale was
executed in their favor (Exh D).
Meanwhile, under date of 9 September 1980 PBCom applied for extrajudicial foreclosure of the mortgage executed by Carlos Po (Exh E), and in the succeeding
auction sale held on 4 November 1980, it acquired the lot at its winning bid of P1,006,540.56. The corresponding Certificate of Sale was then executed in its favor (Exh
F). It appears further that sometime in 1981 plaintiff Amparo Casafranca who had stepped into the shoes of mortgagor Carlos Po by virtue of the auction sale in her
favor (Exh D) offered to redeem the property from PBCom by tendering to its manager, Isidore Falek, a check in the amount of P500,000 which, in her estimate, would
be sufficient to settle the account of Carlos Po. PBCom did not accept the check as it insisted that any such redemption should be at the price it acquired the lot in the
auction sale. In reaction, plaintiffs filed against PBCom Civil Case No. R-21700 in the RTC of Cebu for nullification of the foreclosure and auction sale (Exh M). In a
judgment which became final and executory on 17 September 1986 (Exh H) the Court set aside the extrajudicial foreclosure and auction sale and declared that the
obligation secured by the mortgage executed by Carlos Po was only P330,000 plus stipulated interest and charges (Exh G). Subsequently, in a letter dated 4 December
1986 PBCom advised plaintiff spouses to pay the sum of P884,281.38 purportedly representing Carlos Pos principal account of P330,000, interest and charges
thereon, attorneys fee[s] and realty taxes which it paid for the lot (Exh. I). Plaintiffs, however, did not agree with said Statement of Account and since the account
remained unpaid, PBCom again applied for extrajudicial foreclosure of mortgage (Exh J), which culminated in an auction sale of the lot on 2 April 1987, during which it
was sold to Natalie Limchio for P1,184,000 (Exh L).
On 6 April 1988 plaintiffs commenced the present action to nullify the auction sale in favor of Natalie Limchio. It is alleged in the complaint that the second
foreclosure was void as it was based on a bloated account. Plaintiffs further alleged that PBCom refused to turn over the correct amount of residue after paying off
the mortgage and costs of the sale. Upon plaintiffs application, the Court issued on 7 April 1988 a TRO enjoining defendant sheriffs from transferring the title of the
lot in favor of defendant Natalie Limchio and the latter, from taking possession of the lot. This was followed by a preliminary injunctive writ which was issued after
hearing and upon plaintiffs filing of a bond. However, before the pre-trial conference could be held, plaintiffs signified their intention to pursue only their alternative
demand for the residue or balance of the proceeds of the auction sale less the correct outstanding account which was secured by the mortgage. For this purpose they
filed an amended complaint only against PBCom (pp. 296-305, rollo) which was admitted, in which they pray for recovery of the sum of P625,724.90 as residue after
paying off the outstanding account [to] the tune of P558,275.80, realty taxes paid by PBCom and costs of the foreclosure proceeding. Hence, what is left for the Court
to ascertain is the true or correct account of Carlos Po as of the auction sale on 2 April 1987 after which, the determination of the residue would follow. . .[5]
As to the amounts due the parties, the trial court computed them as follows:
The mortgage contract (Exh B) explicitly provides for interest of Twelve per cent (12%) per annum or at such higher rate or rates as may be fixed by the MORTGAGEE
from time to time, and shall be payable at the end of every month or otherwise, as the MORTGAGEE may elect and, if not so paid, shall be added to, and become part
of, the principal and shall earn interest at the same rate as the principal. It is then evident that the parties agreed to capitalize the interest due and unpaid, which as
added principal, shall earn new interest. Herein lies the discrepancy in the computation respectively submitted by plaintiffs (pp. 190-191; 204-209, Rollo) and PBCom
(pp. 181-183, Rollo), for while the former assessed only conventional or simple interest, the latter computed compound interest conformable to the mortgage
contract. In this connection, the Court finds PBComs computation of interest to be in accordance with the contractual stipulations of the parties. It may be stressed
that the increase in the rate of interest from 12% to 14% as of 1 December 1979 is authorized in the mortgage contract itself as sanctioned by CB Circular No. 705
dated 1 December 1979. PBCom is further entitled to reimbursement for realty taxes it paid for the lot. But of course, penalties and charges are not due for want of
stipulation in the mortgage contract.
To recapitulate, the principal loan obtained by Carlos Po (now succeeded by plaintiffs) on 15 December 1976 was P330,000. Interest thereon for the first year at 12%
per annum was retained or deducted from the proceeds of the loan. For the next two (2) years or from 25 December 1977 to 30 November 1979, compound interests
earned at the same rate reached P77,660. And then from 1 December 1979to 2 April 1987 (date of auction sale) the rate of interest was raised to 14% per annum, as
authorized in the mortgage contract. At such rate, compound interests for said period would be in the sum of P343,805. Adding both interest earnings to the principal
obligation, the total account would then be P751,465. Additionally, the mortgage contract provides for attorneys fee[s] equivalent to 10% of the amounts due. Hence,
the sum of P75,146.50 in the concept of attorneys fee[s] would raise the account to P826,611.50. Finally, the amount of P83,028.18 representing realty taxes paid by
PBCom for the lot, inclusive of interest, which must be reimbursed, will bring the grand total of the account to P909,639.68.
On the other hand, the publication and other expenses incurred in the foreclosure and auction sale [to] the tune of P707 should be deducted from the amount of
P1,184,000 which Natalie Limchio paid for the lot, leaving net proceeds of P1,183,293. Subtracting therefrom the total account due to PBCom, the residue would be
P273,653.32, which must be delivered to plaintiffs. [6]
In the light of the above, the trial court thus ruled:
WHEREFORE, foregoing premises considered, judgment is hereby rendered in favor of plaintiffs Alejandro and Amparo Casafranca for the sum of P273,653.32
representing the residue or balance of the proceeds of the auction sale conducted on 2 April 1987 after deducting therefrom publication expenses and paying off the
total account due to defendant Philippine Bank of Communications, and ordering the latter to pay unto plaintiffs the aforesaid amount.
SO ORDERED.[7]
Both parties appealed from the above judgment to the Court of Appeals. The petitioner questioned the lower courts failure to include in its computation the
penalty stipulated in the aforementioned promissory notes. On the other hand, the private respondents advanced that: (1) the interest on the sum due to the petitioner
should have stopped running on 31 July 1981; (2) the lower court should have allowed twelve percent (12%) interest per annum on the amount awarded to the private
respondents from 3 April 1987 until the obligation was fully paid; and (3) the lower court should have awarded the private respondents moral and exemplary damages,
attorneys fees, and litigation expenses.

32
The Court of Appeals affirmed the decision of the trial court in toto and subsequently denied the parties separate motions for reconsideration.
The petitioner and the private respondents then instituted with this Court separate petitions for certiorari under Rule 45 of the Rules of Court. While that of the
petitioner was docketed as G.R. No. 118552 (this case), that of the private respondents was docketed as G.R. No. 118809 and assigned to the Second Division. However,
the two actions were not consolidated.
The private respondents in this case filed their Comment[8] to the petition as required in the resolution of 8 February 1995.[9]
On 13 March 1995, the Second Division issued a resolution which dismissed G.R. No. 118809, thus:
[F]or failure to persuasively demonstrate any reversible error in the challenged judgment of the Fourth Division of the Court of Appeals promulgated
on April 29, 1994 - affirming in toto that of the Regional Trial Court of Cebu rendered by Judge (now Court of Appeals Justice) Godardo A. Jacinto
on April 20, 1992 (Civil Case No. CEB-6779) - it appearing on the contrary, that both judgments correctly appreciated the evidence and applied the
relevant legal provisions in ruling, essentially, that there had been no valid tender of payment by petitioners of the amount of the mortgage liability
burdening the property in question, and that the computation of the amount rightly due said petitioners had been correctly made in accordance with
the law applicable to the case (Act No. 3135, as amended). Moreover, the record discloses no important and special reason for the exercise by this
Court of its discretionary power of review in this case.[10]
On 9 May 1995, this Court received the private respondents Manifestation[11] drawing our attention to this resolution.
On 23 August 1995, we gave due course to the petition[12] and required the parties to submit their respective memoranda, which they subsequently did. The
private respondents contended that [a]ctually there are no more issues left for this Honorable Court to decide because all the issues in controversy in this case has [sic]
already been decided with finality by the Second Division of the Supreme Court in G.R. No. 118809. [13] To which, the petitioner replied[14] that the G.R. No. 118809
resolution dispensed with only those issues raised therein by the private respondents and did not touch on the questions raised in this case.
The petition is not impressed with merit.
The two promissory notes in question, signed by Carlos Po,[15] are similarly worded and their pertinent provisions read:
For value received, I/we jointly and severally, promise to pay the Philippine Bank of Communications, at its office in the City of Cebu, Philippines the sum of THREE
HUNDRED THOUSAND PESOS (P300,000.00), Philippine Currency, together with interest thereon at the rate of TWELVE % per annum until paid, which interest rate
the Bank may at any time without notice, raise within the limits allowed by law, and I/we also agree to pay, jointly and solidarily 12% per annum penalty charge, by
way of liquidated damages should this note be unpaid or is not renewed on due date.
xxxxxxxxx
Should it become necessary to collect this note through an attorney-at-law, I/we hereby expressly agree to pay, jointly and severally, ten per cent (10%) of the total
amount due on this note as attorneys fees which in no case shall be less than P 100.00 exclusive of all costs and fees allowed by law stipulated in the contract of real
estate mortgage if any there be.
while the mortgage contract provides in part:[16]
This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust
receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred by the MORTGAGOR(S) and
Pos All Electrical Supply either as principal debtor(s) or as surety(ies) or in any other capacity, including discounts of Chinese and other drafts, bills of exchange,
promissory notes, even without any further endorsements by the Mortgagor(s), said property or properties to stand security for the payment of the said obligations
to the fullest extent and for all that it is (or they are) worth, to the extent of THREE HUNDRED THIRTY THOUSAND PESOS (P330,003.00) Philippine Currency.
xxxxxxxxx
This mortgage shall be subject to the following conditions, to wit:
FIRST: The interest on the obligations secured by this mortgage shall be computed at the rate of Twelve per cent (12%) per annum or at such other or
higher rate or rates as may be fixed by the MORTGAGEE from time to time, and shall be payable at the end of every month or otherwise, as the
MORTGAGEE may elect and if not so paid, shall be added to, and become part of, the principal and shall earn interest at the same rate as the
principal.
xxxxxxxxx
EIGHTH: The MORTGAGOR(S) shall, during the existence of this mortgage, promptly pay when due all taxes or assessments of every kind that may be
levied upon the property or properties hereby mortgaged and deliver the corresponding tax receipts to the MORTGAGEE,.. . In c ase of failure on
the part of the MORTGAGOR(S) to comply with the provisions of this condition, the MORTGAGEE may and is hereby authorized to p ay such taxes
or assessments and to have the buildings insured; and any sum or sums so spent by the MORTGAGEE shall be fully secured hereby and be subject
to the terms hereof. .
xxxxxxxxx
ELEVENTH: The expenses incurred in the drafting, acknowledgment and the registration of this mortgage and of its cancellation, shall be for the account
of, and shall be paid by, the MORTGAGOR(S).
TWELFTH: Should the MORTGAGEE find it necessary to resort to the courts in order to collect any amount which may be due, the interest thereon or
the expenses incurred on account of the matters enumerated in the previous paragraphs, or should the MORTGAGEE in any manner and for any
reason be involved in litigation on account of the property or properties mortgaged, or should foreclosure proceedings be instituted in accordance
with the fourth condition hereof or should the MORTGAGOR(S) encumber the property or properties hereby mortgaged with a second mortgage
without the written consent of the MORTGAGEE, the MORTGAGEE shall be allowed a sum equivalent to Ten Per Centum (10%) of all the amounts
due, but in no case less than THIRTY THREE THOUSAND PESOS as attorneys fees, said amount to be considered part of the principal sum hereby
secured, this mortgage answering for its payment accordingly.
We immediately discern that the mortgage contract does not at all mention the penalties stipulated in the promissory notes. However, the petitioner insists
that the penalties are covered by the following provision of the mortgage contract:
This mortgage is given as security for the payment to the MORTGAGEE on demand or at maturity, as the case may be, of all promissory notes, letters of credit, trust
receipts, bills of exchange, drafts, overdrafts and all other obligations of every kind already incurred or which hereafter may be incurred. . .
The petitioners insistence is based on the supposed rule:
[T]hat the determination of the mortgage debt would not be limited on the mortgage contract itself if from the face thereof, it is apparent that other
obligations are also intended to be secured.
To bolster its argument, the petitioner relies on the cases represented by Mojica vs. Court of Appeals[17] which held:
It has long been settled by a long line of decisions that mortgages to secure future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered.[18]
The Court is unconvinced for the cases relied upon by the petitioner are inapplicable. The doctrine first laid down in Lim Julian vs. Lutero[19] pertains only to
mortgages securing future advancements.
The petitioner would not have been misled into thinking otherwise had it properly quoted Mojica in its petition. The following explanation is helpful to distinguish
future advancements from the loan in the case at bench:
It is not uncommon that persons enter into a contract whereby they draw sums of money from their creditors, usually banks, from time to time, and as security
therefor execute a mortgage on their property. Such contracts are sometimes executed for an account smaller or larger than that actually borrowed. Thus, it may
appear in the contract that the loan secured by the mortgage is only for P10,000 when by reason of advancements made by the creditor to the debtor the amount
ultimately drawn and borrowed is P20,000. Under these circumstances it is inequitable to consider that the mortgage can be foreclosed only for the amount of P
10,000. Indeed, no bank or creditor would be willing to make such advancements which are in excess of the amount stipulated if the payment thereof is not secured .
. .[20]
The obligation in this case was not a series of indeterminate sums incurred over a period of time, but two specific amounts procured in a single instance. Thus,
the inapplicability of Lim Julian. Instead, what applies here is the general rule that an action to foreclose a mortgage must be limited to the amount mentioned in the
mortgage.[21]
Aside from the foregoing, other factors militate against the petitioners stance.
The mortgage provision relied upon by the petitioner is known in American jurisprudence as a dragnet clause, which is specifically phrased to subsume all debts
of past or future origin. Such clauses are carefully scrutinized and strictly construed. [22]
The mortgage contract is also one of adhesion as it was prepared solely by the petitioner and the only participation of the other party was the affixing of his
signature or adhesion thereto. Being a contract of adhesion, the mortgage is to be strictly construed against the petitioner, the party which prepared the agreement. [23]
A reading, not only of the earlier quoted provision, but of the entire mortgage contract yields no mention of penalty charges.[24] Construing this silence strictly
against the petitioner, it can fairly be concluded that the petitioner did not intend to include the penalties on the promissory notes in the secured amount. This explains
the finding by the trial court, as affirmed by the Court of Appeals, that penalties and charges are not due for want of stipulation in the mortgage contract. [25]
Indeed, a mortgage must sufficiently describe the debt sought to be secured, which description must not be such as to mislead or deceive, and an obligation is
not secured by a mortgage unless it comes fairly within the terms of the mortgage. [26] In this case, the mortgage contract provides that it secures notes and other
evidences of indebtedness. Under the rule of ejusdem generis,[27] where a description of things of a particular class or kind is accompanied by words of a generic

33
character, the generic words will usually be limited to things of a kindred nature with those particularly enumerated. [28] A penalty charge does not belong to the species
of obligations enumerated in the mortgage, hence, the said contract cannot be understood to secure the penalty.
There is also sufficient authority to declare that any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the
party who drafted it.[29]
A mortgage and a note secured by it are deemed parts of one transaction and are construed together, [30] thus, an ambiguity is created when the notes provide
for the payment of a penalty but the mortgage contract does not. Construing the ambiguity against the petitioner, it follows that no penalty was intended to be covered
by the mortgage. The mortgage contract consisted of three pages with no less than seventeen conditions in fine print; it included provisions for interest and attorneys
fees similar to those in the promissory notes; and it even provided for the payment of taxes and insurance charges. Plainly. the petitioner can be as specific as it wants
to be, yet it simply did not specify nor even allude to, that the penalty in the promissory notes would be secured by the mortgage. This can then only be interpreted to
mean that the petitioner had no design of including the penalty in the amount secured.
It should also be noted that the private respondents consistently excluded penalty charges in their computation of the amount due to the petitioner, [31] while
the petitioner seemed indecisive in including the said charges.
In its Manifestation[32] of 14 May 1988 before the trial court, the petitioner computed the penalty charge as follows:
Penalty charge on the principal
amount of P330,000.00 from
Dec. 25, 1977 to April 2, 1987
at the rate of 8% per annum . . . . . . . . . . . . . . . . . . . . . . (P)248,233.33
The promissory notes provided for a 12% per annum penalty,[33] not eight percent (8%). The petitioner explained this discrepancy in its
Memorandum[34] submitted to the trial court, claiming:
On the contrary, the banks computation of the actual amount of the mortgage debt should be upheld. In fact, the bank was lenient on the spouses in computing
the amount of the debt. For instance, the rate of charges stipulated is 12% per annum.. . Yet the bank computed the charges at a much lesser rate . . . thereby lessening
the actual amount of the mortgage debt.[35]
The petitioner, however, included in its Offer of Exhibits :[36]
14. EXHIBIT 14- Promissory Note No. 3838 dated 25 October 1977.
14-A - Stipulation on penalty/bank charges.
PURPOSE:
. 3) It is stipulated that PBCom could impose penalty charges of 12% per annum; and 4) PBCom was liberal on plaintiffs as it did not impose the full extent of the
stipulated charges.
Far then from being a display of lenience or liberality, the above circumstances evince the petitioners uncertainty as to whether penalty charges were actually
due it. In fact, in a statement of account [37] signed by the petitioners Senior Vice-President, Isidore Falek, there was no mention of a penalty charge, although there was
an entry stating:
Interest:
xxxxxxxxx
8% Bank charges P248,233.33
Furthermore, the promissory notes are clear that the penalty shall be at 12% per annum, neither more nor less. Thus, when the petitioner claims that under the
same notes it could impose, as in fact it did, the lower penalty of 8% - contrary to what was covenanted - the petitioner only reveals that it is wont to stipulate what it
does not mean. The private respondent then should not be faulted for the petitioners imperfection, and the latter must bear the consequences of its failings.
It is interesting to note that the petition in this case did not include a computation of the sum due as penalty which is the very matter in dispute. The petitioner
merely pegged its claim at 12% per annum on the principal amount of P330,000.00 computed from 1977, [38] which was likewise a departure from the 8% interest rate
which it insisted upon during trial.
After interpreting the mortgage contract strictly against the petitioner, considering the intention of the parties as evidenced by their various pleadings and
assertions, the inescapable conclusion is that the mortgage contract did not authorize the petitioner to include in the secured amount the penalty stipulated in the
promissory notes. The mortgage contract did not contain a trace of the said penalty and, proceeding by the rule that an action to foreclose a mortgage must be limited
to the amount mentioned in the mortgage, such penalty can not be recovered on the foreclosure of the mortgage.
WHEREFORE, finding no reversible error on the part of respondent Court of Appeals, its challenged decision of 29 April 1994 in CA-G.R. CV No. 38332 is hereby
AFFIRMED in toto. Costs against the petitioner. SO ORDERED.
DIONISIO MOJICA, in behalf of Spouses LEONARDO MOJICA (now deceased) and MARINA RUFIDO,petitioner, vs. HON. COURT OF APPEALS, and RURAL BANK OF YAWIT,
INC., respondents. G.R. No. 94247 September 11, 1991
PARAS, J.:
This is a petition for review on certiorari which seeks to reverse and set aside: the decision * of the Court of Appeals dated February 15, 1990 in AC-G.R. CV No. 05987
entitled "Dionisio Mojica, in behalf of spouses Leonardo Mojica (now deceased) and Marina Rufido v. Rural Bank of Kawit, Inc.", which affirmed in toto the decision of
the trial court and (2) the resolution dated June 4, 1990 denying the motion for reconsideration.
The facts of the case as gathered from the records are as follows:
On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of P20,000.00 from defendant Rural Bank of Kawit, Inc. (now respondent). This loan
was secured by a real estate mortgage executed on the same date by the plaintiffs spouses Leonardo Mojica and Marina Rufido (Rollo, Annex "C" p. 40).
The real estate mortgage contract states among others:
... agreement for the payment of the loan of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the
mortgagors ...
2. ... but if the mortgagors shall well and truly fulfill the obligation above stated according to the terms thereof then this mortgage shall become null and
void. (Rollo Petitioner's Memorandum, pp. 86-87)
The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of 218,794 square meters, located in Naic, Cavite, covered by Transfer Certificate of
Title No. RT-155 (Rollo, Annex "A", p. 31). The real estate mortgage was duly registered under Entry No. 74661 of the Registry of Deeds of Cavite (Rollo, Annex "C", p.
41).
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid.).
On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffs spouses from the defendant Rural Bank which loan matured on March 5, 1975
(Rollo, pp. 32; 41).
No formal deed of real mortgage was constituted over any property of the borrowers, although the top of the promissory note dated March 5, 1974, contained the
following notation.
This promissory note is secured by a Real Estate Mortgage executed before the Notary Public of the Municipality of Kawit, Mrs. Felisa Senti under Doc.
No. 62, Page No. 86, Book No.__, Series of 1971.
The Real Estate Mortgage mentioned above is the registered mortgage which guaranteed the already paid loan of P20,000.00 granted on February 1, 1971 (Rollo, p.
8,7).
The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its maturity on March 5, 1975. Respondent rural bank extrajudicially foreclosed
the real estate mortgage on the justification that it was adopted as a mortgage for the new loan of P18,000.00 (Rollo, pp. 32; 41).
The subject property was set for auction sale by the Provincial Sheriff of Cavite for June 27, 1979. In that auction sale, defendant rural bank was the highest bidder,
and its bid corresponded to the total outstanding obligation of plaintiffs spouses Mojica and Rufido (Reno, p. 32).
The proceeds from the sale of the piece of land of plaintiffs spouses were applied to their outstanding obligation with defendant bank (Ibid.)
The corresponding certificate of sale in favor of defendant bank was executed by the Provincial Sheriff also on June 27, 1979, and the instrument was recorded in the
Office of the Register of Deeds of Cavite on June 29, 1979. The one year period for redemption elapses after June 1980 without plaintiffs spouses having redeemed
the foreclosure property (Ibid.)
Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitioners-spouses, in an apparent attempt to pay the debt of P18,000.00 made a partial payment in the
amount of P24,658.00 (P19,958.00 of this amount in check bounced) which the defendant rural bank received and accepted with the issuance of the defendant's
official receipt No. 101 269, ackowledging the payment as partial payment of 'past due loan', together with the "interest on past due lose (Rollo, p. 33).
On August 11, 1980, another partial payment was made by Dionisio Mojica in the amount of P9,958.00 in payment also of 64 past due loan' plus "interest on past due
loan 7 which payment was received by the defendant rural bank and acknowledged with the issuance of official receipt No. 101844. These payments were, however,
considered by the bank as deposit for the repurchase of the foreclosed property (Ibid., p. 33).
On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid balance of the loan, the respondent rural bank issued a 'Computation Slip" indicating therein, that
as of August 14, 1981, the outstanding balance plus interest computed from March 5, 1975 was P21,272.50 (Ibid.).
On November 10, 1981, said bank executed an affidavit of consolidation of ownership, which it subsequently filed with the Register of Deeds of Cavite. As a result,
Transfer Certificate of Title No. T-123964, covering the foreclosed piece of land, was issued in its favor by the Register of Deeds on January 19, 1982. After having
consolidated its ownership over the foreclosed property, defendant bank scheduled the parcel of land to be sold at public auction on February 26, 1982, pursuant to

34
the requirement of the law regarding the disposal by a bank of its acquired assets. Dionisio Mojica and one Teodorico Rufido, brother-in-law of plaintiff Leonardo
Mojica, were notified of such auction sale However, no sale was consummated during that scheduled sale and the property concerned up to now still remains in the
possession of respondent bank (Ibid.).
The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of the loan as per the "Computation Slip" amounting to P21,272.50, resulted in the
filing of a complaint (Rollo, p. 42).
On September 3, 1984, the trial court rendered judgment dismissing the complaint. On November 5, 1984, petitioner filed a motion for reconsideration of the
decision, which motion was denied in the order dated November 17, 1984. On January 2, 1985, a notice of appeal was filed in the Intermediate Appellate Court (Rollo,
p. 42).
On February 15, 1990, the Appellate Court, rendered its decision, aiming in toto the decision of the trial court. The dispositive portion of the decision of the appellate
court reads:
WHEREFORE, finding no reversible error in the decision appealed from, the game is hereby AFFIRMED in toto. With costs against plaintiffs-appellants.
The motion for reconsideration of said decision was denied in a resolution dated June 4, 1990 (Rollo, Annex "B", p. 39).
Hence, this petition.
This Court in its resolution dated September 3, 1990 dismissed the petition for non-compliance with certain requisites but later in its resolution dated November 5,
1990, it reinstated the petition (Rollo, Petition pp. 9-28); Resolutions, pp. 52-53; 61).
The petition is devoid of merit.
The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff on June 27, 1979, had for its basis, a valid and subsisting mortgage contract.
Otherwise stated, there is a need to ascertain the intention of the parties as to the coverage of the mortgage in question with respect to future advancements.
Contracts which are not ambiguous are to be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment (Plastic
Town Center Corp. v. NLRC, 172 SCRA 580 [1989]). Thus, where the intent of the parties has been shown unmistakably with clarity by the language used, the literal
meaning shall control (Paramount Surety & Ins. Co., Inc. v. Ago, 171 SCRA 481 [1989]). Correspondingly, stipulations in the mortgage document constitute the law
between the parties, which must be complied with faithfully (Community and Loan Assn., Inc. v. Court of Appeals, 153 SCRA 564 [1987]).
As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that it serves as guaranty
... for the payment of the loan ... of P20,000.00 and such other loans or other advances already obtained or still to be obtained by the mortgagors as
makers ... (Rollo, p. 14).
It has long been settled by a long line of decisions that mortgages given to secure future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four corners of the instrument the intent to secure
future and other indebtedness can be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by repayment of the amount
named in the mortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero, 49 Phil. 704-705 [1926]). In fact, it has also been held that where the
annotation on the back of a certificate of title about a first mortgage states "that the mortgage secured the payment of a certain amount of money plus interest plus
other obligations arising there under' there was no necessity for any notation of the later loans on the mortgagors' title. It was incumbent upon any subsequent
mortgagee or encumbrances of the property in question to e e the books and records of the bank, as first mortgagee, regarding the credit standing of the debtors
Tady-Y v. PNB, 12 SCRA 19-20 [1964]).
The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were accepted by the bank on July 19 and August 11, 1980 as deposits for conventional
redemption after the property covered by real estate mortgage became the acquired asset of the bank and priced at P85,000.00 and after petitioner had lost all rights
of legal redemption because more than one year had already elapsed from June 29, 1979, the date the certificate of sale was registered in the office of the Registry of
Deeds of Cavite. Indeed, the conventional redemption was subject to be exercised up to March 3, 1982 and was extended up to April 19, 1982 for a fixed amount of
P85,000.00. The respondent bank even favored the petitioner by giving them the first preference to repurchase the property but they failed to avail of this
opportunity, although the bank "is certainly disposed to release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage property was auctioned on June 27, 1979. The only bidder was the respondent bank which bid for
P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its title over the property. As aptly stated by respondent Court:
It would then be unfair to impute that the trial court allowed defendant bank to appropriate the mortgage property, because after the plaintiff-appellants
failed to repurchase the property and filed this action with 'lis pendens', the actions prevented the bank from negotiating for the sale of the property to
other buyers. (p. 36, Rollo)
PREMISES CONSIDERED, the petition is DISMISSED and the assailed decision and resolution of the Intermediate Appellate Court (Court of Appeals) are AFFIRMED. SO
ORDERED.
PEOPLE BANK AND TRUST COMPANY, plaintiff-appellee, vs. W. J. ODOM, defendant-appellant. G.R. No. L-43670 February 25, 1937
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant the balance of an overdraft owing to it from the latter, and to foreclose the mortgage of properties to
guarantee his obligation. The defendant appealed from the judgment of the Court of First Instance of Manila ordering him to pay to the plaintiff the sum of
P138,403.68, with 9 per cent interest per annum from January 4, 1934, until fully paid, plus P500 as attorney's fees, and the costs. The judgment decreed that the
principal and interest should be paid within three months, failing which the mortgaged properties will be sold at public auction, consisting of the rights, title and
interest of the defendant in the contracts of lease of the building known as the "Sugar News Co., Building" and "Edward J. Nell Co. Building" as well as his rights, title,
and interest in the land on which the two buildings are constructed, and that the proceeds of the sale should be applied to the payment of the amount of the
judgment.
On January 12, 1927, the defendant entered into a contract with A. D. Gibbs (Exhibit E) whereby the latter authorized him to construct two concrete buildings of three
floors each, upon his land on Loaisa Street, District of Binondo, City of Manila, described in certificate of title No. 27584. Upon that date, the building known as the
Sugar News Co. Building was completely constructed and its first floor was occupied by the People Bank and Trust Co., but the two upper floors were not fully
equipped; the other building known as the "Edward J. Nell Co. Building" was then under construction. Under the contract the defendant bore all the expenses of
consideration thereof Gibbs assigned to him all the rents which the building may produce for a period of eight (8) years from November 1, 1926, as to the first floor
then already occupied, and as to the other floors to be equipped, from the date they are thus fully equipped. As to the other building, "Edward J. Nell Co. Building",
the parties agreed that the defendant would also bear all the expenses of construction until it is fully completed, and in consideration thereof Gibbs assigned to him
all the rent which it may produce for a period of the eight (8) years and three (3) months from the date of the termination of its construction; this period, however, to
be counted from the completion of each floor in the event that the floors composing the building should not be completed and equipped at the same time.
By virtue of contracts entered into with the plaintiff, the defendant obtained an overdraft from the former amounting to P110,000. To secure this overdraft, the
defendant, on April 26, 1928, assigned to the plaintiff all his rights, title and interest in the contracts of lease with the Sugar News Company, Manila Machinery and
Supply Co., Inc., and T. Yamamoto of the various portions of the "Sugar News Company Building", as well as the rights, title and interest which he had acquired in the
land on which the said building was constructed under the contract which he had with A. D. Gibbs. As additional security, the defendant also assigned to the plaintiff
insurance policy No. 402894 for P100,000 issued by the Manufacturers Life Insurance Company (Exhibit C).
The overdraft was increased to P150,000, and to secure the payment thereof the defendant executed Exhibit B on September 18, 1928, in favor of the plaintiff,
whereby he assigned to the latter also by way of guaranty the same securities which he had given for the overdraft of P110,000.
On January 20, 1931, the overdraft was again increased to P165,000, and to guarantee the payment thereof the defendant executed Exhibit D whereby he assigned to
the plaintiff his rights, title and interest in the contracts of lease with Edward J. Nell Company, El Progreso, Inc., and France & Goulette of various portions of the
"Edward J. Nell Company Building"; in whatever contracts of lease of any portion of the same building which he may enter not in the future, and the rights, title and
interest which he had in the land occupied by the building according to his contract with A. D. Gibbs on January 12, 1927.
On the same date, January 20, 1931, the plaintiff and the defendant executed Exhibit F, whereby the latter assigned to the former his right to collect the rents of the
"Edward J. Nell Company Building" to secure the payment of the overdraft of P165.000 with interest at 9 per cent per annum. The annual rentals then produced by
the building were the following: from Edward J. Nell Company P1,3000, from El Progreso P300 and from the Lyric Film Exchange, Inc., successor of France & Goulette,
P800.
Pursuant to the aforesaid contracts, the defendant drew funds upon plaintiff by way of overdrafts, and on January 4, 1934, his account showed a balance against him
in the amount of P138,403.68, including stipulated interest up to said date.
The defendant contends in his first assigned error that the contract Exhibit D took the place of the previous conrtracts Exhibit B and C. To resolve this point, it is
necessary to take into account the intention of the parties expressed in the contract Exhibit D and the terms in which it was drawn. It was executed, according to the
contract itself, as a result of the increase of the overdraft to P165,000 as well as the additional guaranty given by defendant, consisting of the assignment by way of
guaranty of his rights in his contracts of lease of the Edward J. Nell Company Building and of his rights in the land occupied by the same building. Clause 3 of said
contract stipulated that the contract Exhibit C of April 26, 1928, was incorporated therein and also constituted a guaranty of the payment of the overdraft as
increased to P165,000. In the light of these facts, it is evident that the intention of the parties was neither to set aside the previous contracts nor to substitute Exhibit
D therefor.
In his second assignment of error the defendant contends that the court should have held that the obligation contracted by him was with a term, and the parties not
having fixed the date of payment, the plaintiff should have first brought an action to fix said date under article 1128 of the Civil Code providing that, when it is to be
inferred from the nature and circumstances of the obligation that it was intended to grant the debtor time to pay, and the term is not otherwise stated, the courts
should fix the date of the maturity of the obligation. The contract Exhibit D is a complement of the contracts Exhibits B and C, hence, its language and the intention of
the parties must be interpreted in relation to and jointly with those of the latter under the provisions of article 1285 of the same Code. It was expressly stipulated in
Exhibits B and C that the obligation contracted by the defendant shall expire and be due upon demand of the plaintiff, and in view of the fact that the latter deed was

35
incorporated in Exhibit D as above stated and that the defendant was required by the plaintiff to pay all his indebtedness, it is plain that the obligation was without a
term and that it became due and is demandable. Wherefore, article 1128 of the Civil Code relied upon is not applicable.
The subject of the third assignment of error is the ruling of the court that the contracts evidenced by Exhibits B, C and D are one of mortgage and that the plaintiff's
action is for the foreclosure thereof. The defendant vigorously argues that none of the three contracts is one of mortgage, but an assignment of rights, because in
none of said contracts did the parties intend to constitute a mortgage. A careful examination of the documents shows, in our opinion, that they were really mortgage
contracts inasmuch as they were executed to guarantee the principal obligations of the defendant, consisting of the overdrafts of the indebtedness resulting
therefrom. It positively appears in each of them that the defendant assigned to the plaintiff all his rights in the contracts of lease, in the land, and in the insurance
policy to guarantee his indebtedness resulting from the overdrafts. An assignment to guarantee an obligation as in effect a mortgage and not an absolute conveyance
of title which confers ownership on the assignee. (Title Guaranty & Surety Co. vs. Witmire 195 Fed., 41, 44; Polhemus vs. Trainer, 30 Cal., 685; Campbell vs.
Woodstock Iron Co., 83 Ala., 351; Dunham vs. Whitehead, 21 N. Y., 131; Woodward vs. Crump, 32 S. W., 195.) In Exhibits C and D it was stipulated, among other
things, that if the defendant should comply with all the conditions of the contracts and should pay his indebtedness, together with interest at 9 per cent per annum,
the assignments would become null and void, otherwise they would remain in full force. If the parties' intention as contended by the defendant were that the
assignments are absolute, and not by way of guaranty or mortgage, the stipulation would not have been made because it would be inconsistent with the will of the
contracting parties. Wherefore, we hold that the third assignment of error is untenable.
As a corollary of his theory that the contracts are absolute conveyances, the defendant contends in his fourth and last assignment of error that his civil liability has
ceased and that he does not now owe the plaintiff anything. The conclusions that we have reached in resolving the next preceding assignment of error show that this
last contention of the defendant is equally untenable. The assignments he made not being absolute, and the plaintiff having established that he has not paid his total
overdraft, inasmuch as he still owes the amount of money above stated, with interest, it is evident that he is not yet relieved of his obligation.
Before closing, it is necessary to pass upon an aspect of the case which substantially affects the rights of the defendant. Under the contracts, the plaintiff was
authorized to collect the rents of the two buildings during the period, in turn, might be that fixed in the contract entered into between the defendant and A. D. Gibbs.
We use the conditional form because the contracts of lease have not been put in evidence, hence, we cannot point out the duration thereof with precision. On the
other hand, the plaintiff liquidated the account of the defendant up to January 4, 1934, only, and in the appealed judgment it was decreed that the mortgaged rights
be sold at public auction should the defendant fail to pay his indebtedness within three months. If the indebtedness has already been paid with the rents which the
plaintiff failed to account for, then there would be no ground to take this step. If the indebtedness has not yet been fully paid, neither would it be proper to sell any of
the rights in the mortgage contracts of lease because the latter have already matured according to the contract with Gibbs. For this reason, it is necessary to provide
for the one and the other case. As to the insurance policy, nothing can be said about it as the appealed judgment is silent thereon.
In view of the foregoing, we affirm the appealed judgment, except that part ordering the public sale of the mortgaged rights, with costs to the defendant and
appellant. The plaintiff is ordered to account to the defendant for the rents received from two buildings which have not been included in its liquidation, Exhibit G-4,
and within ten days from notice of this judgment by the court of origin, it shall file a written liquidation showing the final state of the account of the defendant. So
ordered.

Peoples Bank and Trust v. Dahican SUPRA

G.R. Nos. L-54224-25 August 16, 1989


ANTONIO TAMBUNTING and AURORA TAMBUNTING, petitioners,
vs.
REHABILITATION FINANCE CORPORATION (now Development Bank of the Philippines), HEIRS OF JOSE ESCUETA AND ELEUTERIA ESCUETA, DEMETRIO HERNANDEZ,
CANDELARIA PAGUIO and THE COURT OF APPEALS, respondents.
Jose W. Diokno for petitioners.
Teves, Campos & Lim for respondent Heirs of Jose and Eleuteria Escueta. Alberto, Salazar & Associates for respondents Candelaria Paguio and Heirs of Demetrio
Hernandez

NARVASA, J.:
A contract is the law between the parties and, absent any showing that its provisions are wholly or in part contrary to law, morals, good customs, public order, or
public policy, will be enforced to the letter by the Courts. Application of this fundamental principle is all that is required to resolve the controversy at bar. 1
The root of the dispute is traceable to loans obtained by the Spouses Jose and Eleuteria Escueta from the Rehabilitation Finance Corporation (RFC) in the aggregate
sum of P59,000.00. The loans were secured by a mortgage constituted by said spouses over land (and improvements thereon) owned by them, covered by Transfer
Certificates of Title Numbered 493 (39774) and 494 (39775) of the Registry of Deeds of Pasay City. 2
Later, and with the consent of the RFC, the Escuetas created a second mortgage over the same property as security for a loan in the amount of P l6,000.00 obtained
by them from the Spouses Antonio and Aurora Tambunting.3 Both first and second mortgages were recorded in the Registry of Deeds of Pasay City. 4
The Escuetas defaulted in the payment of both loans. The Tambuntings onsequently instituted an action of foreclosure of their second mortgage in the Court of First
Instance of Pasay City. 5 Some three months later, the RFC commenced proceedings for the extra-judicial foreclosure of its first mortgage, which resulted in the sale at
public auction of the mortgaged property to the highest bidder, the RFC itself, subject to the right of redemption of the mortgagors, the Escuetas. 6 The RFC then
applied for and obtained a writ of possession from the proper Court and in virtue thereof, took possession of the foreclosed property. 7
About eight (8) months after the foreclosure sale, the Tambuntings, as second mortgagees, offered to redeem the property. 8 The RFC agreed, subject to the
Escuetas' right of redemption as former owners thereof. 9 Their agreement was reduced to writing, entitled "Deed of Conditional Sale." Under it, the RFC sold the
property in question to the Tambuntings for P74,643.98, 20% of which (Pl4,928.89) was given as down payment, and the balance was amortized over a period of ten
(10)years. 10 The deed also contained following stipulation, 11 among others:
This contract may be evoked within one (1) year from September 16, 1955 at the option of the vendor should the former owner exercise his
right to redeem the property herein sold. In case the property is redeemed or repurchased within said period by the former owner or his
successor-in-interest, the vendor shall refund to the vendees any and all amounts that the vendees may have paid to the vendor under the
conditional sale with interest as provided for by law, rendering, thereby this instrument automatically null and void and without effect.
The Tambuntings took possession, and commenced to collect the rentals from the tenants thereof after notifying them of the deed of conditional sale in their
favor.12 In this connection, the deed also provided that in the event of redemption by the former owner, "all rentals collected will be deducted from the redemption
price. 13
About a month later, the Escuetas learned of the sale in favor of the Tambuntings. Three (3) days before the expiry of the stipulated redemption period, the Escuetas,
having been unable to raise the amount to effect redemption, assigned their right to repurchase to the spouses Demetrio Hernandez and Candelaria Paguio in
consideration of the sum of P15,000.00. 14 On the day following, Hernandez went to the RFC and exercised the right of redemption assigned to him by making a
deposit of P19,088.89, and formally undertaking to pay the balance of the repurchase price in fixed monthly installments over a period of ten (10) years at 6% interest
per annum, these being the terms specified by the RFC for redemption, set out in its Chairman's letter sent to the Escuetas three months after the foreclosure. 15
The RFC then notified the Tambuntings that their contract of conditional sale was deemed revoked in view of the redemption by Hernandez, the Escuetas'successor-
in-interest.16
On the same day the Tambuntings wrote to the RFC, "vehemently" protesting the acceptance by the RFC of the redemption by the Hernandezes "as not in accordance
with law. 17 And some three weeks afterwards, they instituted in the Court of First Instance of Pasay City, an action against the RFC, the Escueta Spouses, and the
Hernandez Spouses, for (1) the nullification of (a) the deed of assignment by the Escuetas in favor of the Hernandez Spouses, (b) the latter's redemption of the
property in question, and (c) the RFC's revocation of its deed of conditional sale with the Tambuntings; (2) the declaration of the validity of said deed of conditional
sale in their favor; (3) the payment of damages by the defendants; and (4) the payment by the Escuetas, particularly, of rentals in arrears for their use and occupation
of one of the apartments standing on the mortgaged property. This action, docketed as Case No. 1686-P, was the Tambuntings' second involving the same property,
their first, Case No. 1565-P, being one for the foreclosure of their second mortgage. 18
The Tambuntings also amended their complaint in the first action.19 They alleged that
1) the deed of assignment of the Escuetas' right of redemption in favor of the Hernandezes was null and void because "fictitious or
simulated," and violative of the Deed of Second Mortgage of which the assignors and the assignees had notice;
2) the redemption sought to be exercised by the Hernandezes was invalid because (a) the amount deposited (down payment of P19,088.89)
was not the full redemption price (P55,000.00) exclusive of costs, insurance premiums, interest, taxes, attorney's fees and liquidated
damages, and (b) was not accompanied by an offer to pay the Tambuntings' mortgage credit; and
3) if the verdict in Civil Case No. 1686-P uphold the redemption by the Hernandezes and the RFC's right to revoke its contract of conditional
sale with the Tambuntings, then the latter's second mortgage should be enforced on the property in question.
The two cases were consolidated, 20 and decided jointly. 21 The Trial Court's judgment went against the Tambuntings, and disposed of the cases as follows:
1) the preliminary injunction earlier issued, restraining the defendants from taking possession of the property in question was lifted and set
aside;
2) the Deed of Conditional Sale between the RFC (which had in the meantime become the Development Bank of the Philippines [DBPI]) and
the Spouses Tambuntings was declared null and void;
3) the Deed of Assignment of the Escuetas' right of redemption in favor of the Hernandezes was pronounced to be valid and subsisting; and

36
4) the Tambuntings were ordered to refund to the Escuetas and Hernandezes "whatever excess rentals there may be from plaintiffs'
(Tambuntings') collection on the mortgaged properties after deducting therefrom the down payment of P14,928.80 and the monthly
amortizations paid by said plaintiffs to defendant RFC under said Deed of Conditional Sale, and . . to pay the costs.
The Tambuntings appealed to the Court of Appeals, but there they fared better. That Court affirmed the Trial Court's decision in toto22 and subsequently denied the
Tambuntings motion for reconsideration . 23 Hence, their present recourse to this Court.
The Tambuntings' submissions in this Court are substantially the same as those they laid before both the Trial Court and the Court of Appeals, to wit:
1) the Escuetas' deed of assignmnent in favor of the Hernandez Spouses violated the terms of the Tambuntings'mortgage' and was fictitious, to boot;
2) even if the assignment were valid, there had been no valid exercise of the right of redemption thereby assigned; and
3) the assignment was designed to deprive petitioners (Tambuntings) of the credit they extended; so that petitioners are also entitled to the damages prayed for
under the(ir) complaint.
The Tambuntings appeal must be rejected and dismissed for lack of merit.
In the first place, the matter of whether or not the assignment was fictitious is an issue of fact and its resolution by the Court of Appeals is, by firmly established and
long observed principle, final and conclusive on this Court. Moreover, the Escuetas' right to redeem the property within one (1) year from September 16, 1955 was
never in any doubt. As much is explicit in the Deed of Conditional Sale already referred to which documented the Tambuntings'redemption of the property as second
mortgagees and provided for its own automatic invalidation upon the exercise by the Escuetas (or their successor-in-interest) of their own nght of redemption within
said period.
Now, the theory of a fictitious transfer of the Escuetas' right of redemption is sustainable only on the premise that such transfer somehow enlarged the scope of the
right or extended the period within which it might be exercised. It did neither, however. Its only effect was to put the transferee in the shoes of the Escuetas, with
exactly the same obligations to fulfill as redemptioner and precisely the same period of time within which to do so. As far as the Escuetas were concerned, there was
no advantage to be gained, no benefit to be derived, no premium in simulating a transfer which altered none of the conditions for a valid redemption, whether
exercised by themselves or by a transferee.
In short, the Escuetas had nothing to gain by going behind the scenes, as it were, and making redemption through a dummy. And even if it be assumed that they in
fact did so, that the redemption had been made for them and on their behalf by the Hernandezes to whom; they had "fictitiously" assigned their right of redemption,
this would be utterly inconsequential, not only because as already pointed out, there is no question about their (the Escuetas') being entitled to redeem, but also
because the redemption was made strictly according to the terms as to down payment and other conditions laid down by the RFC itself. Since, by the way, these
terms were precisely the same as those under which the Tambuntings were initially allowed to redeem, it is illogical and improper, to say the least, for the latter now
to impugn them.
Also untenable is the contention that the deed of assignment executed by the Escuetas in favor of the Hernandez Spouses was violative of the Tambuntings' second
mortgage and therefore, inefficacious. A mortgagor, by encumbering his property, does not ordinarily lose the right to sell the same or create another mortgage over
it, although of course obliged, when exercising said right, to preserve and maintain the superiority of the prior mortgagee's rights. Indeed, recognition of the propriety
of subsequent encumbrances is implicit in the grant of the right of redemption by Section 6 of Act 3135, as amended, in cases of extra-judicial foreclosure of
mortgage, to "any person having a lien on the property subsequent to the mortgage or deed of trust under which the property is sold," in addition to the "debtor, his
successors in interest or any judicial creditor or judgment creditor of said debtor. 24
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, 25 does contain a provision that
'the property mortgaged shall not be . . the subject of any new or subsequent contracts or agreements, saving and excepting those having connection with the first
mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE." But the provision can only be construed as directed against
subsequent mortgages or encumbrances, not to an alienation of the immovable itself. For while covenants prohibiting the owner from constituting a later mortgage
over property registered under the Torrens Act have been held to be legally permissible, 26 stipulations "forbidding the owner from alienating the immovable
mortgaged," are expressly declared void by law. 27 It is clear then that the stipulation against "subsequent agreements" above mentioned had not been breached by
the assignment by the Escuetas (to the Hernandezes) of their right of redemption in connection with the mortgage constituted in favor of the RFC. The assignment
was not a subsequent mortgage or encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the
encumbered real property-in truth, an alienation of the immovable-which could not lawfully be forbidden. Moreover, since the subject of the assignment to the
Hernandezes had "connection with the first mortgage with the RFC," it did not fall within, but was explicitly excepted from, the prohibitory stipulation in question.
Finally, it should not be forgotten that since the Tambuntings, in their own deed of conditional sale with the RFC, had accepted without demur the provision that said
contract could be revoked within one (1) year from September 16, 1 955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to
redeem the property; and that the redemption of the property within said period by "the former owner or his successor-in-interest" would render their instrument of
conditional sale "automatically null and void and without effect,28 they cannot now assume a position inconsistent with said provision.
The execution by the Escuetas of a second mortgage over their property had the effect of subjecting the same property to the payment of two obligations. Both
mortgage debts had to be paid by the mortgagors. If they failed to pay either or both, the unpaid mortgagee had the right to look to the property for satisfaction. Each
mortgagee had the right to foreclose the mortgage; but obviously, the second mortgagee's right was inferior and subordinate to the first. Prior foreclosure by the
second mortgagee could not affect the first mortgagee's rights at all; and if the first mortgagee foreclosed first, the second mortgagee had the right to redeem; i.e.,
pay the first mortgagee's credit, together with all due interests and charges and thus acquire the property mortgaged, subject to the right of redemption of the
mortgagor.
On the other hand, the assignment by the Escuetas of their right of redemption (as regards both mortgage obligations) to the Hernandez Spouses operated as a
transfer of the property itself, together with its recorded encumbrances. The acquisition by the Hernandezes of the Escuetas' rights over the property carried with it
the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the
Tambuntings. The Hernandezes, by stepping into the Escuetas' shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and
could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens
on the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be
exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards, the second mortgage, sought to be judicially foreclosed but
yet unforeclosed, they had the so-called equity of redemption. 29
The Tambuntings were perfectly within their rights when they offered to redeem the property in question after it had been foreclosed and acquired at public auction
by the RFC. And it was correct for the RFC, in accepting the Tambuntings' offer and acquiescing to their redemption of the property, to make such redemption subject
to the Escuetas' own right of redemption, which was exigible against the RFC itself. Hence it was that the Deed of Conditional Sale executed consequent upon that
redemption between the RFC and the Tambuntings, expressly provided in language that could not be made any plainer that 30
This contract may be revoked within one (1) year from September 16, 1955 at the option of the vendor should the former owner exercise his
light to redeem the property herein sold. In case the property is redeemed or repurchased within said period by the former owner or his
successor-in-interest, the vendor shall refund to the vendees any and all amounts that the vendees may have paid to the vendor under the
conditional sale with interest as provided for by law, rendering thereby this instrument automatically null and void and without effect.
The Court has been cited to no fact or argument invalidating this stipulation. The Tambuntings make no claim that their consent to the deed of conditional sale was in
any manner flawed, or that the stipulation is contrary to law, morals, good customs, public order, or public policy. 31 The stipulation is a perfectly legitimate one. The
Tambuntings are bound by it.
There is no dispute either about the fact that the redemption by the Hernandezes, as assignees of the mortgagor spouses, the Escuetas, was made within the time
and in the manner laid down by law and the RFC itself. Their redemption was deemed by the RFC to have been properly exercised. The RFC therefore revoked its
contract with the Tambuntings, as it was bound to pursuant to the explicit provision thereof above quoted-indeed, that contract was, by its terms, rendered
"automatically null and void and without effect" by the redemption-and executed in the Hernandezes' favor a deed of conditional sale, substantially identical to that
earlier signed in favor of the Tambuntings.
Nor can there be any question about the effects of that redemption by the Hernandezes as far as the Tambuntings are concerned. By reason thereof
1) the Tambuntings acquired the right to a refund of "any and all amounts that . . (they) may have paid to the . . (RFC DBP) under the conditional sale with interest as
provided for by law;" and
2) their credit against the Escuetas, and their right to foreclose the second mortgage given as security therefor-and now still subject of Civil Case No.1656-P of the CFI
(now RTC) of Pasay City-remained unaffected and intact, subject, of course, to the equity of redemption which the Hernandezes may exercise as assignees of the
Escuetas.
WHEREFORE, the petition for review on certiorari is DENIED, and the judgment of the Court of Appeals thereby challenged is AFFIRMED, with the modification
hereinafter decreed. The case is accordingly remanded to the Trial Court for a determination not only of (1) the "excess rentals there may be from plaintiffs' (the
Tambuntings') collection on the mortgaged properties" to be refunded by said Tambuntings to the "defendants spouses Escueta and Hernandez " counted from the
date that the Tambuntings were notified in writing by the RFC of the revocation of the deed of conditional sale executed in their favor "after deducting therefrom
the down payment of P14,928.80 and the monthly amortizations paid by said plaintiffs to defendant RFC under said Deed of Conditional Sale," as ordained by the
judgment of the Trial Court, but also (2) the balance of the Tambuntings' mortgage credit against the Escuetas, together with all stipulated interests and charges,
which the Hernandezes, as assignees of the Escuetas, are bound to pay to the Tambuntings within ninety (90) days from finality of that determination, in default of
which the property shall be sold at public auction in accordance with the provisions of Rule 68 of the Rules of Court. Costs against petitioners.

[G.R. No. 130722. December 9, 1999]


SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R CORPORATION, VICENTE COLOYAN in his capacity
as Acting Registrar of the Register of Deeds of Quezon City thru Deputy Sheriff ROBERTO R. GARCIA, respondents.

37
DECISION
YNARES-SANTIAGO, J.:
May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee and that,
otherwise, the sale made without the mortgagees consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee?
The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was
obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage[1] constituted by the spouses upon
their two parcels of land and the improvements thereon located in Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with an area
of 599 and 1,436 square meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.
On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had previously mortgaged to L & R
Corporation for the sum of P430,000.00.[2] The sale was annotated at the back of the respective certificates of title of the properties. [3]
Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial foreclosure proceedings with the
Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the amount of
P221,624.58.[4] When L & R Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds
for registration on August 15, 1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon seeing the inscription
at the back of the certificates of title. Thus, on August 20, 1980, it wrote a letter[5] to the Register of Deeds of Quezon City requesting for the cancellation of the
annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the mortgagees prior
written consent was necessary in case of subsequent encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made
without its prior written consent, the same should not have been registered and/or annotated.
On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of the full redemption price
to L & R Corporation in the form of China Bank Managers Check No. HOF-M O12623 in the amount of P238,468.04.[6] See Exhibits G & 2, Letter of PWHAS to L & R
Corporation, id.6 L & R Corporation, however, refused to accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio
Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China Bank Managers Check No. HOF-O14750
in the amount of P240,798.94.[7] The check was deposited with the Branch Clerk of Court who issued Receipt No. 7522484 [8] for the full redemption price of the
mortgaged properties. Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981. [9]
In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption price and advised it that it can
claim the payment upon surrender of its owners duplicate certificates of title.[10]
On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the Register of Deeds of Quezon City. The
Certificate also informed L & R Corporation of the fact of redemption and directed the latter to surrender the owners duplicate certificates of title within five days.[11]
On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the sale of the mortgaged properties
to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua, but
PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity
to redeem the same.[12]
On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as an adverse claim
on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the owners duplicate copies of the titles to the subject properties. With
the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a Petition [13] on July 17, 1981 against L & R Corporation for
the surrender of the owners duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV, docketed
as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership.[14] Thereafter, on August 20, 1981,
the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No. 280054 [15] and
28055[16] in favor of L & R Corporation, free of any lien or encumbrance.
With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that being the new owner, the
rental payments should be made to them, and that new lease contracts will be executed with interested tenants before the end of August, 1981.[17] Upon learning of
this incident from their tenants, the spouses Litonjua filed an adverse claim [18]and a notice of lis pendens[19] with the Register of Deeds. In the process, they learned that
the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L & R.
A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses Litonjua and PWHAS against herein
respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No. Q-33362.[20] On February 10, 1987, the lower court rendered
its Decision[21] dismissing the Complaint upon its finding that the sale between the spouses Litonjua and PWHAS was null and void and unenforceable against L & R
Corporation and that the redemption made was also null and void.
On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994,[22] on the ground that the sale made to PWHAS
as well as the redemption effected by the spouses Litonjua were valid. However, the same was subsequently reconsidered and set aside in an Amended Decision dated
September 11, 1997.[23]
Hence, the instant Petition on the following issues:
(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid and enforceable;
(2) whether or not the sale of the mortgaged properties by the spouses Litonjua to PWHAS, without the knowledge and consent of L & R Corporation, is
valid and enforceable;
(3) whether or not PWHAS had the right to redeem the foreclosed properties on the account of the spouses Litonjua; and
(4) whether or not there was a valid redemption.
Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows
"8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any other manner encumber the real property/properties subject of this mortgage without the
prior written consent of the MORTGAGEE;
9. That should the MORTGAGORS decide to sell the real property/properties subject of this mortgage, the MORTGAGEE shall be duly notified thereof by the
MORTGAGORS, and should the MORTGAGEE be interested to purchase the same, the latter shall be given priority over all the other prospective buyers;[24]
There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to PWHAS without the prior written
consent of L & R Corporation and without giving the latter notice of such sale nor priority over PWHAS.
Re: Validity of prohibition against subsequent sale of mortgaged property without prior written consent of mortgagee and validity of subsequent sale to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil Code which provides that (A) stipulation
forbidding the owner from alienating the immovable mortgaged shall be void.
In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo,[25] a stipulation prohibiting the mortgagor from entering into second or subsequent
mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any subsequent
sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation,[26] the case of Philippine Industrial Co., supra, was erroneously
cited to have held that the prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the mortgagee
is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the
ruling in Philippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only
to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil Code.
Meanwhile in De la Paz v. Macondray & Co., Inc.,[27] it was held that while an agreement of such nature does not nullify the subsequent sale made by the
mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including him as
a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right of redemption.
In Bonnevie v. Court of Appeals,[28] where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the mortgaged
property were sold without the written consent of the mortgagee, were held as without the right to redeem the said property. No consent having been secured from
the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as debtors. It was further held that since their
rights were never recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the original mortgagors-vendors. Without
discussing the validity of the stipulation in question, the same was, in effect, upheld.
Again, in Cruz v. Court of Appeals,[29] while a similar provision was recognized and applied, no discussion as to its validity was made since the same was not raised
as an issue.
On the other hand, in Tambunting v. Rehabilitation Finance Corporation,[30] the validity of a similar provision was specifically raised and discussed and found as
invalid. It was there ratiocinated that --
To be sure, the deed of second mortgage executed by the Escuetas in favor of Aurora Tambunting, married to Antonio L. Tambunting, does contain a provision that
the property mortgaged shall not be x x x the subject of any new or subsequent contracts of agreements, saving and excepting those having connection with the first
mortgage with the RFC, without first securing the written permission and consent of the MORTGAGEE. But the provision can only be construed as directed against
subsequent mortgages or encumbrances, not to an alienation of the immovable itself. For while covenants prohibiting the owner from constituting a later mortgage
over property registered under the Torrens Act have been held to be legally permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-342; Bank of
the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations forbidding the owner from alienating the immovable mortgaged are expressly declared void by law (Art.
2130, Civil Code). It is clear that the stipulation against subsequent agreements above mentioned had not been breached by the assignment by the Escuetas (to the

38
Hernandezes) of their right of redemption in connection with the mortgage constituted in favor of the R.F.C. The assignment was not a subsequent mortgage or
encumbrance, licitly comprehended by the prohibitory stipulation, but was actually a sale or conveyance of all their rights in the encumbered real property in truth, an
alienation of the immovable which could not lawfully be forbidden. Moreover, since the subject of the assignment to the Hernandezes had connection with the first
assignment with the R.F.C., it did not fall within, but was explicitly excepted from, the prohibitory stipulation in question. Finally, it should not be forgotten that since
the Tambuntings, in their own deed of conditional sale with the R.F.C., had accepted without demur the provision that said contract could be revoked within one (1)
year from September 16, 1955 at the option of the RFC, as vendor, should the former owner (Escueta) exercise his right to redeem the property; and that the
redemption of the property within said period by the former owner or his successor-in-interest would render their instrument of conditional sale automatically null
and void and without effect, they cannot now assume a position inconsistent with said provision. (underscoring, Ours)
Earlier, in PNB v. Mallorca,[31] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to
dispose a principal attribute of ownership is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot
oppose.
In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida v. Court of
Appeals.[32] According to the Court of Appeals, said cases, are not only more recent that that of Tambunting, supra, but are also more applicable to the issue at bar.
We are not convinced.
As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no discussion as to its validity was made since
the same was not raised as an issue. Thus, it cannot be said that the specific pronouncement in the Tambunting case that such a stipulation can only be construed as
against subsequent mortgages or encumbrances but not to an alienation of the immovable itself, which is prohibited under Article 2130, was abandoned thereby. On
the other hand, the facts in the case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the said case was a second
mortgage over a foreclosed property during the period of redemption. Thus, the ruling in Medida quoted in the Amended Decision that what is delimited is not the
mortgagors jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted, actually refers
to the fact that the only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the
possession use and enjoyment of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged property
without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation in controversy.
Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is
concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a stipulation
violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed
of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent
of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without
taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged
property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole
prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from
selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. In
other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil
Code.
Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by the spouses
Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.
Re: Validity of redemption effected by PWHAS on the account of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the
spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in
effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that
x x x. The acquisition by the Hernandezes of the Escuetas rights over the property carried with it the assumption of the obligations burdening the property, as
recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas shoes as
assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated
otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage
deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption.
The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right to
redeem, but also his successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.
Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure sale, well
within the one year period of redemption.
Re: Validity and enforceability of stipulation granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is concerned. Said
paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see nothing
wrong in this provision. The right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the consideration
for the right of first refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua provided that in case they decide to sell the
property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to buy the property at that price.Thus, while the
spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, it had the obligation under
paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of
L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered
to L & R Corporation.
What then is the status of the sale made to PWHAS in violation of L & R Corporations contractual right of first refusal? On this score, we agree with the Amended
Decision of the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman, Bocaling & Co v. Bonnevie[33] is instructive on this point
The respondent court correctly held that the Contract of Sale was not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise
valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies
for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the
Contract of Lease.
According to Tolentino, rescission is a remedy granted by law to the contracting parties and even to third persons, to secure reparation for damages caused to them
by a contract, even if this should be valid, by means of the restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief
allowed for one of the contracting parties and even third persons from all injury and damage the contract may cause, or to protect some incompatible and
preferential right created by the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies
its invalidation for reasons of equity. (underscoring, Ours)
It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.
In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the Deed of Real
Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration,
which equates to notice to the whole world.
We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the
Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, and was
agreeable to pay the difference between such purchase price and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-
year period to redeem. That it did not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by
the spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers.
All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is
valid, notwithstanding the absence of L & R Corporations prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of
the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by L & R Corporation. However,
while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporations right of first refusal.
Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with no sale having been made,
they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of litigation. In effect, the spouses
Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal of the spouses Litonjuas decision to sell. To do so would afford them
undue advantage on account of the appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and
ignored the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold
and enforce the right of first refusal of L & R Corporation.
WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:
(a) Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda Litonjua and Philippine White
House Auto Supply, Inc. and ordering said spouses to return to Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;

39
(c) Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto Supply, Inc. and ordering Quezon
City Sheriff Roberto Garcia to return to it the redemption check of P240,798.94;
(d) Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to pay to the Litonjua spouses the
additional sum of P189,201.96 representing the difference from the purchase price of P430,000.00 in the rescinded sale;
(e) Deleting the awards for moral and exemplary damages and attorneys fees to the respondents.
No pronouncement as to costs.
SO ORDERED.

PNB v. Mallorca SUPRA

KOREA EXCHANGE BANK, petitioner, vs. FILKOR BUSINESS INTEGRATED, INC., KIM EUNG JOE, and LEE HAN SANG, respondents. [G.R. No. 138292. April 10, 2002]

QUISUMBING, J.:
This petition assails the order[1] dated April 16, 1999 of the Regional Trial Court of Cavite City, Branch 88, in Civil Case No. N-6689. Said order denied petitioners
partial motion for reconsideration of the trial courts order[2] dated March 12, 1999 whereby respondents were ordered to pay petitioner various sums of U.S. dollars as
payment of the formers various loans with interest but omitted to state that the property mortgaged as security for said loans be foreclosed and sold at public auction
in case respondents fail to pay their obligations to petitioner ninety days from entry of judgment.
The facts are summarized from the findings of the trial court.
On January 9, 1997, respondent Filkor Business Integrated, Inc. (Filkor), borrowed US$140,000 from petitioner Korea Exchange Bank, payable on July 9, 1997. Of
this amount, only US$40,000 was paid by Filkor.[3]
In addition, Filkor executed nine trust receipts in favor of petitioner, from June 26, 1997 to September 11, 1997. However, Filkor failed to turn over to petitioner
the proceeds from the sale of the goods, or the goods themselves as required by the trust receipts in case Filkor could not sell them.[4]
In the period from June 9, 1997 to October 1, 1997, Filkor also negotiated to petitioner the proceeds of seventeen letters of credit issued by the Republic Bank
of New York and the Banque Leumi France, S.A. to pay for goods which Filkor sold to Segerman International, Inc. and Davyco, S.A. When petitioner tried to collect the
proceeds of the letters of credit by presenting the bills of exchange drawn to collect the proceeds, they were dishonored because of discrepancies. [5]
Prior to all the foregoing, in order to secure payment of all its obligations, Filkor executed a Real Estate Mortgage on February 9, 1996. It mortgaged to petitioner
the improvements belonging to it constructed on the lot it was leasing at the Cavite Export Processing Zone Authority. [6] Respondents Kim Eung Joe and Lee Han Sang
also executed Continuing Suretyships binding themselves jointly and severally with respondent Filkor to pay for the latters obligations to petitioner.[7]
As respondents failed to make good on their obligations, petitioner filed Civil Case No. N-6689 in the Regional Trial Court of Cavite City, docketed as Korea
Exchange Bank vs. Filkor Business Integrated, Inc. In its complaint, petitioner prayed that (a) it be paid by respondents under its twenty-seven causes of action; (b) the
property mortgaged be foreclosed and sold at public auction in case respondents failed to pay petitioner within ninety days from entry of judgment; and (c) other reliefs
just and equitable be granted.[8]
Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the 1997 Rules of Civil Procedure. On March 12, 1999, the trial court rendered its
order granting petitioners motion, reasoning as follows:
xxx
It appears that the only reason defendants deny all the material allegations in the complaint is because the documents attached thereto are mere photocopies and
not the originals thereof. Section 7, Rule 8 of the Rules of Court allows copies of documents to be attached to the pleading as an exhibit. Defendants are, therefore,
deemed to have admitted the genuineness and due execution of all actionable documents attached to the complaint inasmuch as they were not specifically denied,
pursuant to Section 8 of the Rule 8 of the Rules of Court.
In the case at bar, there is clearly no substantial triable issue, hence, the motion for summary judgment filed by plaintiff is proper.
A summary of judgment is one granted by the court upon motion by a party for an expeditious settlement of the case, there appearing from the pleadings,
depositions, admissions and affidavits that there are no important questions or issues of fact involved (except as to the amount of damages) and that, therefore, the
moving party is entitled to a judgment as a matter of law (Sections 1, 2, 3, Rule 35, 1997 Rules of Civil Procedure).
The court having taken into account the pleadings of the parties as well as the affidavits attached to the motion for summary judgment and having found that there is
indeed no genuine issue as to any material fact and that plaintiff is entitled to a summary of judgment as a matter of law, hereby renders judgment for the plaintiff
and against the defendants, ordering said defendants jointly and severally to pay plaintiff, as follows [9]
The trial court then rendered judgment in favor of petitioner, granting its prayers under all its twenty-seven causes of action. It, however, failed to order that
the property mortgaged by respondent Filkor be foreclosed and sold at public auction in the event that Filkor fails to pay its obligations to petitioner.
Petitioner filed a motion for partial reconsideration of the trial courts order, praying that the aforesaid relief of foreclosure and sale at public auction be granted.
In an order dated April 16, 1999, the trial court denied petitioners motion, ruling as follows:
Plaintiff, in opting to file a civil action for the collection of defendants obligations, has abandoned its mortgage lien on the property subject of the real estate
mortgage.
The issue has already been resolved in Danao vs. Court of Appeals, 154 SCRA 446, citing Manila Trading and Supply Co. vs. Co Kim, et al., 71 Phil. 448, where the
Supreme Court ruled that:
The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an ordinary action to recover the indebtedness with the right to
execute a judgment thereon on all the properties of the debtor including the subject matter of the mortgage, subject to the qualification that if he fails in the remedy
by him elected, he cannot pursue further the remedy he has waived.
WHEREFORE, the Partial Motion for Reconsideration filed by the plaintiff of the Courts Order dated March 12, 1999 is hereby denied for lack of merit.
SO ORDERED.[10]
Hence, the present petition, where petitioner ascribes the following error to the trial court.
THE REGIONAL TRIAL COURT OF CAVITE CITY ERRED IN RULING THAT PETITIONER HAD ABANDONED THE REAL ESTATE MORTGAGE IN ITS FAVOR, BECAUSE IT FILED A
SIMPLE COLLECTION CASE.[11]
The resultant issue is whether or not petitioners complaint before the trial court was an action for foreclosure of a real estate mortgage, or an action for
collection of a sum of money. In addition, we must also determine if the present appeal was correctly lodged before us rather than with the Court of Appeals.
In petitioners complaint before the trial court, Paragraph 183 thereof alleges:
183. To secure payment of the obligations of defendant Corporation under the First to the Twenty-Seventh Cause of Action, on February 9, 1996, defendant
Corporation executed a Real Estate Mortgage by virtue of which it mortgaged to plaintiff the improvements standing on Block 13, Lot 1, Cavite Export Processing
Zone, Rosario, Cavite, belonging to defendant Corporation covered by Tax Declaration No. 5906-1 and consisting of a one-story building called warehouse and
spooling area, the guardhouse, the cutting/sewing area building and the packing area building. (A copy of the Real Estate Mortgage is attached hereto as Annex SS and
made an integral part hereof.)[12]
This allegation satisfies in part the requirements of Section 1, Rule 68 of the 1997 Rules of Civil Procedure on foreclosure of real estate mortgage, which provides:
SECTION 1. Complaint in action for foreclosure. In an action for the foreclosure of a mortgage or other encumbrance upon real estate, the complaint shall set forth the
date and due execution of the mortgage; its assignments, if any; the names and residences of the mortgagor and the mortgagee; a description of the mortgaged
property; a statement of the date of the note or other documentary evidence of the obligation secured by the mortgage, the amount claimed to be unpaid thereon;
and the names and residences of all persons having or claiming an interest in the property subordinate in right to that of the holder of the mortgage, all of whom shall
be made defendants in the action.
In Paragraph 183 above, the date and due execution of the real estate mortgage are alleged. The properties mortgaged are stated and described therein as well.
In addition, the names and residences of respondent Filkor, as mortgagor, and of petitioner, as mortgagee, are alleged in paragraphs 1 and 2 of the complaint. [13] The
dates of the obligations secured by the mortgage and the amounts unpaid thereon are alleged in petitioners first to twenty-seventh causes of action.[14] Moreover, the
very prayer of the complaint before the trial court reads as follows:
WHEREFORE, it is respectfully prayed that judgment be rendered:
xxx
2. Ordering that the property mortgaged be foreclosed and sold at public auction in case defendants fail to pay plaintiff within ninety (90) days from entry of
judgment.
x x x[15]
Petitioners allegations in its complaint, and its prayer that the mortgaged property be foreclosed and sold at public auction, indicate that petitioners action was
one for foreclosure of real estate mortgage. We have consistently ruled that what determines the nature of an action, as well as which court or body has jurisdiction
over it, are the allegations of the complaint and the character of the relief sought. [16] In addition, we find no indication whatsoever that petitioner had waived its rights
under the real estate mortgage executed in its favor. Thus, the trial court erred in concluding that petitioner had abandoned its mortgage lien on Filkors property, and
that what it had filed was an action for collection of a sum of money.

40
Petitioners action being one for foreclosure of real estate mortgage, it was incumbent upon the trial court to order that the mortgaged property be foreclosed
and sold at public auction in the event that respondent Filkor fails to pay its outstanding obligations. This is pursuant to Section 2 of Rule 68 of the 1997 Rules of Civil
Procedure, which provides:
SEC. 2. Judgment on foreclosure for payment or sale.- If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain
the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the
judgment. (Italics supplied.)
Accordingly, the dispositive portion of the decision of the trial court dated March 12, 1999, must be modified to comply with the provisions of Section 2 of Rule
68 of the 1997 Rules of Civil Procedure. This modification is subject to any appeal filed by respondents of said decision.
On the propriety of the present appeal, we note that what petitioner impugns is the determination by the trial court of the nature of action filed by petitioner,
based on the allegations in the complaint. Such a determination as to the correctness of the conclusions drawn from the pleadings undoubtedly involves a question of
law.[17] As the present appeal involves a question of law, petitioner appropriately filed it with this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil
Procedure, which provides:
SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth. (Italics supplied).
There is no dispute with respect to the fact that when an appeal raises only pure questions of law, this Court has jurisdiction to entertain the same.[18]
WHEREFORE, the petition is GRANTED. The Order dated March 12, 1999, of the Regional Trial Court of Cavite City, Branch 88, in Civil Case No. N-6689 is hereby
MODIFIED, to state that the mortgaged property of respondent Filkor be ordered foreclosed and sold at public auction in the event said respondent fails to pay its
obligations to petitioner within ninety (90) days from entry of judgment.
No pronouncement as to costs. SO ORDERED.

[G.R. No. 128567. September 1, 2000]


HUERTA ALBA RESORT, INC., petitioner, vs. COURT OF APPEALS and SYNDICATED MANAGEMENT GROUP, INC., respondents.
DECISION
PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional errors. Public policy dictates that once a judgment becomes final, executory and
unappealable, the prevailing party should not be denied the fruits of his victory by some subterfuge devised by the losing party. Unjustified delay in the enforcement of
a judgment sets at naught the role of courts in disposing justiciable controversies with finality.
TheCase

At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution, dated March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which
set aside the Order, dated July 21, 1995, and Order, dated September 4, 1997, of the Regional Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid orders
of the trial court held that petitioner had the right to redeem subject pieces of property within the one-year period prescribed by Section 78 of Republic Act No. 337
otherwise known as the General Banking Act.
Section 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage in favor of a bank, banking or credit institution, whether judicially or extrajudicially,
the mortgagor shall have the right, within one year after the sale of the real estate as a result of the foreclosure of the respective mortgage, to redeem the property.
TheFacts

The facts that matter are undisputed:


In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional
Trial Court of Makati City, the herein private respondent sought the foreclosure of four (4) parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc.
(Intercon).
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a loan amounting to P8.5 million obtained by petitioner from Intercon, in whose
favor petitioner mortgaged the aforesaid parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage right thereover to the private respondent, on the ground that the same
was ultra vires.Petitioner also questioned during the trial the correctness of the charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals Justice Buenaventura J. Guerrero, came out with its decision granting herein
private respondent SMGIs complaint for judicial foreclosure of mortgage, disposing as follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above principal from September 6, 1998, until fully paid;
(4) 5% of the sum total of the above amounts, as reasonable attorneys fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt hereof by the defendant. In default of such payment, the four parcels of land subject
matter of the suit including its improvements shall be sold to realize the mortgage debt and costs, in the manner and under the regulations that govern sales of real
estate under execution.[1]
Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate
court, which dismissed the case on June 29, 1993 on the ground of late payment of docket fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via a petition for certiorari, docketed as G.R. No. 112044, which this court
resolved to dismiss on December 13, 1993, on the finding that the Court of Appeals erred not in dismissing the appeal of petitioner.
Petitioners motion for reconsideration of the dismissal of its petition in G.R. No. 112044 was denied with finality in this Courts Resolution promulgated on
February 16, 1994. On March 10, 1994, leave to present a second motion for reconsideration in G.R. No. 112044 or to submit the case for hearing by the Court en banc
was filed, but to no avail. The Court resolved to deny the same on May 11, 1994.
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044 became final and executory and was entered in the Book of Entries of
Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a motion for execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-
5424. The said motion was granted on July 13, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a Notice of Levy and Execution was issued by the Sheriff concerned, who issued
on August 1, 1994 a Notice of Sheriffs Sale for the auction of subject properties on September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to Quash and Set Aside Writ of Execution ascribing to it grave abuse of discretion
in issuing the questioned Writ of Execution. To support its motion, petitioner invited attention and argued that the records of the case were still with the Court of
Appeals and therefore, issuance of the writ of execution was premature since the 150-day period for petitioner to pay the judgment obligation had not yet lapsed and
petitioner had not yet defaulted in the payment thereof since no demand for its payment was made by the private respondent. In petitioners own words, the dispute
between the parties was principally on the issue as to when the 150-day period within which Huerta Alba may exercise its equity of redemption should be counted.
In its Order of September 2, 1994, the lower court denied petitioners urgent motion to quash the writ of execution in Civil Case No. 89-5424, opining that subject
judgment had become final and executory and consequently, execution thereof was a matter of right and the issuance of the corresponding writ of execution became
its ministerial duty.
Challenging the said order granting execution, petitioner filed once more with the Court of Appeals another petition for certiorari and prohibition with
preliminary injunction, docketed as C.A.-G.R. SP No. 35086, predicated on the same grounds invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties proceeded and the private respondent was declared the highest bidder. Thus,
private respondent was awarded subject bidded pieces of property. The covering Certificate of Sale issued in its favor was registered with the Registry of Deeds on
October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification asking the trial court to clarify whether or not the twelve (12) month period of
redemption for ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of redemption of subject property should be governed by the rule on the sale of judicially foreclosed
property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994 and Motion to Set Aside Said Order, contending that the said Order
materially altered the Decision dated April 30, 1992 which declared that the satisfaction of the judgment shall be in the manner and under the regulation that govern
sale of real estate under execution.

41
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the issues raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the
one hundred-fifty day period within which petitioner may redeem subject properties should be computed from the date petitioner was notified of the Entry of Judgment
in G.R. No. 112044; and that the 150-day period within which petitioner may exercise its equity of redemption expired on September 11, 1994. Thus:
Petitioner must have received the resolution of the Supreme Court dated February 16, 1994 denying with finality its motion for reconsideration in G.R. No.
112044 before March 14, 1994, otherwise the Supreme Court would not have made an entry of judgment on March 14, 1994. While, computing the 150-day
period, petitioner may have until September 11, 1994, within which to pay the amounts covered by the judgment, such period has already expired by this time, and
therefore, this Court has no more reason to pass upon the parties opposing contentions, the same having become moot and academic.[2](Underscoring supplied).
Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.-G.R. SP No. 35086. In its Motion for Reconsideration dated October 18,
1994, petitioner theorized that the period of one hundred fifty (150) days should not be reckoned with from Entry of Judgment but from receipt on or before July 29,
1994 by the trial court of the records of Civil Case No. 89-5424 from the Court of Appeals. So also, petitioner maintained that it may not be considered in default, even
after the expiration of 150 days from July 29, 1994, because prior demand to pay was never made on it by the private respondent. According to petitioner, it was
therefore, premature for the trial court to issue a writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate of Sale in view of the pendency of petitioners Motion for Reconsideration in
CA-G.R. SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioners motion for reconsideration in CA-G.R. SP No. 35086. Absent any further action with respect to
the denial of the subject motion for reconsideration, private respondent presented a Second Motion for Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in CA G.R. SP No. 35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the private respondent. The pertinent Order declared that all pending incidents
relating to the Order dated September 26, 1994 had become moot and academic. Conformably, the Transfer Certificates of Title to subject pieces of property were then
issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for Clarification seeking clarification of the date of commencement of the one (1) year
period for the redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such Motion for Clarification since its Decision promulgated on September 30, 1994
had already become final and executory; ratiocinating thus:
We view the motion for clarification filed by petitioner, purportedly signed by its proprietor, but which we believe was prepared by a lawyer who wishes to hide under
the cloak of anonymity, as a veiled attempt to buy time and to delay further the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and period of redemption of petitioner, but was merely circumscribed to the question of whether
respondent judge could issue a writ of execution in its Civil Case No. 89-5424 xxx.
We further ruled that the one-hundred fifty day period within which petitioner may exercise its equity of redemption should be counted, not from the receipt of
respondent court of the records of Civil Case No. 89-5424 but from the date petitioner was notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one- year right of redemption of petitioner because, in the first place, the foreclosure in this case is judicial, and as
such, the mortgagor has only the equity, not the right of redemption xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property, the question of whether the Syndicated Management Group, Inc., is a bank or credit institution was
never brought before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification.[3] (Underscoring supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No. 35086 its pretended right under Section 78
of R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial foreclosure, petitioner should have averred in its pleading that it was entitled to
the beneficial provisions of Section 78 of R.A. No. 337; but again, petitioner did not make any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995, the private respondent filed a Motion for Issuance of Writ of Possession
with the trial court.
During the hearing called on April 21, 1995, the counsel of record of petitioner entered appearance and asked for time to interpose opposition to the Motion
for Issuance of /Writ of Possession.
On May 2, 1995, in opposition to private respondents Motion for Issuance of /writ of Possession, petitioner filed a Motion to Compel Private Respondent to
Accept Redemption. It was the first time petitioner ever asserted the right to redeem subject properties under Section 78 of R.A. No. 337, the General Banking Act;
theorizing that the original mortgagee, being a credit institution, its assignment of the mortgage credit to petitioner did not remove petitioner from the coverage of
Section 78 of R.A. No. 337. Therefore, it should have the right to redeem subject properties within one year from registration of the auction sale, theorized the petitioner
which concluded that in view of its right of redemption, the issuance of the titles over subject parcels of land to the private respondent was irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon Inoturan, denied private respondents motion for a writ of possession, opining that
Section 78 of the General Banking Act was applicable and therefore, the petitioner had until October 21, 1995 to redeem the said parcels of land, said Order ruled as
follows:
It is undisputed that Intercon is a credit institution from which defendant obtained a loan secured with a real estate mortgage over four (4) parcels of land. Assuming
that the mortgage debt had not been assigned to plaintiff, there is then no question that defendant would have a right of redemption in case of foreclosure, judicially
or extrajudicially, pursuant to the above quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant lost its right of redemption by virtue of the assignment of its mortgage debt by Intercon to plaintiff,
which is not a bank or credit institution.The issue is resolved in the negative. The right of redemption in this case is vested by law and is therefore an absolute privilege
which defendant may not lose even though plaintiff-assignee is not a bank or credit institution (Tolentino versus Court of Appeals, 106 SCRA 513). Indeed, a contrary
ruling will lead to a possible circumvention of Section 78 because all that may be needed to deprive a defaulting mortgagor of his right of redemption is to assign his
mortgage debt from a bank or credit institution to one which is not. Protection of defaulting mortgagors, which is the avowed policy behind the provision, would not
be achieved if the ruling were otherwise. Consequently, defendant still possesses its right of redemption which it may exercise up to October 21, 1995 only, which is
one year from the date of registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendants right of redemption has not yet expired, the cancellation of defendants transfer certificates of title and the issuance of new
ones in lieu thereof in favor of plaintiff are therefore illegal for being premature, thereby necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for Issuance of Writ of Possession is hereby denied;
(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in an amount computed according to the terms stated in the Writ of Execution dated
July 15, 1994 plus all other related costs and expenses mentioned under Section 78, RA 337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the defendant the following titles of the four (4) parcels of land, namely TCT Nos. V-
38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to register the certificate of sale dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum thereof upon the transfer certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is now deemed resolved.
SO ORDERED.[4]
Private respondent interposed a Motion for Reconsideration seeking the reversal of the Order but to no avail. In its Order dated September 4, 1995, the trial
court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of September 4, 1995 of the trial court, the private respondent filed with this
court a Petition for Certiorari, Prohibition and Mandamus, docketed as G.R. No. 121893, but absent any special and cogent reason shown for entertaining the same, the
Court referred the petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due course to the petition and set aside the trial courts Order dated July 21,
1995 and Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioners Motion for Reconsideration of the Decision promulgated on November 14, 1996 in
CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition, placing reliance on the assignment of errors, that:
I THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD
RESOLVED WITH FINALITY THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION.
II THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION UNDER
SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).
III THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED TO THE
ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.[5]
In its comment on the petition, private respondent countered that:

42
A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE
RIGHT OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE THE FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH HELD
THAT PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE OF ITS ALLEGED RIGHT OF REDEMPTION.
D. IN HOLDING THAT THE PETITIONER HAD THE RIGHT OF REDEMPTION OVER THE SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE LAW
OF THE CASE.[6]
And by way of Reply, petitioner argued, that:
I. THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY RESOLVED THEREIN - WHETHER WITH FINALITY OR OTHERWISE -
THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337.
II. THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND WITHIN ONE (1) YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE OF SALE.
III THE PRINCIPLE OF THE LAW OF THE CASE HAS ABSOLUTELY NO BEARING HERE:
(1) THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN CIVIL CASE
NO. 89-5424.
(2) THUS, THE RTCS ORDER RECOGNIZING PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE THE
EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN CIVIL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate to the pivotal issue of whether or not the petitioner has the one-year right of redemption of
subject properties under Section 78 of Republic Act No. 337 otherwise known as the General Banking Act.
The petition is not visited by merit.
Petitioners assertion of right of redemption under Section 78 of Republic Act No. 337 is premised on the submission that the Court of Appeals did not resolve
such issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD
RESOLVED WITH FINALITY THE ISSUE OF WHETHER PETITIONER HUERTA ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS
TO MERELY NOTE THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE
POSSIBLY BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR CLARIFICATION,
THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086, EXCEPT TO MERELY
NOTE THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND JOINED
BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL COURT.
III.
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS MANDATORY AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-BOUND TO
RECOGNIZE SUCH RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER HUERTA ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF THE LAW
TO AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE
LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that what petitioner has been adjudged to have was only the equity of redemption
over subject properties. On the distinction between the equity of redemption and right of redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate
Court,[7] comes to the fore. Held the Court in the said case:
The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.
The right of redemption in relation to a mortgage - understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure
sale - exists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is
the Philippine National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs
certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, when confirmed by an
order of the court, x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as
may be allowed by law. Such rights exceptionally allowed by law (i.e., even after confirmation by an order of the court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right to redeem the property sold on foreclosure - after confirmation by the court of the foreclosure sale - which right may be
exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such
a case, the foreclosure sale, when confirmed by an order of the court. x x shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser. There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that -
x x If upon the trial x x the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and costs, and shall render judgment for the sum so found due and order the same to be paid into court within a period of not less
than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold to realize the mortgage debt and costs.
This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period from the date of service of the
order, and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be
effected any longer.[8] (Underscoring supplied)
Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No. 337.
Petitioner avers in its petition that the Intercom, predecessor in interest of the private respondent, is a credit institution, such that Section 78 of Republic Act
No. 337 should apply in this case. Stated differently, it is the submission of petitioner that it should be allowed to redeem subject properties within one year from the
date of sale as a result of the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its asserted right under Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after confirmation by the court of the foreclosure sale, and within one (1) year from the
date of registration of the certificate of sale. Indeed, the facts show that it was only on May 2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession,
did petitioner file a Motion to Compel Private Respondent to Accept Redemption, invoking for the very first time its alleged right to redeem subject properties under to
Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right to redeem under Section 78 of R.A. No. 337. Petitioner failed to assert
a right to redeem in several crucial stages of the Proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part Motion for Clarification, petitioner failed to allege and prove that private
respondent's predecessor in interest was a credit institution and therefore, Section 78 of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify
whether the sale of subject properties was execution sale or judicial foreclosure sale.

43
So also, when it presented before the trial court an Exception to the Order and Motion to Set Aside Said Order dated October 13, 1994, petitioner again was
silent on its alleged right under Section 78 of R.A. No. 337, even as it failed to show that private respondent's predecessor in interest is a credit institution. Petitioner
just argued that the aforementioned Order materially altered the trial court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78 of R.A. No. 337 and of the predecessor in interest of private respondent as a
credit institution, when the trial court came out with an order on February 10, 1995, confirming the sale of subject properties in favor of private respondent and
declaring that all pending incidents with respect to the Order dated September 26, 1994 had become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the Court of Appeals, seeking "clarification" of the date of commencement
of the one (1) year redemption period for the subject properties, petitioner never intimated any alleged right under Section 78 of R.A. No. 337 nor did it invite attention
to its present stance that private respondent's predecessor-in-interest was a credit institution. Consequently, in its Resolution dated March 20, 1995, the Court of
Appeals ruled on the said motion thus:
But we never made any pronouncement on the one-year right of redemption of petitioner because, in the first place, the foreclosure in this case is judicial, and as
such, the mortgagor has only the equity, not the right of redemption xxx. While it may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property, the question of whether the Syndicated Management Group, Inc., is bank or credit institution was
never brought before us squarely, and it is indeed odd and strange that petitioner would now sarcastically ask a rhetorical question in its motion for
clarification.[9] (Underscoring supplied).
If petitioner were really acting in good faith, it would have ventilated before the Court of Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A.
No. 337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the complaint for judicial foreclosure, petitioner should have alleged that it was entitled to
the beneficial provisions of Section 78 of R.A. No. 337 but again, it did not make any allegation in its answer regarding any right thereunder. It bears stressing that the
applicability of Section 78 of R.A. No. 337 hinges on the factual question of whether or not private respondents predecessor in interest was a credit institution. As was
held in Limpin, a judicial foreclosure sale, when confirmed by an order of the court, xx shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as may be allowed by law,[10] which confer on the mortgagor, his successors in interest or any judgment
creditor of the mortgagor, the right to redeem the property sold on foreclosure after confirmation by the court of the judicial foreclosure sale. Thus, the claim that
petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 - since private respondents predecessor-in-interest is a credit institution - is in the nature
of a compulsory counterclaim which should have been averred in petitioners answer to the compliant for judicial foreclosure.
xxx A counterclaim is, most broadly, a cause of action existing in favor of the defendant against the plaintiff. More narrowly, it is a claim which, if established,
will defeat or in some way qualify a judgment or relief to which plaintiff is otherwise entitled. It is sometimes defined as any cause of action arising in contract
available against any action also arising in contract and existing at the time of the commencement of such an action. It is frequently defined by the codes as a cause of
action arising out of the contract or transaction set forth in the complaint as the foundation of the plaintiffs claim, or connected with the subject of the
action.[11] (underscoring supplied)
The counterclaim is in itself a distinct and independent cause of action, so that when properly stated as such, the defendant becomes, in respect to the matters stated
by him, an actor, and there are two simultaneous actions pending between the same parties, wherein each is at the same time both a plaintiff and a
defendant. Counterclaim is an offensive as well as a defensive plea and is not necessarily confined to the justice of the plaintiffs claim. It represents the right of the
defendant to have the claims of the parties counterbalanced in whole or in part, and judgment to be entered in excess, if any. A counterclaim stands on the same
footing, and is to be tested by the same rules, as if it were an independent action.[12] (underscoring supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in its answer its purported right under Section 78 of R.A. No. 337:
xxx The rules of counterclaim are designed to enable the disposition of a whole controversy of interested parties conflicting claims, at one time and in one action,
provided all parties be brought before the court and the matter decided without prejudicing the rights of any party.[13]
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A. No. 337 precludes it from so doing at this late stage of the case. Estoppel
may be successfully invoked if the party fails to raise the question in the early stages of the proceedings. [14] Thus, a party to a case who failed to invoked his claim in the
main case, while having the opportunity to do so, will be precluded, subsequently, from invoking his claim, even if it were true, after the decision has become final,
otherwise the judgment may be reduced to a mockery and the administration of justice may be placed in disrepute. [15]
All things viewed in proper perspective, it is decisively clear that the trial court erred in still allowing petitioner to introduce evidence that private respondents
predecessor-in-interest was a credit institution, and to thereafter rule that the petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In effect,
the trial court permitted the petitioner to accomplish what the latter failed to do before the Court of Appeals, that is, to invoke its alleged right under Section 78 of R.A.
No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that the question of whether the Syndicated Management Council Group, Inc. is a bank or
credit institution was never brought before (the Court of Appeals) squarely. The said pronouncement by the Court of Appeals unerringly signified that petitioner did not
make a timely assertion of any right under Section 78 of R.A. No. 337 in all the stages of the proceedings below.
Verily, the petitioner has only itself to blame for not alleging at the outset that the predecessor-in-interest of the private respondent is a credit institution. Thus,
when the trial court, and the Court of Appeals repeatedly passed upon the issue of whether or not petitioner had the right of redemption or equity of redemption over
subject properties in the decisions, resolutions and orders, particularly in Civil Case no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747,
it was unmistakable that the petitioner was adjudged to just have the equity of redemption without any qualification whatsoever, that is, without any right of redemption
allowed by law.
The law of case holds that petitioner has the equity of redemption without any qualification.
There is, therefore, merit in private respondents contention that to allow petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will disturb the
law of the case. However, private respondents statement of what constitutes the law of the case is not entirely accurate. The law of the case is not simply that the
defendant possesses an equity of redemption. As the Court has stated, the law of the case holds that petitioner has the equity of the redemption without any
qualification whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No. 337. Whether or not the law of the case is erroneous is immaterial,
it still remains the law of the case. A contrary rule will contradict both the letter and spirit of the rulings of the Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No.
39243, and CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to forestall so simple a matter as making the security given for a just debt to
answer for its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as confirmed by the Order dated February 10, 1995 of the trial court in Civil
Case No. 89-5424 operated to divest the rights of all the parties to the action and to vest their rights in private respondent. There then existed only what is known as
the equity of redemption, which is simply the right of the petitioner to extinguish the mortgage and retain ownership of the property by paying the secured debt within
the 90-day period after the judgment became final.There being an explicit finding on the part of the Court of Appeals in its Decision of September 30, 1994 in CA-G.R.
No. 35086 - that the herein petitioner failed to exercise its equity of redemption within the prescribed period, redemption can no longer be effected. The confirmation
of the sale and the issuance of the transfer certificates of title covering the subject properties to private respondent was then, in order. The trial court therefore, has
the ministerial duty to place private respondent in the possession of subject properties.
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of Appeals, declaring null and void the Order dated 21 July 1995 and Order dated 4
September 1997 of the Regional Trial Court of Makati City in Civil Case No. 89-5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.

FACTS:
Syndicated Management Group, Inc. (SMGI), as mortgagee-assignee, filed a complaint before the RTC for foreclosure of 4 parcels of land mortgaged by Huerta Alba
Resort to Intercon Fund Resource (Intercon).
DECISION OF LOWER COURTS:
(a) RTC granted the complaint
(b) CA dismissed appeal due to late payment of docket fees (c) Supreme Court dismissed petition for certiorari.
SMGI then filed with the trial court of origin a motion for execution of decision. Thus, a writ of execution was issued. Petitioner filed an urgent motion to quash and
set aside the writ of execution. The dispute is principally is as to when the 150 period within which Huerta Alba may exercise its equity of redemption be counted.

DECISIONS:
(a) RTC denied to urgent motion to quash.
Meanwhile, the auction sale proceeded with SMGI as the sole bidder.
(b) CA held that the 150 periods should be computed from the date petitioner was notified of the Entry of Judgment but the same period has expired already.
Huerta Alba filed with the RTC a motion for clarification seeking clarification whether or not the 12 month period of redemption for ordinary execution should apply.

DECISIONS:
(1) RTC: redemption should be governed by the rule on the sale of judicially foreclosed property under Rule 68 of the Rules of Court
Huerta Alba again sought clarification with CA of the date of the commencement of the 1 year period for the redemption of the properties
(2) CA: Foreclosure in this case is judicial and as such mortgagor has only the equity and not the right or redemption. Even if under section 78 of RA 337 (General
Banking Act), a mortgagor of a bank, banking or credit institution, whether the foreclosure was done judicially or extrajudicially, has a period of 1 year from the
auction sale within which to redeem the foreclosed property, it was never raised whether SMGI is a bank or credit institution.
Upon motion for a writ of possession by SMGI, Huerta Alba then filed in opposition a motion to compel respondent to accept redemption, alleging for the first time
his right under RA 337, theorizing that the original mortgagee being a credit institution, its assignment of mortgage credit did not remove the coverage of RA 337

44
DECISIONS:
(1) RTC: denied SMGIs writ of possession.
(2) CA: set aside the RTCs decision.
Hence, the present petition.

ISSUE:
Whether or not Huerta Alba has the one year right of redemption of subject properties under Section 78 of RA 337

RULING:
YES, however, this was not seasonably filed.
The claim that it is entitled to the beneficial provisions of RA 337 since SMGIs predecessor-in-interest is a credit institution is in a nature of a compulsory
counterclaim which should have been averred in its answer to the complaint for judicial foreclosure.
The failure of petitioner to seasonably assert its right under RA 337 precludes it from so doing at this late stage case. Estoppel may be successfully invoked if the party
fails to raise the question in the early stages in proceeding.
The sale of the properties, as confirmed by the court, operated to divest Huerta Alba of its right of redemption. There then existed only what is known as equity of
redemption, which is simply the right of the petitioner to extinguish the mortgage and retain ownership of the property by paying the secured debt within the 90 day
period after the judgment became final. However, redemption can no longer be effected since petitioner failed to exercise its equity of redemption within the
prescribed period.
The equity of redemption is, to be sure, different from and should not be confused with the right of redemption.

RIGHT OF REDEMPTION
General Rule:
The right of redemption in relation to a mortgage understood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure
sale exists only in the case of the extrajudicial foreclosure of the mortgage.
Exception:
No such right is recognized in a judicial foreclosure except only where the mortgagee is the Philippine National Bank or a bank or banking institution.
I. Extrajudicial foreclosure right of redemption
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs
certificate of foreclosure sale.
II. Judicial foreclosure
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, when confirmed by an
order of the court, x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption a
may be allowed by law.
Such rights exceptionally allowed by law (i.e. even after confirmation by an order of the court) are those granted by the charter of the Philippine National Bank (Acts
No. 2747 and 2938), and the General Banking Act (R.A. 337). These laws confer on the mortgagor, his successors in interest or any judgment creditor of the mortgagor,
the right to redeem the property sold on foreclosure after confirmation by the court of the foreclosure sale which may be exercised within a period of one (1) year,
counted from the date of registration of the certificate of sale in the Registry Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such
a case, the foreclosure sale, when confirmed by an order of the court. x x shall operate to divest the rights of all the parties to the action and to vest their rights in the
purchaser.

EQUITY OF REDEMPTION
There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage and retain
ownership of the property by paying the secured debt:

1. within the 90-day period after the judgment becomes final, in accordance with Rule 68, or
2. even after judgment becomes final, in accordance with Rule 68, or
3. even after the foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that xx If upon the trial xx the court shall find the facts set forth in the complaint to be true, it shall ascertain the amount due to the
plaintiff upon the mortgage debt or obligation, including interest and costs, and shall render judgment for the sum so found due and order the same to be paid into
court within a period of not less than ninety (90) days from the date of the service of such order, and that in default of such payment the property be sold to realize the
mortgage debt and costs. This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period
from the date of service of the order, and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of
confirmation, no redemption can be effected any longer.

SPOUSES RICARDO ROSALES and ERLINDA SIBUG, petitioners, vs. SPOUSES ALFONSO and LOURDES SUBA, THE CITY SHERIFF OF MANILA, respondents. [G.R. No.
137792. August 12, 2003]

SANDOVAL-GUTIERREZ, J.:
Challenged in the instant petition for review on certiorari are the Resolutions[1] dated November 25, 1998 and February 26, 1999 of the Court of Appeals
dismissing the petition for certiorari in CA G.R. SP No. 49634, Spouses Ricardo Rosales and Erlinda Sibug vs. Alfonso and Lourdes Suba.
On June 13, 1997, the Regional Trial Court, Branch 13, Manila rendered a Decision[2] in Civil Cases Nos. 94-72303 and 94-72379, the dispositive portion of which
reads:
WHEREFORE, judgment is rendered:
(1) Declaring the Deed of Sale of Exhibit D, G and I, affecting the property in question, as an equitable mortgage;
(2) Declaring the parties Erlinda Sibug and Ricardo Rosales, within 90 days from finality of this Decision, to deposit with the Clerk of Court, for payment to the parties
Felicisimo Macaspac and Elena Jiao, the sum of P65,000.00, with interest at nine (9) percent per annum from September 30, 1982 until payment is made, plus the
sum of P219.76 as reimbursement for real estate taxes;
(3) Directing the parties Felicisimo Macaspac and Elena Jiao, upon the deposit on their behalf of the amounts specified in the foregoing paragraph, to execute a deed
of reconveyance of the property in question to Erlinda Sibug, married to Ricardo Rosales, and the Register of Deeds of Manila shall cancel Transfer Certificate of Title
No. 150540 in the name of the Macaspacs (Exh. E) and issue new title in the name of Sibug;
(4) For non-compliance by Sibug and Rosales of the directive in paragraph (2) of this dispositive portion, let the property be sold in accordance with the Rules of Court
for the release of the mortgage debt and the issuance of title to the purchaser.
SO ORDERED.[3]
The decision became final and executory. Spouses Ricardo and Erlinda Rosales, judgment debtors and herein petitioners, failed to comply with paragraph 2
quoted above, i.e., to deposit with the Clerk of Court, within 90 days from finality of the Decision, P65,000.00, etc., to be paid to Felicisimo Macaspac and Elena Jiao. This
prompted Macaspac, as judgment creditor, to file with the trial court a motion for execution.
Petitioners opposed the motion for being premature, asserting that the decision has not yet attained finality. On March 5, 1998, they filed a manifestation and
motion informing the court of their difficulty in paying Macaspac as there is no correct computation of the judgment debt.
On February 23, 1998, Macaspac filed a supplemental motion for execution stating that the amount due him is P243,864.08.
Petitioners failed to pay the amount. On March 25, 1998, the trial court issued a writ of execution ordering the sale of the property subject of litigation for the
satisfaction of the judgment.
On May 15, 1998, an auction sale of the property was held wherein petitioners participated. However, the property was sold for P285,000.00 to spouses Alfonso
and Lourdes Suba, herein respondents, being the highest bidders. On July 15, 1998, the trial court issued an order confirming the sale of the property and directing the
sheriff to issue a final deed of sale in their favor.
On July 28, 1998, Macaspac filed a motion praying for the release to him of the amount of P176,176.06 from the proceeds of the auction sale, prompting
petitioners to file a motionpraying that an independent certified public accountant be appointed to settle the exact amount due to movant Macaspac.
Meanwhile, on August 3, 1998, the Register of Deeds of Manila issued a new Transfer Certificate of Title over the subject property in the names of respondents.
On August 18, 1998, respondents filed with the trial court a motion for a writ of possession, contending that the confirmation of the sale effectively cut off
petitioners equity of redemption. Petitioners on the other hand, filed a motion for reconsideration of the order dated July 15, 1998 confirming the sale of the property
to respondents.
On October 19, 1998, the trial court, acting upon both motions, issued an order (1) granting respondents prayer for a writ of possession and (2) denying
petitioners motion for reconsideration. The trial court ruled that petitioners have no right to redeem the property since the case is for judicial foreclosure of mortgage
under Rule 68 of the 1997 Rules of Civil Procedure, as amended. Hence, respondents, as purchasers of the property, are entitled to its possession as a matter of right.

45
Forthwith, petitioners filed with the Court of Appeals a petition for certiorari, docketed as CA-G.R. SP No. 49634, alleging that the trial court committed grave
abuse of discretion amounting to lack or excess of jurisdiction in issuing a writ of possession to respondents and in denying their motion for reconsideration of the order
dated July 15, 1998 confirming the sale of the property to said respondents.
On November 25, 1998, the CA dismissed outright the petition for lack of merit, holding that there is no right of redemption in case of judicial foreclosure of
mortgage.Petitioners motion for reconsideration was also denied.
Hence this petition.
In the main, petitioners fault the Appellate Court in applying the rules on judicial foreclosure of mortgage. They contend that their loan with Macaspac is
unsecured, hence, its payment entails an execution of judgment for money under Section 9 in relation to Section 25, Rule 39 of the 1997 Rules of Civil Procedure, as
amended,[4] allowing the judgment debtor one (1) year from the date of registration of the certificate of sale within which to redeem the foreclosed property.
Respondents, upon the other hand, insist that petitioners are actually questioning the decision of the trial court dated June 13, 1997 which has long become
final and executory; and that the latter have no right to redeem a mortgaged property which has been judicially foreclosed.
Petitioners contention lacks merit. The decision of the trial court, which is final and executory, declared the transaction between petitioners and Macaspac an
equitable mortgage. In Matanguihan vs. Court of Appeals,[5] this Court defined an equitable mortgage as one which although lacking in some formality, or form or words,
or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible
or contrary to law. An equitable mortgage is not different from a real estate mortgage, and the lien created thereby ought not to be defeated by requiring compliance
with the formalities necessary to the validity of a voluntary real estate mortgage.[6] Since the parties transaction is an equitable mortgage and that the trial court ordered
its foreclosure, execution of judgment is governed by Sections 2 and 3, Rule 68 of the 1997 Rules of Civil Procedure, as amended, quoted as follows:
SEC. 2. Judgment on foreclosure for payment or sale. If upon the trial in such action the court shall find the facts set forth in the complaint to be true, it shall ascertain
the amount due to the plaintiff upon the mortgage debt or obligation, including interest and other charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid to the court or to the judgment obligee within a period of not less that ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment, and that in default of such payment the property shall be sold at public auction to satisfy the judgment.
SEC. 3. Sale of mortgaged property, effect. When the defendant, after being directed to do so as provided in the next preceding section, fails to pay the amount of the
judgment within the period specified therein, the court, upon motion, shall order the property to be sold in the manner and under the provisions of Rule 39 and other
regulations governing sales of real estate under execution.Such sale shall not effect the rights of persons holding prior encumbrances upon the property or a part
thereof, and when confirmed by an order of the court, also upon motion, it shall operate to divest the rights in the property of all the parties to the action and to vest
their rights in the purchaser, subject to such rights of redemption as may be allowed by law.
x x x.
In Huerta Alba Resort, Inc. vs. Court of Appeals,[7] we held that the right of redemption is not recognized in a judicial foreclosure, thus:
The right of redemption in relation to a mortgageunderstood in the sense of a prerogative to re-acquire mortgaged property after registration of the foreclosure
saleexists only in the case of the extrajudicial foreclosure of the mortgage. No such right is recognized in a judicial foreclosure except only where the mortgagee is the
Philippine National bank or a bank or a banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor the right of redemption within one (1) year from the registration of the sheriffs
certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of redemption exists. The law declares that a judicial foreclosure sale, when confirmed by an
order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their rights in the purchaser, subject to such rights of redemption as
may be allowed by law. Such rights exceptionally allowed by law (i.e., even after the confirmation by an order of the court) are those granted by the charter of the
Philippine National Bank (Act Nos. 2747 and 2938), and the General Banking Act (R.A.337). These laws confer on the mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right to redeem the property sold on foreclosureafter confirmation by the court of the foreclosure salewhich right may be
exercised within a period of one (1) year, counted from the date of registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a
case, the foreclosure sale, when confirmed by an order of the court, x x x shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser. There then exists only what is known as the equity of redemption. This is simply the right of the defendant mortgagor to extinguish the mortgage
and retain ownership of the property by paying the secured debt within the 90-day period after the judgment becomes final, in accordance with Rule 68, or even after the
foreclosure sale but prior to its confirmation.
xxx
This is the mortgagors equity (not right) of redemption which, as above stated, may be exercised by him even beyond the 90-day period from the date of service of the
order, and even after the foreclosure sale itself, provided it be before the order of confirmation of the sale. After such order of confirmation, no redemption can be
effected any longer. (Italics supplied)
Clearly, as a general rule, there is no right of redemption in a judicial foreclosure of mortgage. The only exemption is when the mortgagee is the Philippine
National Bank or a bank or a banking institution. Since the mortgagee in this case is not one of those mentioned, no right of redemption exists in favor of petitioners. They
merely have an equity of redemption, which, to reiterate, is simply their right, as mortgagor, to extinguish the mortgage and retain ownership of the property by paying
the secured debt prior to the confirmation of the foreclosure sale. However, instead of exercising this equity of redemption, petitioners chose to delay the proceedings
by filing several manifestations with the trial court. Thus, they only have themselves to blame for the consequent loss of their property.
WHEREFORE, the petition is DENIED. The Resolutions of the Court of Appeals dated November 25, 1998 and February 26, 1999 in CA G.R. SP No. 49634 are
AFFIRMED. SO ORDERED.

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