CREDTRANS 2SR 3rd EXAM TSN PDF

CREDIT TRANSACTIONS | FROM THE LECTURES OF ATTY.
JAZZIE SARONA-LOZARE
February 2, 2016 (Tongo) to submit a certification from the Bureau of Forest

Development that the land is alienable and disposable.
PART IX: REALMORTGAGE & FORECLOSURE OF However, on October 29, 1981, said office issued a
REAL ESTATE MORTGAGE certificate attesting to the fact that the said property was
The civil code refers it as a real mortgage but it is more classified as timberland, hence not subject to disposition.
known as a real estate mortgage and is a contract where The loan application of respondent spouses was
a debtor secures to a creditor the fulfillment of a principal nevertheless eventually approved by DBP in the sum of
obligation special subjected to such security immovable P140,000.00, despite the aforesaid certification of the
property or real rights over the immovable property which
obligation shall be satisfied with the proceeds of the sale bureau, on the understanding of the parties that DBP woul
of the said property or rights in case the said obligation is work for the release of the land by the former Ministry of
not complied with at the time stipulated. Natural Resources.
A real estate mortgage is an accessory contract. In the To secure payment of the loan, respondent spouses
absence of a separate consideration, it will have the same executed a real estate mortgage over the land on March
consideration as the principal contract … as an accessory 17, 1982, which document was registered in the Registry
contract it cannot exist independently. Although the of Deeds pursuant to Act No. 3344. However, DBP did not
obligation thereby secured is incurred by a third person. release the entire amount of the loan ostensibly because
the release of the land from the then Ministry of Natural
It will be valid if the principal obligation is valid. And cannot Resources had not been obtained. On July 7, 1983,
be avoided on the ground of lack of consideration. respondent spouses, as plaintiffs, filed a complaint
against DBP in the trial court seeking the annulment of the
DBP vs CA subject deed of absolute sale on the ground that it
belongs to the lands of the public domain.
DEVELOPMENT BANK OF THE PHILIPPINES VS.
COURT OF APPEALS, CELEBRADA MANGUBAT DBP averred that the annulment of the sale and the return
AND ABNER MANGUBAT of the purchase price to respondent spouses would
redound to their benefit but would result in petitioner's
(G.R. No. 110053, October 16, 1995)
prejudice, since it had already released P118,540.00 to
FACTS: On April 27, 1965, Pacifico Chica mortgaged the the former while it would be left without any security for
land to DBP to secure a loan of P6,000.00. However, he theP140,000.00 loan and that in the remote possibility
defaulted in the payment of the loan, hence DBP caused that the land is reverted to the public domain, respondent
the extrajudicial foreclosure of the mortgage. In the spouses should be made to immediately pay, jointly and
auction sale held on September 9, 1970, DBP acquired severally, the total amount of P118,540.00 with interest.
the property as the highest bidder and was issued a RTC rendered judgment in favor of respondent spouses,
certificate of sale on September 17, 1970 by the sheriff. annulling the deed of absolute sale. CA affirmed.
The certificate of sale was entered in the Book of
ISSUE: [Main issues in this case]
Unregistered Property on September 23, 1970. Pacifico
Chica failed to redeem the property, and DBP (1) WON private respondent spouses Celebrada and
consolidated its ownership over the same. Abner Mangubat should be ordered to pay petitioner DBP
their loan obligation due under the mortgage contract
On October 14, 1980, respondent spouses offered to buy
executed between them and DBP. YES.
the property for P18,599.99. DBP made a counter-offer of
P25,500.00 which was accepted by respondent spouses. (2) WON petitioner should reimburse respondent spouses
The parties further agreed that payment was to be made the purchase price of the property and the amount of
within six months thereafter for it to be considered as cash P11,980.00 for taxes and expenses for the relocation
payment. On July 20, 1981, the deed of absolute sale, Survey. (must be qualified) DBP should reimburse the
which is now being assailed herein, was executed by DBP spouses for the purchase price but not for taxes and
in favor of respondent spouses. Said document contained expenses for recolaction.
a waiver of the seller's warranty against eviction.
HELD 1:
Thereafter, respondent spouses applied for an industrial
tree planting loan with DBP. The latter required the former
2 SANCHEZ ROMAN 1516: BATACAN, CABANGBANG, CALATRAVA, DAMALERIO, GEMENTIZA, JALA, ROMERO, TONGO 1
CREDIT TRANSACTIONS | FROM THE LECTURES OF ATTY. JAZZIE SARONA-LOZARE
Considering that neither party questioned the legality and to which the latter is supposed to have a good title, and,
correctness of the judgment of the court a quo, as in consequence of facts unknown alike to both parties, he
affirmed by respondent court, ordering the annulment of has no title at all, equity will cancel the transaction and
the deed of absolute sale, such decreed nullification of the cause the purchase money to be restored to the buyer,
document has already achieved finality. putting both parties in status quo.
Turning now to the issue of whether or not private Thus, on both local and foreign legal principles, the return
respondents should be made to pay petitioner their loan by DBP to respondent spouses of the purchase price, plus
obligation amounting to P118,540.00, we answer in the corresponding interest thereon, is ineluctably called for.
affirmative. However, despite that admission of respondent spouses’
list of damages as evidence, the Court agrees with
In its legal context, the contract of loan executed between petitioner that the same cannot constitute sufficient legal
the parties is entirely different and discrete from the deed basis for an award of P4,000.00 and P7,980.00 as
of sale they entered into. The annulment of the sale will reimbursement for land taxes and expenses for the
not have an effect on the existence and demandability of relocation survey, respectively. The list of damages was
the loan. One who has received money as a loan is bound prepared extrajudicially by respondent spouses by
to pay to the creditor an equal amount of the same kind themselves without any supporting receipts as bases
and quality. thereof or to substantiate the same. That list, per se, is
necessarily self-serving and, on that account, should have
The fact that the annulment of the sale will also result
been declared inadmissible in evidence as the factum
in the invalidity of the mortgage does not have an
probans.
effect on the validity and efficacy of the principal
obligation, for even an obligation that is unsupported In order that damages may be recovered, the best
by any security of the debtor may also be enforced by evidence obtainable by the injured party must be
means of an ordinary action. Where a mortgage is not presented. Actual or compensatory damages cannot be
valid, as where it is executed by one who is not the presumed, but must be duly proved, and so proved with a
owner of the property, or the consideration of the reasonable degree of certainty.
contract is simulated or false, the principal obligation
which it guarantees is not thereby rendered null and [Other Possible questions:]
void. That obligation matures and becomes
(1) Was the deed of sale void? YES. Considering that
demandable in accordance with the stipulations
neither party questioned the legality and correctness
pertaining to it.
of the judgment of the court a quo, as affirmed by
Under the foregoing circumstances, what is lost is respondent court, ordering the annulment of the deed
only the right to foreclose the mortgage as a special of absolute sale, such decreed nullification of the
remedy for satisfying or settling the indebtedness document has already achieved finality.
which is the principal obligation. In case of nullity, the
(2) Was there a contract of mortgage? NO, the fact of
mortgage deed remains as evidence or proof of a
personal obligation of the debtor, and the amount due annulment of the sale resulted in the invalidity of
to the creditor may be enforced in an ordinary themortgage, the subject property being classified as
personal action. timberland. Hence, DBP had no title to the property.
HELD 2: (3) Will the invalidity of the contract of mortgage affect the
principal loan obligation? NO, since it is an accessory
A contract which the law denounces as void is necessarily
contract.
no contract whatever, and the acts of the parties in an
effort to create one can in no wise bring about a change What was the subject matter of the mortgage?
of their legal status. The parties and the subject matter of The parcel of lot.
the contract remain in all particulars just as they did before Who was the seller? DBP
any act was performed in relation thereto. Buyer: sps mangubat
An action for money had and received lies to recover back Who is the mortgagor? SPS mangubat.
money paid on a contract, the consideration of which has What is the requirement for a valid mortgage?
failed. As a general rule, if one buys the land of another, 2085. Can you own something that is inalienable? No.
The mortgage is not valid. Other characteristics of real estate mortgage- it is

subsidiary and also unilateral. As the obligation is only on
So the mortgage was not valid due to the fact that the sale the part of the creditor who must free the property from
was annulled. Nevertheless the principal obligation is still encumbrance once the obligation is fulfilled.
in existence because a contract of mortgage is an
accessory contract. It can be declared as void without Kinds of mortgages
declaring as void the principal obligation.
1. Voluntary mortgage - as agreed upon by the parties
Here the annulment of the sale by DBP in favor of or constituted by the will of the owneror the party by which
spouses sps was declared null and void because the land it is created.
turns out to be a timber land and not subject to disposition.
The declaration of the nullity of the contract operates to 2. Legal mortgage- require by law to be executed in favor
restore things to the state of condition in which they were of certain persons
found before the execution. 3. Equitable mortgage (Art 1602) – Although it lacks the
The return by DBP to the spouses of the purchase price proper formalities or other requisites of a mortgage
plus interest is called for. However that contract is required by law, it nevertheless reveals the intention of the
different from the contract of loan executed by the parties parties to burden real properties as a security for a debt
wherein the DBP was the creditor and the spouses were and contains nothing impossible contrary to law.
the debtor. SORIANO VS GALIT
The said loan is different and discreet from the deed of MARCELO R. SORIANO vs. SPOUSES RICARDO and
sale they entered into. The annulment of the sale will not ROSALINA GALIT
effect on the existence and demandability of the loan. The
fact that the annulment of the sale will also result in the (G.R. No. 156295, September 23, 2003)
invalidity of the mortgage, cause again the spouses here
could not be considered as the owner thereof, they could FACTS: Respondent Ricardo Galit contracted a loan from
not foreclose, it does not have an effect on the validity and petitioner Marcelo Soriano amounting to P480,000.00.
efficacy of the principal obligation. For even an obligation This loan was secured by a REM over a parcel of land
that is unsupported by any security or in this case covered by OCT. No. 569. When respondent defaulted in
unsupported by a mortgage, may also be enforced by his obligation, Soriano filed a complaint for sum of money
means of ordinary action. against him with the RTC of Balanga City.
Where the mortgage is not valid where it is executed by Upon failure of the respondent spouses Galit to file their
one who is not the owne or when the consideration is answer, the trial court declared the spouses in default and
simulated or false, the principal obligation which it it thereafter rendered judgment in favor of petitioner
guarantees is not rendered thereby null and void. The Soriano ordering the respondents to pay. The judgment
obligation matures and becomes demandable in became final and executory. Accordingly, the trial court
accordance of the stipulation pertaining to it. issued a writ of execution in due course, by virtue of
which, Deputy Sheriff Renato E. Robles levied on the
Under this case what is only lost is the right to foreclose following real properties of the Galit spouses: (1) A parcel
the mortgage. But the indebtedness still remains. The of land covered by OCT No. T-569 (Homestead Patent
mortgage though remains as an evidence or proof of the No. 14692) situated in the Bo. of Tapulac, Orani, Bataan;
personal obligation of the debtor and the amount due may (2)STORE/HOUSE – CONSTRUCTED on Lot No. 1103
still be enforced in an ordinary personal action and not made of strong materials G.I. roofing situated at Centro I,
through foreclosure. Orani, Bataan; and (3)BODEGA – constructed on Lot
1103, made of strong materials, G.I. roofing, situated in
This is an effect of a mortgage being an accessory
Centro I, Orani, Bataan. On December 23, 1998,
contract. While it can be considered void in itself, it cannot
petitioner emerged as the highest and only bidder with a
affect the existence of the principal obligation. If the
bid price of P483,000.00.
principal obligation is null and void then necessarily
contract of mortgage is also considered as null and void. Thus, on February 4, 1999, Deputy Sheriff Robles issued
a Certificate of Sale of Execution of Real Property. On
April 23, 1999, petitioner caused the registration of the
“Certificate of Sale on Execution of Real Property” with by the parties in the controversy, much more so in this
the Registry of Deeds. case where the contents of a copy thereof subsequently
registered.
Ten months from the time the Certificate of Sale on
Execution was registered with the Registry of Deeds, ART. 415. The following are immovable property:
petitioner moved for the issuance of a writ of possession
which was granted by the RTC. This was, however, (1) Land, buildings, roads and constructions of all kinds
subsequently nullified by the Court of Appeals because it adhered to the soil.
included a parcel of land (OCT No. T-40785) which was xxxxxx
not among those explicitly enumerated in the Certificate
of Sale issued by the Deputy Sheriff, but on which stand (3) Everything attached to an immovable in a fixed
the immovables (the BODEGA and STORE/HOUSE) manner, in such a way that it cannot be separated
covered by the said Certificate. Petitioner contends that therefrom without breaking them material or deterioration
the sale of these immovables necessarily encompasses of the object;
the land on which they stand.
(4) Statues, reliefs, paintings or other objects for use or
ISSUES: ornamentation, placed in buildings or on lands by the
owner of the immovable in such a manner that it reveals
(1) WON the land on which the buildings levied upon in the intention to attach them permanently to the
execution is necessarily included. NO. tenements;
(2) WON the cert. of sale on execution of real property (5) Machinery, receptacles, instruments or implements
and the writ of possession are null and void despite the intended by the owner of the tenement for an industry or
fact that they enjoy the presumption of regularity being works which may be carried on in a building or on a piece
public documents. YES. of land, and which tend directly to meet the needs of the
said industry or works;
HELD:
(6) Animal houses, pigeon houses, beehives, fish ponds
(1) Art. 4151 of the Civil Code enumerates land and or breeding places of similar nature, in case their owner
buildings separately. This can only mean that a building has placed them or preserves them with the intention to
is, by itself, considered immovable. Thus, it has been held have them permanently attached to the land, and forming
that while it is true that a mortgage of land necessarily a permanent part of it; the animals in these places are
includes, in the absence of stipulation of the also included;
improvements thereon, buildings, still a building by
itself may be mortgaged apart from the land on which xxxxxx
it has been built. Such mortgage would be still a real (9) Docks and structures which, though floating, are
estate mortgage for the building would still be intended by their nature and object to remain at a fixed
considered immovable property even if dealt with place on a river, lake or for documentation purposes is
separately and apart from the land. being contested. No reason has been offered how and
In this case, considering that what was sold by virtue of why the questioned entry was subsequently intercalated
the writ of execution issued by the trial court was merely in the copy of the certificate of sale subsequently
the storehouse and bodega constructed on the parcel of registered with the Registry of Deeds. Absent any
land covered by Transfer Certificate of Title No. T-40785, satisfactory explanation as to why said entry was
which by themselves are real properties of respondents- belatedly inserted, the surreptitiousness of its inclusion
spouses, the same should be regarded as separate and coupled with the furtive manner of its intercalation casts
distinct from the conveyance of the lot on which they serious doubt on the authenticity of petitioner’s copy of the
stand. Certificate of Sale. Thus, it has been held that while a
public document like a notarized deed of sale is vested
(2) True, public documents by themselves may be with the presumption of regularity, this is not a guarantee
adequate to establish the presumption of their validity. of the validity of its contents.
However, their probative weight must be evaluated not in
isolation but in conjunction with other evidence adduced It must be pointed out in this regard that the issuance
of a Certificate of Sale is an end result of judicial
foreclosure where statutory requirements are strictly An incorrect title number together with a correct technical
adhered to; where even the slightest deviations description of the property to be sold and vice versa is
therefrom will invalidate the proceeding and the sale. deemed a substantial and fatal error which results in the
Among these requirements is an explicit enumeration invalidation of the sale.
and correct description of what properties are to be
sold stated in the notice. The stringence in the Subsequently including properties which shall not
observance of these requirements is such that an deemed explicitly mentioned therein for registration
incorrect title number together with a correct technical purposes under suspicious circumstances and acts of
description of the property to be sold and vice versa is fraud. They included the parcel of land covered by TCT
deemed a substantial and fatal error which results in the no 340785 which was not included during the public
invalidation of the sale. auction sale. Their defense that they included these
properties xxx dorsal portion of the copy of certificate of
The certificate of sale is an accurate record of what sale.
properties were actually sold to satisfy the debt. The
strictness in the observance of accuracy and correctness The argument that the land of each buildings therein is
in the description of the properties renders the necessary included, again has no mwritn. Article 415 of
enumeration in the certificate exclusive. Thus, your civil code enumerates lands and buildings
subsequently including properties which have not been separately. That means a building by itself is considered
explicitly mentioned therein for registration purposes an immovable.
under suspicious circumstances smacks of fraud. The While it is true that the mortgage of land necessarily
explanation that the land on which the properties sold is includes in the absence of the stipulation of the
necessarily included and, hence, was belatedly typed on improvements thereon, a building itself may be
the dorsal portion of the copy of the certificate mortgaged apart from the land which it has been built.
subsequently registered is at best a lame excuse Such mortgage would still be real estate mortgage for the
unworthy of belief. building is still considered immovable even if dealt
separately and apart from the land.
The appellate court correctly observed that there was a
marked difference in the appearance of the typewritten What was sold here by virtue of writ of execution was
words appearing on the first page of the copy of the merely OCT no 569 the store house and bodega
Certificate of Sale registered with the Registry of constructed on that land covered by TCT no 407085
Deeds[38] and those appearing at the dorsal portion which by themselves are real properties by the
thereof. respondent spouses and the same should be regarded as
separate and distinct from the conveyance of the lot from
Underscoring the irregularity of the intercalation is the which they stand.
clearly devious attempt to let such an insertion pass
unnoticed by typing the same at the back of the first page Art 2124. Only the following property may be the
instead of on the second page which was merely half- object if a contract of mortgage:
filled and could accommodate the entry with room to (1) Immovables;
spare. (2) Alienable real right in accordance with the
laws, imposed upon movables.
Here you have a valid real estate mortgage over a parcel Nevertheless, movables may be the object of a chattel
of land. Subsequently there was a writ of execution levied mortgage.
on the land, the store, house and bodega. Remember
your property on the enumeration of the different kinds of
Number 1 is immovable. You have to take note of Article
immovable. Different yung land itself from a building. So 415 of property as well as alienable real right in
in other words you could subject a real estate mortgage a accordance with the laws imposed upon movables.
building, bodega or warehouse excluding the land. Nevertheless, movables may be the object of a chattel
mortgage.
Now this is very important especially with regards to the
foreclosure of the real estate mortgage. In a real estate Alienable real rights are rights over immovable, the right
mortgage especially the sale thereof there must be an to use the property not the property itself but the right to
explicit enumeration and correct description of what use may be a subject of a mortgage. A real right over the
properties are to be sold as stated in the notice. property is nevertheless considered as a real property.
respondent bank and required petitioner to submit

These are the valid subject matter of mortgage. Notice the documents its:
word only in 2124. So this means the list in 2124 is
exclusive. If you have a movable it would be a pledge if 1) Audited Financial Statements for 1979 and 1980;
there is no delivery otherwise a chattel mortgage intended
by the parties. 2) Projected cash flow (cash in - cash out) for five (5)
years detailed yearly; and
Now take note article 2085… requisites of the ownership,
3) List of additional machinery and equipment and proof
future property cannot be an object of contract of
of ownership thereof.
mortgage. But the stipulation subjected to the mortgage
lien, properties which the mortgagor may subsequently On September 25, 1981, petitioner sent another letter
acquire , install or use in connection with real property addressed to PNB Vice-President Jose Salvador,
already mortgage belonging to a mortgagor is valid.
regarding his request for restructuring of his loans. He
MENDOZA VS CA offered respondent PNB the following proposals: 1) the
disposal his house and lot and a vacant lot in order to pay
DANILO D. MENDOZA, also doing business under the the overdue trust receipts; 2) capitalization and
name and style of ATLANTIC EXCHANGE conversion of the balance into a 5-year term loan payable
PHILIPPINES, vs. COURT OF APPEALS, PHILIPPINE semi-annually or on annual installments; 3) a new Two
NATIONAL BANK, FERNANDO MARAMAG, JR., Million Pesos (P2,000,000.00) LC/TR line in order to
RICARDO G. DECEPIDA and BAYANI A. BAUTISTA enable Atlantic Exchange Philippines to operate at full
capacity.
(G.R. No. 116710, June 25, 2001)
The petitioner testified that respondent PNB
FACTS: Petitioner Danilo D. Mendoza is engaged in the Mandaluyong Branch found his proposal favorable and
domestic and international trading of raw materials and recommended the implementation of the agreement.
chemicals. He operates under the business name Atlantic However, Fernando Maramag, PNB Executive Vice-
Exchange Philippines (Atlantic). Sometime in 1978 he President, disapproved the proposed release of the
was granted by respondent Philippine National Bank mortgaged properties and reduced the proposed new
(PNB) a 500,000.00 credit line and a 1,000,000.00 Letter LC/TR line to One Million Pesos (P1,000,000.00).
of Credit/Trust Receipt (LC/TR) line. Petitioner claimed he was forced to agree to these
changes and that he was required to submit a new formal
As security for the credit accommodations and for those
proposal and to sign two (2) blank promissory notes.
which may thereinafter be granted, petitioner mortgaged
to respondent PNB the following: 1) three (3) parcels of According to petitioner, respondent PNB approved his
land with improvements 2) his house and lot and 3) proposal. He further claimed that he and his wife were
several pieces of machinery and equipment in his Pasig asked to sign two (2) blank promissory note forms.
cocochemical plant. According to petitioner, they were made to believe that the
blank promissory notes were to be filled out by
Petitioner executed in favor of respondent PNB three (3)
respondent PNB to conform with the 5-year restructuring
promissory notes covering the Five Hundred Thousand
plan allegedly agreed upon.
Pesos (P500,000.00) credit line. Petitioner made use of
his LC/TR line to purchase raw materials from foreign Petitioner testified that respondent PNB allegedly
importers. contravened their verbal agreement by 1) affixing dates
on the two (2) subject promissory notes to make them
On March 9, 1981, he wrote a letter to respondent PNB
mature in two (2) years instead of five (5) years as
requesting for the restructuring of his past due accounts
supposedly agreed upon.
into a five-year term loan and for an additional LC/TR line
of Two Million Pesos (P2,000,000.00). According to the Upon their failure to make good of the said loans
letter, because of the shut-down of his end-user Respondent PNB extra-judicially foreclosed the real and
companies and the huge amount spent for the expansion chattel mortgages, and the mortgaged properties were
of his business, petitioner failed to pay to respondent bank sold at public auction to respondent PNB, as highest
his LC/TR accounts as they became due and bidder, for a total of Three Million Seven Hundred Ninety
demandable. PNB Mandaluyong replied on behalf of the
Eight Thousand Seven Hundred Nineteen Pesos and Fifty fact "immovables by destination" under Art. 415 (5) of the
Centavos (P3,798,719.50). Civil Code. It is an established rule that a mortgage
constituted on an immovable includes not only the land
ISSUE: WON the foreclosure sale was proper. but also the buildings, machinery and accessories
HELD: (The court found out that PNB did not categorically installed at the time the mortgage was constituted as well
agree to petitioner’s proposal to extend the credit line to as the buildings, machinery and accessories belonging to
five years.)To the substantive issue of mortgate. the mortgagor, installed after the constitution thereof.
Petitioner prays for the release of some of his movables
What are the movables here?
being withheld by respondent PNB, alleging that they
The machineries.
were not included among the chattels he mortgaged to
respondent bank. However, petitioner did not present any So will it be a valid subject of a real estate mortgage?
proof as to when he acquired the subject movables and The court ruled here, yes because the movables here are
hence it is not to be believe that the same were "after immovables by destination because it was attached to the
acquired" chattels not covered by the chattel and real property owned by the Mendoza.
estate mortgages.
May example na aquarium siya, meron siyang immovable
In asserting its rights over the subject movables, of movable so can it be considered as an immovable or
respondent PNB relies on a common provision in the two movable? Merong instance na mahulog siya sa
(2) subject Promissory Notes Nos. 127/82 and 128/82 paragraph 5 of 415, immovable by destination.
which states:
Here take note that respondent PNB asserts that those
In the event that this note is not paid at maturity or when movables, machineries and equipments here were infact
the same becomes due under any of the provisions immovables by destination under article 415(5) of CC. It
hereof, we hereby authorized the BANK at its option and is established rule that the mortgage constituted on the
without notice, to apply to the payment of this note, any immovable includes not only the land but also the
and all moneys, securities and things of value which may buildings, machineries and accessories installed at the
be in its hands on deposit or otherwise belonging to me/us time the mortgage is constituted as well as the buildings,
and for this purpose. We hereby, jointly and severally, machineries and accessories belonging to the mortgagor
irrevocably constitute and appoint the BANK to be our true installed after the constitution thereof.
Attorney-in-Fact with full power and authority for us in our
Here you still have a valid subject matter of a real estate
name and behalf and without prior notice to negotiate, sell
mortgage contract.
and transfer any moneys securities and things of value
which it may hold, by public or private sale and apply the Also notice here, a stipulation in the mortgage extending
proceeds thereof to the payment of this note. its scope and effect to after acquired properties is valid
and binding where the after acquired properties is in
It is clear, however, from the above-quoted provision of
renewal of or in substitution for goods on hand when the
the said promissory notes that respondent bank is mortgage was executed or is purchased with proceeds of
authorized, in case of default, to sell "things of value" the sale of such goods. However the petitioner did not
belonging to the mortgagor "which may be on its hands present any proof as to when the subject movables were
for deposit or otherwise belonging to me/us and for this acquired.
purpose." Besides, the petitioner executed not only a
chattel mortgage but also a real estate mortgage to
secure his loan obligations to respondent bank. February 5, 2016 (Damalerio)
A stipulation in the mortgage, extending its scope and We already started with Real Estate Mortgage. Take note
effect to after-acquired property is valid and binding where that it is accessory in nature.
the after-acquired property is in renewal of, or in
We have different Kinds of mortgages:
substitution for, goods on hand when the mortgage was 1) Voluntary/Conventional Mortgage
executed, or is purchased with the proceeds of the sale of 2) Legal Mortgage
such goods. More importantly, respondent bank makes a 3) Equitable Mortgage (Art. 1602)
valid argument for the retention of the subject movables.
Respondent PNB asserts that those movables were in
Last time we have emphasized the Objects of real estate The Credit Line Agreement stipulated that the loan would
mortgage: Movables and alienable real rights. Art. 2024 bear interest at the "prevailing PCI Bank lending rate" per
is clear, by the term “ONLY, it means that the list is annum on the principal obligation and a "penalty fee of
exclusive. three percent (3%) per month on the outstanding
amount."
The importance of your Property: being able to identify
which is an immovable or not. And to which we have To secure the payment of the loan, a Real Estate
emphasized that the building by itself is an immovable Mortgage over their 2 parcels of land in favor of PCI Bank
and, in fact, can be subject to a real estate mortgage, was executed. Spouses Viola made partial payments
separate from the land on which it stands. which totaled P 3,669,210.67; PCI Bank contends
however, that Spouses Viola made no further payments
The distinctions between a Pledge and a REM: since Nov. 24, 2000 despite demand they failed to pay
1) Pledge involves personal property; while a REM their outstanding obligation.
involves real property.
2) Pledge is a Real contract, wherein there is a Thus, PCI Bank extrajudicially foreclosed the mortgage
transfer of possession; however, in a REM, it is before the RTC and that the mortgaged properties were
not necessary that the mortgagee must be in sold at a public auction.
possession of the property mortgaged for the
validity of the said accessory contract. More than five months later or on October 8, 2003,
3) Under Pledge, the pledgee has the right to petitioners filed a complaint for annulment of foreclosure
receive the fruits; no such right exists in a REM, sale. Petitioners alleged:
unless otherwise stipulated.
4) In Pledge, the foreclosure is extrajudicial in  that "the foreclosure proceedings and auction sale
nature; in REM you will see that it may be judicial were null and void because the mortgage debt is only
or extrajudicial. P3,679,210.67 as of April 15, 2003, but the
mortgaged properties were sold to satisfy an inflated
Again, it is NOT required that the mortgagee be in and erroneous principal obligation of P4,783,254.69,
possession of the subject property. One’s status a plus 3% penalty fee per month or 33% per year and
mortgagee cannot be the basis of possession. As a 15% interest per year, which amounted to
general rule therefore, the mortgagor retains possession P14,024,623.22 as of September 30, 2002;"
of the property mortgaged as security for the payment of  that "the parties never agreed and stipulated in the
the sum borrowed from the mortgagee-creditor, because real estate mortgage contract" that the 15% interest
by the mortgage, the debtor merely subjects the property per annum on the principal loan and the 3% penalty
to a lien but ownership is NOT parted with. fee per month on the outstanding amount would be
covered or secured by the mortgage;
But it is not an essential requisite of the mortgage that  that assuming respondent could impose such interest
the property remains in the possession of the mortgagor. and penalty fee, the same are "exorbitant,
Therefore, it is still possible, by agreement between the unreasonable, iniquitous and unconscionable, hence,
parties, that possession transferred to the mortgagee must be reduced;" and that respondent is only
without altering the nature of the contract. allowed to impose the legal rate of interest of 12% per
annum on the principal loan absent any stipulation
Again, such transfer of possession is NOT necessary for thereon.
the perfection of the mortgage, but the parties can agree
that the possession of the property be transferred to the Respondent denied petitioners’ assertions, contending
mortgagee. that the absence of stipulation in the mortgage contract
securing the payment of 15% interest per annum on the
We have here the case of: principal loan, as well as the 3% penalty fee per month on
SPOUSES VIOLA vs EQUITABLE (2008) the outstanding amount, is immaterial since the mortgage
contract is "a mere accessory contract which must take its
FACTS: bearings from the principal Credit Line Agreement."
March 31, 1997 Spouses Leopoldo and Mercedita Viola
of Leo-Mers Commercial, Inc. obtained a loan through a The RTC upheld the position of the PCI Bank but reduced
credit line facility in the maximum amount of P the interest on the principal loan from 15% to 12% per
4,700,000.00 from PCI Bank. annum and the penalty fee per month on the outstanding
amount from 3% to 1.5% per month. Accordingly, the
court nullified the foreclosure proceedings and the "Penalty fee" is entirely different from "bank charges." The
Certificate of Sale subsequently issued, "without phrase "bank charges" is normally understood to refer to
prejudice" to the holding anew of foreclosure proceedings compensation for services. A "penalty fee" is likened to a
based on the "re-computed amount" of the indebtedness, compensation for damages in case of breach of the
"if the circumstances so warrant." obligation. Being penal in nature, such fee must be
specific and fixed by the contracting parties, unlike in the
ISSUE: present case which slaps a 3% penalty fee per month of
WON the mortgage contract also secured the penalty fee the outstanding amount of the obligation.
per month on the outstanding amount as stipulated in the
Credit Line Agreement? NO Moreover, the "penalty fee" does not belong to the
species of obligation enumerated in the mortgage
HELD: contract, namely: "loans, credit and other banking
A mortgage must "sufficiently describe the debt sought to facilities obtained from the Mortgagee, including the
be secured, which description must not be such as to interest and bank charges, the costs of collecting the
mislead or deceive, and an obligation is not secured by a same and of taking possession of and keeping the
mortgage unless it comes fairly within the terms of the mortgaged properties, and all other expenses to which the
mortgage. Mortgagee may be put in connection with or as an incident
to this mortgage . . ."
In the case at bar, the parties executed two separate
documents on March 31, 1997 – the Credit Line The court held, Indeed, a mortgage must sufficiently
Agreement granting the Client a loan through a credit describe the debt sought to be secured, which
facility in the maximum amount of P4,700,000.00, and the description must not be such as to mislead or deceive,
Real Estate Mortgage contract securing the payment and an obligation is not secured by a mortgage unless
thereof. Undisputedly, both contracts were prepared by it comes fairly within the terms of the mortgage. Under
respondent and written in fine print, single space. the rule of ejusdem generis, where a description of things
of a particular class or kind is "accompanied by words of
The Real Estate Mortgage contract states, a generic character, the generic words will usually be
“That for and in consideration of certain loans, credit and limited to things of a kindred nature with those particularly
other banking facilities obtained from the Mortgagee, the enumerated . . . " A penalty charge does not belong to
principal amount of which is (P4,700,000.00) Philippine the species of obligations enumerated in the
Currency, and for the purpose of securing the payment mortgage, hence, the said contract cannot be
thereof, including the interest and bank charges understood to secure the penalty.
accruing thereon...”
Regarding Respondent’s contention that absence of
The immediately-quoted provision of the mortgage stipulation for the penalty fee in the mortgage
contract does not specifically mention that, aside from the contract is of no consequence as the deed of
principal loan obligation, it also secures the payment of "a mortgage is merely an “accessory contract” that
penalty fee of three percent (3%) per month of the "must take its bearings from the principal Credit Line
outstanding amount to be computed from the day Agreement".
deficiency is incurred up to the date of full payment
thereon," which penalty as the above-quoted portion of Such absence is significant as it creates an ambiguity
the Credit Line Agreement expressly stipulates. between the two contracts, which ambiguity must be
resolved in favor of petitioners and against respondent
Since an action to foreclose "must be limited to the who drafted the contracts. Again, as stressed by the Court
amount mentioned in the mortgage" and the penalty fee in Philippine Bank of Communications:
of 3% per month of the outstanding obligation is not A mortgage and a note secured by it are deemed parts of
mentioned in the mortgage, it must be excluded from the one transaction and are construed together, thus, an
computation of the amount secured by the mortgage. ambiguity is created when the notes provide for the
payment of a penalty but the mortgage contract does
Regarding CA decision that the phrase "including the not. Construing the ambiguity against the petitioner, it
interest and bank charges" in the mortgage contract follows that no penalty was intended to be covered by
"refers to the penalty charges stipulated in the Credit the mortgage. Plainly, the petitioner can be as specific
Line Agreement" is unavailing. 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 Let’s proceed to Art. 2125.
including the penalty in the amount secured. Art. 2125.
In addition to the requisites stated in Article 2085, it
RTC decision AFFIRMED with MODIFICATION in that the is indispensable, in order that a mortgage may be
"penalty fee" per month of the outstanding obligation is validly constituted, that the document in which it
excluded in the computation of the amount secured by appears be recorded in the Registry of Property. If the
the Real Estate Mortgage executed by petitioners in instrument is not recorded, the mortgage is
respondent’s favor. nevertheless binding between the parties.
POLICY: A mortgage must sufficiently describe the debt The persons in whose favor the law establishes a
sought to be secured, which description must not be such mortgage have no other right than to demand the
as to mislead or deceive. An obligation is not secured by execution and the recording of the document in which
a mortgage unless it comes fairly within the terms of the the mortgage is formalized.
mortgage.
Notice here that Art. 2125 REQUIRES that the Deed of
So essentially, the penalty fee will just be excluded from REM or document be registered in the Registry of
the amount covered by the mortgage. Still, the debtors Property. What is the effect if the REM was not
here would still liable for the penalty, but it will not be registered? It will not affect 3rd persons.
covered by the mortgage. So in the foreclosure
proceedings, hindi kasali yung amount na yun.
What happened in the case of:
One of things that you should take note in a mortgage is TAN vs VALDEHUEZA (1975)
that:
- It must sufficiently describe the debt sought to be FACTS:
secured, which description must not be such as The parcel of land was the subject matter of the public
to mislead or deceive; and an obligation is not auction sale held on May 6, 1955 in Oroquieta, Misamis
secured by a mortgage unless it comes fairy Occidental, wherein the plaintiff was the highest bidder
within the terms of the mortgage. and as such a Certificate of Sale was executed by MR.
VICENTE D. ROA, who was then the Provincial Sheriff, in
Here the parties executed a Credit Line Agreement, favor of LUCIA TAN. Due to the failure of defendant
wherein there is a penalty fee of 3% per month, from the Arador Valdehueza to redeem the said land within the
date of deficiency up to the date of full payment. However, period of one year as being provided by law, ROA
the 3% penalty was not included in the Real Estate executed an ABSOLUTE DEED OF SALE in favor of
Mortgage. What we have there is, “...for the purpose of LUCIA TAN.
securing payment thereof, including interest and bank
charges…” Defendants ARADOR VALDEHUEZA and REDICULO
VALDEHUEZA have executed two documents of DEED
It was held that the term “bank charges” did not include OF PACTO DE RETRO SALE in favor of the plaintiff
the 3% penalty. Since an action to foreclose must be herein, LUCIA TAN of two portions of a parcel of land
limited to the amount of the mortgage, the penalty fee of which is described in the second cause of action with the
3% per month must be excluded from the computation of total amount of P1,500.00.
the amount secured by the mortgage. Penalty Fee is
different from Bank Charges, as bank charges is normally That from the execution of the Deed of Sale with right to
understood to refer to compensation for services. On the repurchase, defendants Arador Valdehueza and Rediculo
other hand, a penalty fee is a compensation for damages Valdehueza remained in the possession of the land; that
in case of breach; being penal in nature, such fee must be land taxes to the said land were paid by them.
specific and fixed by the contracting parties.
Tan filed a complaint for injunction on July 24, 1957
Again, what’s the effect here? The penalty fee would be against the Valdehuezas, to enjoin them "from entering
excluded from the computation, BUT the debtors would the above-described parcel of land and gathering the nuts
still be liable for the said amount. therein ...."
The first Deed of Pacto de Retro (dated August 5, 1955)

was not registered in the Registry of Deeds, while the 2nd
Deed of Pacto de Retro (dated March 15, 1955) was
registered. mortgage even if it’s not registered, there being no 3rd

parties involved.
The trial court declared Lucia Tan the absolute owner of
the property described in the REGISTERED deed of Take note that in the Old Civil Code, registration was
pacto de retro. And as regards the land covered by the necessary for the validity of the mortgage. However it I
UNREGISTERED deed of pacto de retro, the already clear under Art. 2125, even if the instrument is not
Valdehuezas were ordered to pay the plaintiff the amount recorded, the mortgage is nonetheless binding between
of P300 with legal interest of 6% from August 15, 1966, the parties. The fact that the mortgage is annotated or
the said land serving as guaranty of the said amount of registered is only as to affect 3rd persons. In the absence
payment; of such annotation or registration of the mortgage, 3 rd
persons dealing with the property are NOT bound by the
ISSUE: mortgage. Under the Torrens System, 3rd parties are
Was there a valid mortgage? YES charged only with the knowledge of those encumbrances
placed in the title, as well as their actual knowledge.
HELD:
The trial court treated the registered deed of pacto de Again, mortgage may be binding as between the parties,
retro as an equitable mortgage but considered the but not against 3rd persons in the absence of registration.
unregistered deed of pacto de retro "as a mere case of
simple loan, secured by the property thus sold under Notice that this is one of the differences between a REM
pacto de retro," on the ground that no suit lies to foreclose and a Pledge. The requirement in pledge in order to bind
an unregistered mortgage. It would appear that the trial 3rd persons is that it must be in a public instrument,
judge had not updated himself on law and jurisprudence; indicating the date of the pledge and the description of the
he cited, in support of his ruling, article 1875 of the old thing pledged. It is not required to be registered. But here
Civil Code and decisions of this Court circa 1910 and in a REM, the requirement is that it must be duly
1912. registered in the Registry of Deeds to bind 3rd persons.
Under article 1875 of the Civil Code of 1889, registration With regard to the last paragraph of Art. 2125, this applies
was a necessary requisite for the validity of a mortgage to Legal or Equitable mortgages:
even as between the parties, but under article 2125 of the “The persons in whose favor the law
new Civil Code (in effect since August 30,1950), this is no establishes a mortgage have no other right than to
longer so. demand the execution and the recording of the
document in which the mortgage is formalized.”
If the instrument is not recorded, the mortgage is
nonetheless binding between the parties. (Article 2125, So for example in a pacto de retro sale which is actually
2nd sentence). an Equitable Mortgage, the mortgagor can seek the
execution and recording of the documents to formalize the
The Valdehuezas having remained in possession of the mortgage. And considering that the intention of the parties
land and the realty taxes having been paid by them, the was to have the property mortgaged and not to sell it, the
contracts which purported to be pacto de retro mortgagee cannot appropriate the subject property.
transactions are presumed to be equitable mortgages, What he has is the right to have the execution and
whether registered or not, there being no third parties recording thereof, and he can also file an action to have
involved. the mortgage registered. (So both parties have this right.)
What was executed by the parties? 2 documents of pacto With regard to the perfection of a REM, you might have
de retro sale. However it appears that the defendants noticed that in the first part of the discussion of De Leon,
remain in possession of the land, and the taxes were paid the characteristics that were mentioned of a mortgage
by him. were: REAL, ACCESSORY, and SUBSIDIARY.
So what do you have here? It was shown that the intention When you say REAL, a contract is perfected by
of these documents of pacto de retro sale was to secure DELIVERY. But in a contract of mortgage under Art.
the obligation of the Valdehuezas, having remained in 2125, delivery is NOT necessary for its perfection. So
possession of the land and the realty taxes having paid dalawa nalang, it’s either Consensual or Formal/Solemn
by them. So these transactions purported to be pacto de contract. Now if you recall the case of Hechanova, it was
retro sale are presumed to be Equitable Mortgages, stated therein that:
applying Art. 1602 of the Civil Code. Here you have a valid
“No valid mortgage is constituted where the Deed parties. The registration only operates as a notice of the
of Mortgage is a mere private document, and therefore mortgage to others, but it does not add any validity, nor
not registered.” convert an invalid mortgage into a valid one.
However, if we take a look at the same case as well as Now we have the case of:
Art. 2125, even if this case held that being in a private STATE INVESTMENT vs CA (1996)
document, the mortgage is void, there’s a discussion that
the mortgagee may demand the reduction of the FACTS:
mortgage in a public instrument. On October 15, 1969, a contract to sell was executed by
Spouses Canuto and Ma. Aranzazu Oreta, and the Solid
Now if you say that it’s really void, diba when a contract is Homes, Inc. (SOLID), involving a parcel of land in Capitol
VOID, no rights can arise from it? So what can we deem Park Homes Subd., in Quezon City for a consideration of
from this one? Take a look again at Art. 2125. If the P 39,347.00.
instrument is not recorded, the instrument is nevertheless
binding between the parties. Upon signing of the contract, the spouses made payment
amounting to P 7,869.40, with the agreement that the
So here, as long as there is an instrument, then you balance shall be payable in monthly installments of P
already have a perfected contract of mortgage. So what 451.70, at 12% interest p.a.
we could say is that, it is a FORMAL contract; that it must
be, at the very least, IN WRITING, in order to bind the On November 4, 1976. SOLID executed several real
parties: the mortgagor and the mortgagee. estate mortgage contracts in favor of State Investment
Homes, Inc. (STATE) over its subdivided parcels of land,
However again, if you take a look at the cases or one of which is the subject lot. For failure of SOLID to
discussions of the provisions in the Civil Code, there’s no comply with its mortgage obligations contract, STATE
express provision or ruling that would really indicate that extrajudicially foreclosed the mortgaged properties
for a valid mortgage, it must be in writing, or that it is including the subject lot on April 6, 1983, with the
perfected by mere consent, or that there must be delivery. corresponding certificate of sale issued therefore to
STATE.
But try to summarize so far what we have discussed here,
at the very least we could say, based on Art. 2125, that it SOLID thru a MOA negotiated for the deferment of
must be in writing, in an instrument/document to bind the consolidation of ownership over the foreclosed properties
mortgagor and mortgagee. by committing to redeem the properties from STATE.
Thereafter, the spouses filed a complaint before the
Why wasn’t there much emphasis on this one? First, as HLURB, against SOLID and STATE for failure on the part
long as we have the right of the parties to demand the of SOLID to execute the necessary absolute deed of sale
execution and the recording of the document. Yun yung as well as to deliver the title to said property despite full
right na mabigay. And this is relevant, why? Because in payment of purchase price.
the absence of a proper document, of duly executing it
before a notary public, and of recording it in the Registry In defense, SOLID alleged that the obligation under the
of Deeds, hindi mo rin ma-foreclose. Okay? If you try to contract to sell has become so difficult that they be
foreclose it, and what you have is only oral or verbal, you released from the said obligation by substituting subject
cannot foreclose the property. So you must have some lot with another suitable residential lot from another
written document. And at the very least, that would subdivision, which they operate. STATE averred that
establish your right to demand the execution and unless SOLID pays the redemption price of P 125,195.00,
recording of the document to formalize the mortgage. it has a “right to hold on and not release the foreclosed
properties.” The OAALA rendered a decision ordering
Mortgage again is necessary in the sense that it is a STATE to execute a deed of conveyance in favor of the
security to the principal obligation. Why do you need this spouses, and SOLID to pay STATE the portion of its loan,
mortgage? So that in case there is default on the part of which corresponds to the value of the lot as collateral.
the debtor, you can foreclose it. Yun naman yung end
ditto diba. And you can foreclose it, again as long as there ISSUE:
is proper registration and notarization of the document. Who between the Spouses Oreta and STATE have better
right over the subject lot? (SPOUSES ORETA)
Now if the mortgage is NOT REGISTERED, but it is in a
PUBLIC INSTRUMENT, again it is binding between the HELD:
STATE's registered mortgage right over the property is

inferior to that of respondents-spouses' unregistered right. Our conclusion might have been different if the mortgagee
The unrecorded sale between respondents-spouses and were an ordinary individual or company without the
SOLID is preferred for the reason that if the original owner expertise of the petitioner in the mortgage and sale of
(SOLID, in this case) had parted with his ownership of the registered land or if the land mortgaged were some
thing sold then he no longer had ownership and free distance from the mortgagee and could not be
disposal of that thing so as to be able to mortgage it conveniently inspected. But there were no such
again. Registration of the mortgage is of no moment since impediments in this case. The facilities of the petitioner
it is understood to be without prejudice to the better right were not so limited as to prevent it from making a more
of third parties. careful examination of the land to assure itself that there
were no unauthorized persons in possession.
Petitioner asserts that a purchaser or mortgagee of land/s
covered under the Torrens System "is not required to do The above-enunciated rule should apply in this case as
more than rely upon the certificate of title for it is enough petitioner admits of being a financing institution. We take
that the purchaser or mortgagee examines the pertinent judicial notice of the uniform practice of financing
certificate of title without need of looking beyond such institutions to investigate, examine and assess the real
title." property offered as security for any loan application
especially where, as in this case, the subject property is a
As a general rule, where there is nothing in the certificate subdivision lot located at Quezon City, M.M. It is a settled
of title to indicate any cloud or vice in the ownership of the rule that a purchaser or mortgagee cannot close its eyes
property, or any encumbrance thereon, the purchaser is to facts which should put a reasonable man upon his
not required to explore further than what the Torrens Title guard, and then claim that he acted in good faith under
upon its face indicates in quest for any hidden defect or the belief that there was no defect in the title of the vendor
inchoate right that may subsequently defeat his right or mortgagor. Petitioner's constructive knowledge of the
thereto. This rule, however, admits of an exception as defect in the title of the subject property, or lack of such
where the purchaser or mortgagee, has knowledge of a knowledge due to its negligence, takes the place of
defect or lack of title in his vendor, or that he was aware registration of the rights of respondents-spouses.
of sufficient facts to induce a reasonably prudent man to Respondent Court thus correctly ruled that petitioner was
inquire into the status of the title of the property in not a purchaser or mortgagee in good faith; hence
litigation. petitioner cannot solely rely on what merely appears on
the face of the Torrens Title.
In this case, petitioner was well aware that it was dealing
with SOLID, a business entity engaged in the business of Notice here that State’s mortgage was registered.
selling subdivision lots. In fact, the OAALA found that at Nevertheless, the SC held that its registered mortgage
the time the lot was mortgaged, State Investment had was inferior to that of the Spouses’ unregistered right.
been aware of the lot's location and that the said lot
formed part of Capital Park/Homes Subdivision.” It was submitted here that if the original owner (Solid) has
parted with the ownership of the thing sold, then he no
Thus, we have to deviate from the general rule because longer had ownership. To those who had Sales, what was
of the failure of the petitioner in this case to take the the contract executed between Solid and Spouses Oreta?
necessary precautions to ascertain if there was any flaw It was a Contract to Sell. We already made a distinction in
in the title of the mortgage. The petitioner is an investment Sales that in a Contract to Sell, ownership is not yet
and financing corporation. We presume it is experienced transferred, It is subject to a condition which is the full
in its business. Ascertainment of the status and condition payment of the purchase price. In fact in this case, Solid
of properties offered to it as security for the loans it was being demanded by the Spouses to execute the
extends must be a standard and indispensable part of its necessary Deed of Sale. So although the SC held that
operations. Surely, it cannot simply rely on an Solid parted with the ownership, looking at the contract
examination of a Torrens certificate to determine what the itself, ownership was actually not yet transferred.
subject property looks like as its condition is not apparent Nevertheless, it was still NOT a valid mortgage because
in the document. The land might be in a depressed area. there is failure to comply with the 3rd requisite: FREE
There might be squatters on it. It might be easily DISPOSAL.
inundated. It might be an interior lot, without convenient
access. These and other similar factors determine the Even if they will assume that Solid still remains the owner
value of the property and so should be of practical of the subject property, it had no free disposal of the thing
concern to the petitioner.
so as to be able to mortgage it again. So you do not have

a valid mortgage. On October 24, 1994 the rural bank where she worked
cancelled its lien on Corpuz’s title, she having incurred no
Registration of the mortgage is of no moment. Wala liability to her employer. Without Corpuz’s knowledge and
siyang effect! It will NOT cure the invalidity of the consent, however, Natividad Alano, the rural bank’s
mortgage, since it is understood to be without prejudice to manager, turned over Corpuz’s title to Julita Camacho
the better right of 3rd parties. and Amparo Callejo.
As a general rule, when there is nothing in the Certificate Conniving with someone from the assessor’s office,
of Title to indicate any cloud or vice in the ownership of Alano, Camacho, and Callejo prepared a falsified deed of
the property, or any encumbrance thereon, the purchaser sale, making it appear that on February 23, 1995 Corpuz
is not required to explore further than what the Torrens sold her land to one "Mary Bondoc" for P50,000.00. They
Title, upon its face, indicates in quest for any hidden caused the registration of the deed of sale, resulting in the
defect or inchoate right that may subsequently defeat his cancellation of TCT 32815 and the issuance of TCT
right thereto. Here, when State entered into a mortgage 63262 in Bondoc’s name. About a month later or on
with Solid, nothing was indicated in the Title. March 27, 1995 the trio executed another fictitious deed
of sale with "Mary Bondoc" selling the property to the
But exception: as where the purchaser or mortgagee has spouses Rufo and Teresa Palaganas for
knowledge of a defect or lack of Title by the vendor, or only P15,000.00. This sale resulted in the issuance of
that he was aware of sufficient fact as to induce a TCT 63466 in favor of the Palaganases.
reasonably prudent man to inquire into the status of the
Title of the property in litigation. Nine days later or on April 5, 1995 the Palaganases
executed a deed of sale in favor of spouses Virgilio and
State Investment was well aware that it was dealing with Elena Songcuan for P50,000.00, resulting in the issuance
SOLID, a business entity engaged in the business of of TCT 63528. Finally, four months later or on August 10,
selling subdivision lots. In fact, at the time the lot was 1995 the Songcuans took out a loan of P1.1 million from
mortgaged, State Investment had been aware of the lot's petitioner Philippine National Bank (PNB) and, to secure
location and that it formed part of a subdivision. Since payment, they executed a real estate mortgage on their
State Investment is an investment and financing title. Before granting the loan, the PNB had the title
corporation, it cannot simply rely on an examination of a verified and the property inspected.
Torrens Certificate to determine what the subject property
looks like, as its condition is not apparent in the document. On November 20, 1995 respondent Corpuz filed, through
The land might be in a depressed area, there might be an attorney-in-fact, a complaint before the Dagupan
squatters on it, it might be inundated, or it might be an Regional Trial Court (RTC) against Mary Bondoc, the
interior lot without convenient access. Palaganases, the Songcuans, and petitioner PNB, asking
for the annulment of the layers of deeds of sale covering
So here, you have State Investment NOT being a valid the land, the cancellation of TCTs 63262, 63466, and
mortgagee of the property. A purchaser or mortgagee 63528, and the reinstatement of TCT 32815 in her name.
cannot close its eyes to facts which should put a
reasonable man on his guard, and then claim that he ISSUE:
acted in good faith under the belief that there was no Whether or not petitioner PNB is a mortgagee in good
defect in the title of the vendor or mortgagor. State is faith, entitling it to its lien on the title to the property in
clearly NOT a purchaser or mortgagee in good faith. dispute. NO
What do you mean by this Doctrine of Mortgagee in RULING:

Good Faith? What happened in the case of: Petitioner PNB points out that, since it did a credit
investigation, inspected the property, and verified the
PNB vs. CORPUZ clean status of the title before giving out the loan to the
Songcuans, it should be regarded as a mortgagee in good
FACTS: faith. PNB claims that the precautions it took constitute
On October 4, 1974 respondent Mercedes Corpuz sufficient compliance with the due diligence required of
delivered her owner’s duplicate copy of TCT 32815 to banks when dealing with registered lands.
Dagupan City Rural Bank as security against any liability
she might incur as its cashier. She later left her job and As a rule, the Court would not expect a mortgagee to
went to the United States. conduct an exhaustive investigation of the history of the
mortgagor’s title before he extends a loan. But petitioner Here, I don’t know what their system was, but it appears
PNB is not an ordinary mortgagee; it is a bank. Banks are that they were able to issue 3 different titles in a matter of
expected to be more cautious than ordinary individuals in 3 months. So that should have led PNB to be suspicious
dealing with lands, even registered ones, since the of the transaction. In fact, it was even aware that the
business of banks is imbued with public interest. It is of previous sales were only for P15,000 – P50,000, yet PNB
judicial notice that the standard practice for banks before appraised the value to around P700,000. So the
approving a loan is to send a staff to the property offered discrepancy of the value should have alerted PNB.
as collateral and verify the genuineness of the title to Anyone who deliberately ignores a significant fact that
determine the real owner or owners. would create suspicion in an otherwise reasonable person
cannot be considered as an innocent mortgagee for
One of the CA’s findings in this case is that in the course value.
of its verification, petitioner PNB was informed of the
previous TCTs covering the subject property. And the What happened in the case of:
PNB has not categorically contested this finding. It is CANLAS vs. CA (2000)
evident from the faces of those titles that the ownership of
the land changed from Corpuz to Bondoc, from Bondoc to FACTS:
the Palaganases, and from the Palaganases to the  August, 1982: Osmundo S. Canlas executed a
Songcuans in less than three months and mortgaged to Special Power of Attorney authorizing Vicente
PNB within four months of the last transfer. Mañosca to mortgage 2 parcels of land situated in BF
Homes Paranaque in the name of his wife Angelina
The above information in turn should have driven the PNB Canlas.
to look at the deeds of sale involved. It would have then  Subsequently, Osmundo Canlas agreed to sell the
discovered that the property was sold for ridiculously low lands to Mañosca for P850K.
prices: Corpuz supposedly sold it to Bondoc for  September 3, 1982: Mañosca mortgage to Atty.
justP50,000.00; Bondoc to the Palaganases for Manuel Magno the parcels of lands for P100K with
just P15,000.00; and the Palaganases to the Songcuans the help of impostors who misrepresented
also for justP50,000.00. Yet the PNB gave the property themselves as the Spouses Canlas.
an appraised value of P781,760.00. Anyone who  September 29, 1982: Mañosca was granted a loan by
deliberately ignores a significant fact that would create the respondent Asian Savings Bank (ASB)
suspicion in an otherwise reasonable person cannot be for P500K with the parcels of land as security and
considered as an innocent mortgagee for value. The with the help of the same impostors. The loan was
Court finds no reason to reverse the CA decision. left unpaid resulting in an extrajudicial foreclosure on
the lots.
Here, the mortgagee is a Bank. It is expected to be more  January 15, 1983: Canlas wrote a letter informing
cautious than ordinary individuals in dealing with lands, ASB that the mortgage was without their
even registered ones, since the business of banks is authority. He also requested the sheriff Contreras to
imbued with public interest. It is not sufficient for them to hold or cancel the auction. Both parties refused.
just look at the Title if it’s clean or without any annotation.  The spouses Canlas filed a case for annulment of
deed of real estate mortgage with prayer for the
It is of judicial notice that the standard practice for banks issuance of a writ of preliminary injunction
before approving a loan, is to send a staff to the property  RTC: restrained the sheriff from issuing a Certificate
offered as collateral and verify the genuineness of the of Sheriff’s Sale and annulled the mortgage
Title to determine the real owner/s thereof.  CA: reversed holding Canlas estopped for coming to
the bank with Mañosca and letting himself be
Here, PNB was informed of the previous titles covering introduced as Leonardo Rey
the subject property. Notice that from Corpuz up to
Songcuan, who mortgaged the property to PNB, the ISSUE:
transfers and titles were issued in a matter of less than 3 W/N the ASB had was negligent due to the doctrine of last
months. Mas mabilis pa nung 1995, ngayon it takes clear chance. YES
almost a year before a title is issued. If you purchase a
property and title will be transferred to your name, it takes HELD:
6 months to almost a year before you get hold of the title Article 1173. The fault or negligence of the obligor consist
in your name. in the omission of that diligence which is required by the
nature of the obligation and corresponds with the
circumstances of the persons, of the time and of the
place. When negligence shows bad faith, the provisions So the degree of diligence required of banks is more than
of articles 1171 and 2201, paragraph 2, shall apply. that of a good father of a family.
 The degree of diligence required of banks is more However, the bank in this case did not observe the
than that of a good father of a family required diligence in ascertaining or verifying the real
 not even a single identification card was exhibited by identity of the couple, who introduced themselves as
the said impostors to show their true identity Spouses Canlas. Not even a single identification card was
 acted simply on the basis of the residence certificates exhibited by the impostors to show their identity. What did
bearing signatures which tended to match the they present? Resident Certificate. Yun lang. Madali lang
signatures affixed on a previous deed of mortgage to man yan kunin. And then they just looked at it, oh same
Atty. Magno signature sa previous mortgage. But that is not sufficient.
 previous deed of mortgage did not bear the tax The bank obviously fell short of its responsibility to
account number of the spouses as well as the observe MORE THAN the diligence of a good father of a
Community Tax Certificate of Angelina Canlas family. The bank did not require the impostors to submit
additional proof of their true identity.
Doctrine of last clear chance
 where both parties are negligent but the negligent act In this case, the Doctrine of Last Clear Chance is
of one is appreciably later in point of time than that of applied, wherein the bank must suffer the resulting loss.
the other, or where it is impossible to determine
whose fault or negligence brought about the Doctrine of Last Clear Chance:
occurrence of the incident, the one who had the last Where both parties are negligent, but the negligent act of
clear opportunity to avoid the impending harm but one (the bank) is appreciably later in point of time than
failed to do so, is chargeable with the consequences that of the other (the spouses); or where it is impossible
arising therefrom to determine whose fault or negligence brought about the
 the antecedent negligence of a person does not occurrence of the incident, the one who had last clear
preclude recovery of damages caused by the opportunity to avoid the impending harm but failed to so,
supervening negligence of the latter, who had the last is chargeable with the consequences arising therefrom.
fair chance to prevent the impending harm by the
exercise of due diligence The rule is that, the antecedent negligence of a person
 Antecedent Negligence: Osmundo Canlas was does not preclude recovery of damages caused by the
negligent in giving Vicente Mañosca the opportunity supervening negligence of the latter. It cannot be denied
to perpetrate the fraud, by entrusting him the owner's that the bank has the last clear chance to prevent the
copy of the transfer certificates of title of subject fraud, by the simple expedient of faithfully complying with
parcels of land the requirements for banks to ascertain the identity of the
 Supervening Negligence: Failing to perform the persons transacting with them.
simple expedient of faithfully complying with the
requirements for banks to ascertain the identity of the Under the facts of this case, although Canlas was
persons transacting with them - ASB bears the loss undoubtedly negligent, it is the Bank who must suffer the
 Canlas went to ASB with Mañosca and he was loss. However, his negligence made him undeserving of
introduced as Leonardo Rey. He didn't an award of an attorney’s fees.
correct Mañosca. However, he did not know that the
lots were being used as a security for he was there to Settled is the rule that a mortgage is constituted only by
make sure that Mañosca pays his debt so he cannot the Absolute Owner. That is an Art. 2085 requirement. A
be estopped from assailing the validity of the mortgage constituted by an impostor is therefore VOID.
mortgage
 But being negligent in believing the misrepresentation TAKE NOTE:
by Mañosca that he had other lots and that the lot
were not to be used as a security, Canlas was Doctrine of Mortgagee in Good Faith:
negligent and undeserving of Attorney's fees. Mortgagee has the right to rely in good faith on the
 the contract of mortgage sued upon was entered into Certificate of Title of the mortgagor of the property given
and signed by impostors who misrepresented as security, and in the absence of any fact that may
themselves as the spouses Osmundo Canlas and arouse suspicion, he has no obligation to undertake
Angelina Canlas = complete nullity further investigation.
All persons dealing with a property covered by a Torrens due diligence, it cannot be accorded with the
Certificate of Title, as buyers or mortgagees, are not status of a mortgagee in good faith.
required to go beyond what appears on the face of the
title. However, this does not apply when the title is still in Now, registration of a mortgage. Once the mortgage has
the name of the rightful owner and we have a mortgagor been signed in due form, then the mortgagee is entitled to
who is a different person pretending to be the owner. its registration as a matter of right.
Exceptions to this doctrine: Q: What do you mean by that? Registration is a matter

1) The purchaser/mortgagee has knowledge of a of right?
defect or lack of title of the vendor, or when the
mortgagee does not directly deal with the A: When we say registration is a matter of right,
registered owner of the property registration does not pass upon the validity of a mortgage
2) The purchaser/mortgagee was aware of sufficient but it is only registered just to affect third persons.
facts to induce a reasonably prudent man to
inquire into the status of the property in litigation So what happened in the case of Agricultural vs Yusay?
3) When the purchase/mortgagee is a bank or
AGRICULTURAL CREDIT COOPERATIVE
financing institution, it is required to look further
ASSOCIATION OF HINIGARAN vs. ESTANISLAO
than what appears on the face of the title, as it is
YULO YUSAY, ET AL.
expected to exercise greater care and prudence.
If it failed to observe due diligence, it cannot be
FACTS: July 20, 1952, Rafaela Yulo executed in favor of
accorded the status of a bona fide mortgagee.
the movant a mortgage for P33,626.29, due from her, her
mother, sisters, brothers, and others, which amount she
February 9, 2016 (Calatrava)
assumed to pay to the movant. A motion was presented
Ok, so let us continue with Real Estate Mortgage. to the court by the movant demanding the surrender of the
owner's duplicate certificate of title that he may annotate
So last meeting we have discussed the Doctrine of said mortgage at the back of the certificate. Estanislao
Mortgagee in Good Faith as discussed in the cases. This Yusay, a part owner of the lot, opposed the petition on the
doctrine states that the mortgagee has the right to rely in ground that he is owner of a part of the property in
good faith on the certificate of title of the mortgagor of the question; that the granting of the motion would operate to
property given as security and in the absence of any sign his prejudice, as he has not participated in the mortgage
cited in the motion; that Rafaela Yulo is dead; that the
that might arouse suspicion, such mortgagee has no
motion is not verified and movant's rights have lapsed by
obligation to undertake further investigation. All persons
prescription. Finally it is argued that his opposition raises
dealing with the property covered by a Torrens Certificate a controversial matter which the court has no jurisdiction
of Title as buyers or mortgagees are not required to go to pass upon. Margarita, Maria, Elena and Pilar, all
beyond what appears in the face of the title. surnamed Yulo, joined the oppositor Estanislao Yusay,
raising the same objections interposed by Yusay.
However take note of the exceptions:
1. Purchaser or mortgagee has knowledge of the The existence of the mortgage is not disputed, and neither
defect or lack of title in the vendor. So even if the is the fact that the mortgagor Rafaela Yulo is part owner
of Lot No. 855 of the Cadastral Survey of Pontevedra. The
title is clean, but in actual knowledge, you are not
oppositors do not dispute that she is such a part owner,
a mortgagee in good faith; and their main objection to the petition is that as part
2. Also when the mortgagee has not directly deal owners of the property, the annotation of the mortgage on
with the registered owner of the property; the common title will affect their rights.
3. When the mortgagee was aware of sufficient
facts to induce a reasonably prudent man to ISSUE: WON as part owners of the property, the
inquire about the status of the property in annotation of the mortgage on the common title will affect
litigation; their (Yusay) rights.
4. Where the purchaser or the mortgagee is a bank
or financing institution, it is required to look further RULING: The court held that even if the ownership of the
than what appears in the face of the title. It is deceased Rafaela Yulo over the portion of the lot in
expected to exercise greater care and prudence, question and the validity of the mortgage are disputed,
such invalidity of the mortgage is no proof of the non-
so not just ordinary diligence. If it failed to observe
existence of the mortgage nor a ground for objecting to its
registration, citing the case of Register of Deeds of Manila Q: Now in this case, it was emphasized that
vs. Maxima Tinoco Vda. de Cruz, et, al., 95 Phil., 818; 53 registration is a ministerial act, what do you mean by
Off. Gaz., 2804. that?
A: When we say ministerial, the person accepting the
In his Brief before this Court, counsel for appellants argue order of registration does not have the discretion to
that the mortgage sought to be registered was not identify if such application is valid or not. All he has to do
recorded before the closing of the intestate proceedings is to register the mortgage without questioning if it is valid
of the deceased mortgagor, but was so recorded only four or not.
months after the termination of said proceedings, so that
the claim of movant has been reduced to the character of AGRICULTURAL vs YUSAY: So take note of this.
a mere money claim, not a mortgage, hence the mortgage Registration is a mere ministerial act in which a deed,
may not be registered. In the first place, as the judge contract or instrument sought to be inscribed in the
below correctly ruled, the proceeding to register the records of the Office of the Register of Deeds and
mortgage does not purport to determine the supposed annotated at the back of the certificate of title covering the
invalidity of the mortgage or its effect. Registration is a land subject of the deed, contract or instrument. So in
mere ministerial act by which a deed, contract or
other words, the ROD here does not exercise discretion.
instrument is sought to be inscribed in the records of the
Or does not exercise discretion when a document,
Office of the Register of Deeds and annotated at the back
of the certificate of title covering the land subject of the mortgage for example is submitted to her office for
deed, contract or instrument. registration. All she has to do is to check whether the
requirements have been complied with. 1, mortgage was
The registration of a lease or mortgage, or the entry of a duly notarized; and 2, proper fees were paid. While he
memorial of a lease or mortgage on the register, is not a would not refuse to have the property registered just
declaration by the state that such an instrument is a valid because another party is questioning said mortgage. The
and subsisting interest in land; it is merely a declaration proper action is to file in court a case for the nullity of the
that the record of the title appears to be burdened with the mortgage document and the cancellation of the
lease or mortgage described, according to the priority set annotation in the title with the ROD.
forth in the certificate.
The registration of a lease or mortgage or the entry of a
The mere fact that a lease or mortgage was registered memorial of a lease or mortgage on the register, is not a
does not stop any party to it from setting up that it now declaration by the state that such an instrument is a valid
has no force or effect. (Niblack, pp. 134-135, quoted in and subsisting interest in land; it is merely a declaration
Francisco Land Registration Act, l950 ed., p. 348.) that the record of the title appears to be burdened with the
lease or mortgage described, according to the priority set
The court below, in ordering the registration and
forth in the certificate. The mere fact that a lease or
annotation of the mortgage, did not pass on its invalidity
or effect. As the mortgage is admittedly an act of the mortgage was registered does not stop any party to it from
registered owner, all that the judge below did and could setting up that it now has no force or effect. Again, file a
do, as a registration court, is to order its registration and case in court.
annotation on the certificate of title covering the land
The court here did not pass on its invalidity or effect when
mortgaged. By said order the court did not pass upon the
effect or validity of the mortgage — these can only be it ordered the registration and annotation of the mortgage.
determined in an ordinary case before the courts, not To order its registration, all the judge below could do was
before a court acting merely as a registration court, which to order its registration and annotation on the certificate of
did not have the jurisdiction to pass upon the alleged title covering the land mortgaged. Again, the court did not
effect or validity. pass upon the effect or validity of the mortgage.
Wherefore, the order appealed from is hereby affirmed, In fact, recall the case of State Investment, diba we said
with costs against oppositors-appellants. So ordered. that the mortgagee’s right or the mortgage therein was
registered, nevertheless such registered mortgage was
Q: What is the issue here? considered inferior to the buyer’s unregistered right for the
A: The issue in this case is W/N Registration will pass reason that there was no compliance with Article 2085-
upon the validity of said mortgage. ownership or there was no free disposal. So registration
is of no moment since it is understood to be without
prejudice to the right of third parties.
Q: Now, with regard to properties, conjugal properties On 29 June 2001, the trial court rendered its Decision in
or properties subject to the absolute community of favor of petitioners. The trial court declared that Aguete
spouses, what is the requirement for a valid mortgage did not sign the loan documents, did not appear
of these properties? before the Notary Public to acknowledge the
execution of the loan documents, did not receive the
A: It will depend if the marriage was before or after the loan proceeds from PNB, and was not aware of the
institution of the Family Code. If it is before, if no consent loan until PNB notified her in 14 August 1978 that she and
was obtained, and there was a mortgage in the property, her family should vacate the mortgaged property because
it will be considered merely voidable. But after the Family of the expiration of the redemption period. Under the Civil
Code, it will be considered void. Code, the effective law at the time of the transaction, Ros
could not encumber any real property of the conjugal
What happened in the case of Ros vs PNB? partnership without Aguete’s consent. Aguete may,
during their marriage and within ten years from the
JOE A. ROS and ESTRELLA AGUETE vs. PHILIPPINE transaction questioned, ask the courts for the
NATIONAL BANK - LAOAG BRANCH annulment of the contract her husband entered into
G.R. No. 170166 (April 6, 2011) without her consent, especially in the present case
where her consent is required.
FACTS: On January 13, 1983, spouses Jose A. Ros and
Estrella Aguete filed a complaint for the annulment of the On 17 October 2005, the appellate court rendered its
Real Estate Mortgage and all legal proceedings taken Decision and granted PNB’s appeal. The appellate court
thereunder against PNB, Laoag Branch before the Court reversed the trial court’s decision, and dismissed
of First Instance, Ilocos Norte. petitioners’ complaint.
The averments in the complaint disclosed that plaintiff- The appellate court stated that the trial court concluded
appellee Joe A. Ros obtained a loan of P115,000.00 from forgery without adequate proof. The appellate court
PNB Laoag Branch on October 14, 1974 and as security declared that Aguete affixed her signatures on the
for the loan, plaintiff-appellee Ros executed a real estate documents knowingly and with her full consent.
mortgage involving a parcel of land – Lot No. 9161 of the
Cadastral Survey of Laoag, with all the improvements
thereon described under Transfer Certificate of Title No. Assuming arguendo that Aguete did not give her
T-9646. consent to Ros’ loan, the appellate court ruled that
the conjugal partnership is still liable because the
Upon maturity, the loan remained outstanding. As a loan proceeds redounded to the benefit of the family.
result, PNB instituted extrajudicial foreclosure The records of the case reveal that the loan was used for
proceedings on the mortgaged property. After the lapse the expansion of the family’s business. Therefore, the
of one (1) year without the property being redeemed, the debt obtained is chargeable against the conjugal
property was consolidated and registered in the name of partnership.
PNB, Laoag Branch on August 10, 1978.
ISSUE: Whether or not the real estate mortgage was
Claiming that she has no knowledge of the loan obtained valid? YES
by her husband nor she consented to the mortgage
instituted on the conjugal property – a complaint was filed HELD: The Civil Code was the applicable law at the time
by Estrella Aguete to annul the proceedings pertaining to of the mortgage. The subject property is thus considered
the mortgage, sale and consolidation of the property – part of the conjugal partnership of gains, as provided
interposing the defense that her signatures affixed on the under Articles 153, 160, 161, 166 and 173 of the Civil
documents were forged and that the loan did not redound Code.
to the benefit of the family.
There is no doubt that the subject property was acquired
In its answer, PNB prays for the dismissal of the complaint during Ros and Aguete’s marriage. There is also no doubt
for lack of cause of action, and insists that it was plaintiffs- that Ros encumbered the subject property when he
appellees’ own acts of omission/connivance that bar them mortgaged it for P115,000.00. PNB Laoag does not doubt
from recovering the subject property on the ground of that Aguete, as evidenced by her signature, consented to
estoppel, laches, abandonment and prescription. Ros’ mortgage to PNB of the subject property. On the
other hand, Aguete denies ever having consented to the
loan and also denies affixing her signature to the the family cannot be deemed to be his exclusive and
mortgage and loan documents. private debts.
The husband cannot alienate or encumber any If the husband himself is the principal obligor in the
conjugal real property without the consent, express contract, i.e., he directly received the money and services
or implied, of the wife. Should the husband do so, to be used in or for his own business or his own
then the contract is voidable. Article 173 of the Civil profession, that contract falls within the term "x x x x
Code allows Aguete to question Ros’ encumbrance of obligations for the benefit of the conjugal partnership."
the subject property. Annulment will be declared only Here, no actual benefit may be proved. It is enough that
upon a finding that the wife did not give her consent. the benefit to the family is apparent at the signing of the
In the present case, we follow the conclusion of the contract. From the very nature of the contract of loan or
appellate court and rule that Aguete gave her consent to services, the family stands to benefit from the loan facility
Ros’ encumbrance of the subject property. or services to be rendered to the business or profession
of the husband. It is immaterial, if in the end, his business
The documents disavowed by Aguete are acknowledged or profession fails or does not succeed. Simply stated,
before a notary public, hence they are public where the husband contracts obligations on behalf of
documents. Every instrument duly acknowledged the family business, the law presumes, and rightly so,
and certified as provided by law may be presented in that such obligation will redound to the benefit of the
evidence without further proof, the certificate of conjugal partnership.
acknowledgment being prima facie evidence of the
execution of the instrument or document involved. Thus, Ros' loan redounded to the benefit of the family and
The execution of a document that has been ratified before thus, the debt is chargeable to the conjugal partnership.
a notary public cannot be disproved by the mere denial
of the alleged signer. PNB was correct when it stated Q: First, was there really a forgery?
that petitioners’ omission to present other positive A: No. It was not proven that there was forgery because
evidence to substantiate their claim of forgery was fatal to what is executed here was a notarized document thereby,
petitioners’ cause. Petitioners did not present any according to the court it enjoys the presumption of
corroborating witness, such as a handwriting expert, who regularity. And it needs clear and convincing evidence in
could authoritatively declare that Aguete’s signatures order to overcome it. In this case, Estrella did not provide
were really forged. any evidence at all.
Q: Assuming there was no consent on the part of the
A notarized document carries the evidentiary weight wife, what was the effect as to the mortgage?
conferred upon it with respect to its due execution, A: In this case, the marriage was celebrated before the
and it has in its favor the presumption of regularity Family Code, so the Court here applied Article 173 of the
which may only be rebutted by evidence so clear, old Civil Code where it states that the mortgage was
strong and convincing as to exclude all controversy merely voidable. Hence, it is valid unless annulled.
as to the falsity of the certificate. Absent such, the
presumption must be upheld. ROS vs PNB: So again take note, your provisions in the
Family Code as well as the Civil Code. If you discovered
Ros himself cannot bring action against PNB, for no therein, the consent of the other spouse, disposition and
one can come before the courts with unclean hands. or encumbrance, so hindi lang sale, including mortgage
In their memorandum before the trial court, petitioners since it is covered with the term encumbrance. So if it is
themselves admitted that Ros forged Aguete’s covered by the Family Code, what is provided?
signatures. Disposition or encumbrance or acts of administration do
not include disposition or encumbrance without authority
The application for loan shows that the loan would be
of the court or the written consent of the other spouse. In
used exclusively "for additional working [capital] of buy &
the absence of such authority or consent, the disposition
sell of garlic & virginia tobacco." In her testimony, Aguete
confirmed that Ros engaged in such business, but or encumbrance shall be void. So that is in the Family
claimed to be unaware whether it prospered. Aguete was Code.
also aware of loans contracted by Ros, but did not know
But under the facts of this case of Ros vs PNB, it was the
where he "wasted the money." Debts contracted by the
Civil Code that was applicable at the time of the mortgage.
husband for and in the exercise of the industry or
profession by which he contributes to the support of Wherein the husband cannot alienate or encumber any
conjugal real property without the consent, express or
implied of the wife. Should the husband do so, the mortgage follows the property wherever it goes and
contract is voidable. Meaning valid until annulled. subsists notwithstanding the changes in ownership,
Annulment will be declared only upon the finding that the wherein the personality of the owner is disregarded.
wife did not give her consent. However, under the facts of Whoever subsequently acquires the property carries with
this case, the documents were acknowledged before a it the obligation to observe the mortgage if the mortgage
notary public, public documents, they have the prima facie is registered. So what do we mean by this? It means that,
presumption of valid execution thereof and cannot be since a mortgage is merely a lien or encumbrance on the
disproved by the denial of the alleged signer. So the wife property, the owner still has the right to alienate or sell the
here was not able to prove that here signature was forged subject property. But, for the mortgagee to have a better
other than her mere denial. right as against a subsequent purchaser, he must have
registered his mortgage. So even if it will be sold to
Also take note here that the husband cannot bring an another person, if the debtor fails to pay his obligation the
action against PNB because no one comes to court with property can still be foreclosed. As all subsequent
unclean hands being a party to the said contract. In their purchaser of the property must respect the mortgage,
memorandum, petitioners themselves admitted that it was again, as long as the mortgage is registered. Or if not, the
the husband who forged the signature. subsequent buyer must know of its existence.
And also take note as to whether it redounded to the So again, what is the effect if the debtor fails to pay and
benefit of the family, it was held by the Court that the the mortgaged property was sold to a third person? If you
husband was engaged in the buy and sell of garlic and have registered the mortgage, you can still foreclose it.
Virginia tobacco. And that was the purpose of the loan, The subsequent buyer, the now present owner, cannot
additional working capital of that business. The wife assail that I am now the owner, you cannot foreclose the
claimed that she was unaware whether it prospered, but property anymore. No, because your right as a mortgagee
she was also aware that the loans were contracted by is a real right, it attaches to the property. Not to the debtor,
Ros, the husband but did not know where to use or not to the mortgagor. So what does that mean? The fact
wasted the money. Debts contracted by the husband for that ownership has been transferred, does not preclude
and in the exercise of the industry or profession by which the foreclosure of the mortgage. However take note that,
he contributes to the support of the family cannot be the subsequent purchaser of course would not be liable
deemed to be his exclusive and private debts. for any deficiency. Kasi sa kanila naman, they have a
So also take note that, for example if the mortgage is better right as to its ownership. Pero is not a party to the
found to be void under the Family Code because the wife principal obligation, he is not a party to the mortgage. So
did not give her written consent, what is considered void in case there is a deficiency, the subsequent purchaser
is merely the mortgage, not the principal obligation. cannot be held liable. Sino ang habulin? Of course yung
Where a mortgage is not valid, the principal obligation principal debtor. Unles of course, that subsequent buyer
which it guarantees is not necessarily rendered null and gave consent or there is a novation wherein he assumed
void. As what is lost is only the right to foreclose the the obligation of the principal debtor. Or entered into a
mortgage and the mortgage deed remains as an evidence contract of guaranty or surety wherein he himself
of personal obligation. guaranteed the personal obligation of the debtor. Rather,
ang maiwan na lang na right is the right that is available
Now, Article 2126: to the mortgagee is to foreclose the mortgage. Again, sold
the property in a public auction to satisfy the
Art. 2126. The mortgage directly and immediately indebtedness.
subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of Article 2127:
the obligation for whose security it was constituted.
(1876) Art. 2127. The mortgage extends to the natural
accessions, to the improvements, growing fruits, and
Remember that a registered mortgage creates a real right the rents or income not yet received when the
as distinguished from a personal right. When you say a obligation becomes due, and to the amount of the
real right, this is a right in rem, inseparable from the party indemnity granted or owing to the proprietor from the
and enforceable against the whole world. So the insurers of the property mortgaged, or in virtue of
mortgage is attached to the property itself and the expropriation for public use, with the declarations,
amplifications and limitations established by law, Like for example, you mortgage a grocery store including
whether the estate remains in the possession of the the inventory therein. So pwede yan siya subject sa
mortgagor, or it passes into the hands of a third mortgage including the inventory. But remember if it is a
person. (1877) grocery store, i-replenish mo diba? So even if at the time
the obligation fell due, iba na yung nandiya na stocks it
So this is another provision in the New Civil Code which would still be covered if what was agreed upon by the
shows that the mortgage is again inseparable from the parties is it would include these after-acquired properties.
property. Now 2127 explains to what is the extent of the Such stipulation is not unlawful or immoral.
mortgage. Remember that from the time the obligation
becomes due and the debtor fails to pay, that is the time Now, also take note that we have this concept of a dragnet
that after demand is made and the debtor still fails to pay, or a blanket mortgage clause.
the property may now be foreclosed. The mortgage
Q: What is this dragnet clause?
extends to all the accessions, improvements, growing
fruits and rents or income, as well as to the proceeds of A: Is one which is specifically phrased to subsume all
the insurance should the property be destroyed, or if the debts of past and future origins. Such clauses are
property is expropriated, to the extent of the value of the carefully scrutinized and strictly construed. Mortgages of
just compensation. If the fruits were already harvested this character enable the parties to provide continuous
before, this would not be part of the mortgage. But if they dealings, the nature or extent of which may not be known
are still attached to the property when the obligation or anticipated at the time, and they avoid the expense and
becomes due, they form part of the mortgage. Sounds inconvenience of executing a new security on each new
familiar? Again, your provisions in Property. transaction. A dragnet clause operates as a convenience
and accommodation to the borrowers as it makes
If it is expropriated, the mortgage continues upon the just
available additional funds without their having to execute
compensation. If you want to exclude these accessions,
additional security documents, thereby saving time,
improvements or growing fruits, then you agree, expressly
travel, loan closing costs, costs of extra legal services,
stipulated between the mortgagor and the mortgagee.
recording fees, et cetera. (lifted from full text)
Otherwise, the following are deemed included:
PRODUCERS BANK OF THE PHILIPPINES vs.
1. New paintings; EXCELSA INDUSTRIES, INC.
2. Fruits except for those collected before the G.R. No. 152071 (May 8, 2009)
obligation falls due or those removed and stored
when it falls due; FACTS: Respondent Excelsa Industries, Inc. is a
3. Accrued and unpaid rents, by accrued, we mean manufacturer and exporter of fuel products, particularly
charcoal briquettes, as an alternative fuel source.
those already earned but not yet received;
Sometime in January 1987, respondent applied for a
4. Buildings and machineries belonging to the
packing credit line or a credit export advance with
debtor-mortgagor installed on a mortgaged sugar petitioner Producers Bank of the Philippines, a banking
central. This should be familiar to you, one of the institution duly organized and existing under Philippines
cases in property law. All objects or materials laws. The application was supported by Letter of Credit
permanently attached to the mortgaged building No. M3411610NS2970 dated 14 October 1986. Kwang Ju
although they have been placed after the Bank, Ltd. of Seoul, Korea issued the letter of credit
execution of the mortgage; through its correspondent bank, the Bank of the Philippine
5. Another instance, if a more costly building Islands, in the amount of US$23,000.00. T.L. World
erected in place of a mortgaged building which Development Corporation, who was the original
was torn down by the debtor. beneficiary of the letter of credit, transferred to
respondent all its rights and obligations under the said
Now you also have to take note that we have what we call letter of credit.
after-acquired property which was mentioned in 1 of the Petitioner approved respondent’s application for a
cases. If there is a stipulation that the mortgage would packing credit line in the amount of P300,000.00, of which
cover after-acquired properties, the stipulation is valid and about P96,000.00 in principal remained outstanding.
common. Especially, including those that are perishable Respondent executed the corresponding promissory
notes evidencing the indebtedness.
or subject to wear and tear and then will be subsequently
replaced with others.
Prior to the application for the packing credit line,

respondent had obtained a loan from petitioner in the form Petitioner demanded from respondent the payment of the
of a bill discounted and secured credit accommodation in peso equivalent of the export documents, plus interest
the amount of P200,000.00, of which P110,000.00 was and other charges, and also of the other due and unpaid
outstanding at the time of the approval of the packing loans. Due to respondent’s failure to heed the demand,
credit line. The loan was secured by a real estate petitioner moved for the extrajudicial foreclosure on the
mortgage dated 05 December 1986 over respondent’s real estate mortgage over respondent’s properties.
properties.
At the public auction held on 05 January 1988, the Sheriff
The real estate mortgage contained the following of Antipolo, Rizal issued a Certificate of Sale in favor of
clause: petitioner as the highest bidder. The certificate of sale was
For and in consideration of those certain loans, overdraft registered on 24 March 1988. Subsequently, petitioner
and/or other credit accommodations on this date obtained executed an affidavit of consolidation over the foreclosed
from the MORTGAGEE, and to secure the payment of the properties after respondent failed to redeem the same. As
same, the principal of all of which is hereby fixed at a result, the Register of Deeds of Marikina issued new
P500,000, Philippine Currency, as well as those that the certificates of title in the name of petitioner.
MORTGAGEE may hereafter extend to the
MORTGAGOR, including interest and expenses or any On 17 November 1989, respondent instituted an action
other obligation owing to the MORTGAGEE, the for the annulment of the extrajudicial foreclosure with
MORTGAGOR does hereby transfer and convey by way prayer for preliminary injunction and damages against
of mortgage unto the MORTGAGEE, its successors or petitioner and the Register of Deeds of Marikina.
assigns, the parcels of land which are described in the list Docketed as Civil Case No. 1587-A, the complaint was
inserted on the back of this document, and/or appended raffled to Branch 73 of the RTC of Antipolo, Rizal. The
hereto, together with all the buildings and improvements complaint prayed, among others, that the defendants be
now existing or which may hereafter be erected or enjoined from causing the transfer of ownership over the
constructed thereon, of which the MORTGAGOR foreclosed properties from respondent to petitioner.
declares that he/it is the absolute owner, free from all liens
and encumbrances. On 18 December 1997, the RTC rendered a decision
upholding the validity of the extrajudicial foreclosure and
On 17 March 1987, respondent presented for negotiation ordering the issuance of a writ of possession in favor of
to petitioner drafts drawn under the letter of credit and the petitioner. The Court of Appeals then rendered the
corresponding export documents in consideration for its assailed decision reversing the decision of the RTC.
drawings in the amounts of US$5,739.76 and
US$4,585.79. Petitioner purchased the drafts and export ISSUE:
documents by paying respondent the peso equivalent of 1) Whether or not Excelsa is liable for the dishonor of the
the drawings. The purchase was subject to the conditions draft and export - YES
laid down in two separate undertakings by respondent 2) Whether or not the real estate mortgage also served as
dated 17 March 1987 and 10 April 1987. security for respondent's drafts that were not accepted
and paid by Kwang Ju Bank, Ltd. - YES
On 24 April 1987, Kwang Ju Bank, Ltd. notified petitioner 3) Whether or not extrajudicial foreclosure of the
through cable that the Korean buyer refused to pay mortgage may be invalidated for lack of notice to
respondent’s export documents on account of respondent - NO
typographical discrepancies. Kwang Ju Bank, Ltd. 4) Whether or not respondent may still question the
returned to petitioner the export documents. foreclosure sale - NO
Upon learning about the Korean importer’s non-payment, HELD:

respondent sent petitioner a letter dated 27 July 1987, 1) Excelsa is liable.
informing the latter that respondent had brought the Much of the discussion has revolved around who should
matter before the Korea Trade Court and that it was ready be liable for the dishonor of the draft and export
to liquidate its past due account with petitioner. documents. In the two undertakings executed by
Respondent sent another letter dated 08 September respondent as a condition for the negotiation of the drafts,
1987, reiterating the same assurance. In a letter 05 respondent held itself liable if the drafts were not
October 1987, Kwang Ju Bank, Ltd. informed petitioner accepted. The two undertakings signed by respondent
that it would be returning the export documents on are similarly-worded and contained respondent’s express
account of the non-acceptance by the importer. warranties, to wit:
and legal contracts, and the amounts named as

In consideration of your negotiating the above described consideration in said contracts do not limit the amount for
draft(s), we hereby warrant that the said draft(s) and which the mortgage may stand as security if from the four
accompanying documents thereon are valid, genuine corners of the instrument the intent to secure future and
and accurately represent the facts stated therein, and other indebtedness can be gathered.
that such draft(s) will be accepted and paid in
accordance with its/their tenor. We further undertake In Union Bank of the Philippines v. Court of Appeals,
and agree, jointly and severally, to defend and hold you the nature of a dragnet clause was explained, thus:
free and harmless from any and all actions, claims and Is one which is specifically phrased to
demands whatsoever, and to pay on demand all damages subsume all debts of past and future origins. Such
actual or compensatory including attorney’s fees, costs clauses are "carefully scrutinized and strictly
and other awards or be adjudged to pay, in case of suit, construed." Mortgages of this character enable the
which you may suffer arising from, by reason, or on parties to provide continuous dealings, the nature or
account of your negotiating the above draft(s) because of extent of which may not be known or anticipated at the
the following discrepancies or reasons or any other time, and they avoid the expense and inconvenience of
discrepancy or reason whatever. executing a new security on each new transaction. A
"dragnet clause" operates as a convenience and
We hereby undertake to pay on demand the full accommodation to the borrowers as it makes
amount of the above draft(s) or any unpaid balance available additional funds without their having to
thereof, the Philippine perso equivalent converted at the execute additional security documents, thereby saving
prevailing selling rate (or selling rate prevailing at the date time, travel, loan closing costs, costs of extra legal
you negotiate our draft, whichever is higher) allowed by services, recording fees, et cetera.
the Central Bank with interest at the rate prevailing today
from the date of negotiation, plus all charges and Petitioner, therefore, was not precluded from seeking the
expenses whatsoever incurred in connection therewith. foreclosure of the real estate mortgage based on the
You shall neither be obliged to contest or dispute any unpaid drafts drawn by respondent.
refusal to accept or to pay the whole or any part of the
above draft(s), nor proceed in any way against the 3) Extrajudicial foreclosure was valid.
drawee, the issuing bank or any endorser thereof, before Under paragraph 12 of the real estate mortgage,
making a demand on us for the payment of the whole or personal notice of the foreclosure sale is not a
any unpaid balance of the draft(s). requirement to the validity of the foreclosure sale.
In Velasquez v. Solidbank Corporation, where the A perusal of the records of the case shows that a notice
drawer therein also executed a separate letter of of sheriff’s sale was sent by registered mail to respondent
undertaking in consideration for the bank’s negotiation of and received in due course. Yet, respondent claims that it
its sight drafts, the Court held that the drawer can still be did not receive the notice but only learned about it from
made liable under the letter of undertaking even if he is petitioner. In any event, paragraph 12 of the real estate
discharged due to the bank’s failure to protest the non- mortgage requires petitioner merely to furnish
acceptance of the drafts. The Court explained, thus: respondent with the notice and does not oblige
petitioner to ensure that respondent actually receives
Petitioner, however, can still be made liable under the the notice. On this score, the Court holds that petitioner
letter of undertaking. It bears stressing that it is a has performed its obligation under paragraph 12 of the
separate contract from the sight draft. The liability of real estate mortgage.
petitioner under the letter of undertaking is direct and
primary. It is independent from his liability under the 4) Respondent cannot question the foreclosure sale.
sight draft. Liability subsists on it even if the sight Plaintiff is estopped from questioning the foreclosure. The
draft was dishonored for non-acceptance or non- plaintiff is guilty of laches and cannot at this point in
payment. time question the foreclosure of the subject
properties. Defendant bank made demands against the
2) The real estate mortgage served as security for plaintiff for the payment of plaintiff’s outstanding loans and
respondent's drafts. advances with the defendant as early as July 1997.
Respondent executed a real estate mortgage containing
a "blanket mortgage clause," also known as a "dragnet Plaintiff acknowledged such outstanding loans and
clause." It has been settled in a long line of decisions that advances to the defendant bank and committed to
mortgages given to secure future advancements are valid liquidate the same. For failure of the plaintiff to pay its
obligations on maturity, defendant bank foreclosed the time, travel, loan closing costs, costs of extra legal
mortgage on subject properties on January 5, 1988 the services, recording fees, et cetera.
certificate of sale was annotated on March 24, 1988 and
there being no redemption made by the plaintiff, title to So if you notice, this is similar to a continuing guaranty or
said properties were consolidated in the name of suretyship. Kaya lang dito, specific yung properties sa
defendant in July 1989. Undeniably, subject REM. So in this case, petitioner was not precluded from
foreclosure was done in accordance with the seeking the foreclosure of the REM based on the agreed
prescribed rule. drafts drawn by respondent.
Q: Are you sure that was the stipulation with the Also take note here, and we will also discuss this when
dragnet clause? What part of real estate mortgage we go to extrajudicial proceedings, yung notice. Notice
contained the stipulation on the dragnet or blanket was sent by registered mail and this was provided as a
mortgage clause? requirement to the REM. But the requirement here was
A: For and in consideration of those certain loans,
merely for petitioner to furnish respondent with the notice
overdraft and/or other credit accommodations on this date
and does not oblige petitioner to ensure that respondent
obtained from the MORTGAGEE, and to secure the
payment of the same, the principal of all of which is hereby actually receives the notice. On this score, the Court holds
fixed at FIVE HUNDRED THOUSAND PESOS ONLY that petitioner has performed its obligation under
(P500,000.00) Pesos, Philippine Currency, as well as paragraph 12 of the REM.
those that the MORTGAGEE may hereafter extend to the
Q: In the case of PCSO, do you have a blanket
MORTGAGOR, including interest and expenses or any
other obligation owing to the MORTGAGEE… mortgage clause?
Q: So that is the dragnet clause. So what is the effect A: The Supreme Court held that there was no dragnet
of that clause with the obligation?
clause in this case.
A: The effect of such stipulation with the debtor is that the
REM would also secure future debts which would Excelsa PHILIPPINE CHARITY SWEEPSTAKES OFFICE
Industries incur. So in this case was the drafts they (PCSO) vs. NEW DAGUPAN METRO GAS
obtained which Producers Bank already paid to Kwang Ju CORPORATION, PURITA E. PERALTA and PATRICIA
Bank. P. GALANG
PRODUCERS BANK vs EXCELSA: So again take note
of this blank mortgage clause, also known as a dragnet FACTS: Purita E. Peralta is the registered owner of a
parcel of land located at Bonuan Blue Beach Subdivision,
clause. Remember the general rule is that an action to
Dagupan City. In 1989, a real estate mortgage was
foreclose a mortgage must be limited to the amount constituted over such property in favor of PCSO to secure
mentioned in the mortgage. As an exception however, the payment of the sweepstakes tickets purchased
you have this dragnet clause or blanket mortgage clause. Patricia P. Galang (provincial distributor).
Amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as However on July 31, 1990, Peralta sold, under a
security, as long as that is the intention, to secure future conditional sale, the subject property to New Dagupan.
loans or advancements and other indebtedness.
The conveyance to be absolute (full payment of the price
So here, mortgages given to secure future advancements of P800,000.00), New Dagupan paid Peralta P200,000.00
are valid and legal contracts and the amounts named in upon the execution of the corresponding deed and the
consideration of said contracts do not limit the amount for balance of P600,000.00 by monthly instalments of
which the mortgage may stand as security if from the four P70,000.00.
corners of the instrument the intent to secure future and
other indebtedness can be gathered. Peralta showed to New Dagupan a photocopy of TCT,
which bore no liens and encumbrances, and undertook to
Remember that the dragnet clause is one which is deliver the owner’s duplicate within three (3) months from
specifically phrased to subsume all debts of past and the execution of the contract.
future origins (comment na parang X-Men, Past and
Future Origins. :3) A "dragnet clause" operates as a In view of Peralta’s failure to deliver the owner’s duplicate
convenience and accommodation to the borrowers as it of TCT and to execute a deed of absolute sale in its favor,
makes available additional funds without their having to New Dagupan withheld payment of the last instalment
and through its President, Julian Ong Cuña, executed an
execute additional security documents, thereby saving
affidavit of adverse claim, which was annotated on for a period of one year and was extinguished when
October 1, 1991. Peralta completed payment on the sweepstakes tickets
she purchased in 1989.
Due to Peralta’s continued failure to deliver a deed of
absolute sale and the owner’s duplicate of the title, New ISSUE: Who between New Dagupan and PCSO has a
Dagupan filed a complaint for specific performance her. better right to the property in question – NEW DAGUPAN
On the other hand, on May 20, 1992, during the pendency RULING: As a general rule, a mortgage liability is usually
of New Dagupan’s complaint against Peralta, PCSO limited to the amount mentioned in the contract. However,
caused the registration of the mortgage. PCSO filed an the amounts named as consideration in a contract of
application for the extrajudicial foreclosure sale of the mortgage do not limit the amount for which the mortgage
subject property in view of Galang’s failure to fully pay the may stand as security if from the four corners of the
sweepstakes she purchased in 1992. A public auction instrument the intent to secure future and other
took place on June 15, 1993 where PCSO was the indebtedness can be gathered.
highest bidder. A certificate of sale was correspondingly
issued to PCSO. Alternatively, while a real estate mortgage may
exceptionally secure future loans or advancements, these
New Dagupan obtained from the ROD of Dagupan City future debts must be specifically described in the
for its use in Civil Case a certified true copy of TCT that mortgage contract. An obligation is not secured by a
reflected PCSO’s mortgage lien, claiming that it is only mortgage unless it comes fairly within the terms of the
then that it was informed of the subject mortgage, sent a mortgage contract.
letter to PCSO on October 28, 1993, notifying the latter of
its complaint against Peralta and its claim over the subject The stipulation extending the coverage of a mortgage to
property and suggesting that PCSO intervene and advances or loans other than those already obtained or
participate in the case. specified in the contract is valid and has been commonly
referred to as a "blanket mortgage" or "dragnet" clause.
The RTC rendered a Decision (for the specific
performance case), approving the compromise In Prudential Bank v. Alviar,28 this Court elucidated on
agreement between Peralta and New Dagupan. When the the nature and purpose of such a clause as follows:
decision became final and executory, New Dagupan once
again demanded Peralta’s delivery of the owner’s A "blanket mortgage clause," also known as a "dragnet
duplicate of TCT. clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future
In a letter dated March 29, 1994, New Dagupan made a origins. Such clauses are "carefully scrutinized and strictly
similar demand from PCSO, who in response, stated that construed." Mortgages of this character enable the parties
it had already foreclosed the mortgage on the subject to provide continuous dealings, the nature or extent of
property and it has in its name a certificate of sale for which may not be known or anticipated at the time, and
being the highest bidder in the public auction that took they avoid the expense and inconvenience of executing a
place on June 15, 1993. new security on each new transaction. A "dragnet clause"
operates as a convenience and accommodation to the
Thus, New Dagupan filed with the RTC a petition against borrowers as it makes available additional funds without
PCSO for the annulment of TCT or surrender of the their having to execute additional security documents,
owner’s duplicate thereof. thereby saving time, travel, loan closing costs, costs of
extra legal services, recording fees, et cetera. x x x.29
The RTC Branch 42 rendered a Decision in New (Citations omitted)
Dagupan’s favor and ordered PCSO to deliver the
owner’s duplicate copy of TCT in its possession to the A mortgage that provides for a dragnet clause is in the
Registry of Deeds of Dagupan City for the purpose of nature of a continuing guaranty and constitutes an
having the decision to be annotated at the back thereof. exception to the rule than an action to foreclose a
mortgage must be limited to the amount mentioned in the
PCSO’s appeal from the foregoing adverse decision was mortgage contract. Its validity is anchored on Article 2053
dismissed. By way of its assailed decision, the CA did not of the Civil Code and is not limited to a single transaction,
agree with PCSO’s claim that the subject mortgage is in but contemplates a future course of dealing, covering a
the nature of a continuing guaranty, holding that Peralta’s series of transactions, generally for an indefinite time or
undertaking to secure Galang’s liability to PCSO is only until revoked. It is prospective in its operation and is
generally intended to provide security with respect to registration of the mortgage lien prior to its discharge.
future transactions within certain limits, and contemplates
a succession of liabilities, for which, as they accrue, the In this case, the subject mortgage had already been
guarantor becomes liable. In other words, a continuing cancelled or terminated upon Galang’s full payment
guaranty is one that covers all transactions, including before PCSO availed of registration in 1992.
those arising in the future, which are within the description
or contemplation of the contract of guaranty, until the As the subject mortgage was not annotated on TCT No.
expiration or termination thereof.30 52135 at the time it was terminated, there was no need
for Peralta to secure a deed of cancellation in order for
In this case, PCSO claims the subject mortgage is a such discharge to be fully effective and duly reflected on
continuing guaranty. According to PCSO, the intent was the face of her title.
to secure Galang’s ticket purchases other than those
outstanding at the time of the execution of the Deed of Therefore, since the subject mortgage is not in the nature
Undertaking with First Real Estate Mortgage on March 8, of a continuing guaranty and given the automatic
1989 such that it can foreclose the subject mortgage for termination thereof, PCSO cannot claim that Galang’s
Galang’s non-payment of her ticket purchases in 1992. ticket purchases in 1992 are also secured. From the time
PCSO does not deny and even admits that Galang had the amount of P450,000.00 was fully settled, the subject
already settled the amount of P450,000.00. mortgage had already been cancelled such that Galang’s
subsequent ticket purchases are unsecured. Simply put,
However, PCSO refuses to concede that the subject PCSO had nothing to register, much less, foreclose.
mortgage had already been discharged, claiming that
Galang had unpaid ticket purchases in 1992 and these Consequently, PCSO’s registration of its non-existent
are likewise secured as evidenced by the following clause mortgage lien and subsequent foreclosure of a mortgage
in the Deed of Undertaking with First Real Estate that was no longer extant cannot defeat New Dagupan’s
Mortgage. title over the subject property.
As the CA correctly observed, the use of the terms Q: Was it really a continuing guaranty? What do you
"outstanding" and "unpaid" militates against PCSO’s have here, a guaranty or mortgage?
claim that future ticket purchases are likewise secured. A: Mortgage.
That there is a seeming ambiguity between the provision Q: But was there really a dragnet clause?
relied upon by PCSO containing the phrase "after each A: No.
draw" and the other provisions, which mention with Q: Why not?
particularity the amount of P450,000.00 as Galang’s A: Here, the mortgage was only executed to secure the
unpaid and outstanding account and secured by the payment of the tickets which was PhP450,000 and not to
subject mortgage, should be construed against PCSO. future tickets that they obtained.
The subject mortgage is a contract of adhesion as it was Q: Who is the debtor here? Mortgagor?
prepared solely by PCSO and the only participation of A: The debtor is Galang. Peralta.
Galang and Peralta was the act of affixing their signatures Ok, so this is an instance wherein you have a third
thereto. person mortgagor.
Q: With regard to New Dagupan, can it be considered
Considering that the debt secured had already been fully as a purchaser in good faith?
paid, the subject mortgage had already been discharged A: The Supreme Court held that New Dagupan was a
and there is no necessity for any act or document to be purchaser in good faith.
executed for the purpose. As provided in the Deed of Q: But wasn’t the mortgage in favor of PCSO
Undertaking with First Real Estate Mortgage: registered?
A: Yes. However, the registration of the mortgaged lien
15. Upon payment of the principal amount together with occurred after New Dagupan purchased the property and
interest and other expenses legally incurred by the there was also no showing that Peralta told New Dagupan
MORTGAGEE, the above-undertaking is considered that it mortgaged the property to PCSO.
terminated.
PCSO vs NEW DAGUPAN: You have here a REM but
Section 6234 of Presidential Decree (P.D.) No. 1529 take note, in this case you do not have a dragnet clause.
appears to require the execution of an instrument in order Why? Because what is covered by the REM is only with
for a mortgage to be cancelled or discharged. However, the principal amount which was PhP450,000 representing
this rule presupposes that there has been a prior the balance for the ticket accountabilities for all draws of
the principal debtor Galang. So here, there was really no that the parties relied on the security of the first loan could
dragnet clause to cover subsequent purchaser Galang be inferred.
from PCSO. Since the said mortgage is not in the nature
of a continuing guaranty, or as discussed, does not Q: So what does that mean? You have a 1st mortgage
include a blanket or dragnet mortgage clause. Even the with dragnet clause and then another mortgage
automatic termination thereof, why? Because the covering this obligation, which among these two will
obligation was already paid. PCSO cannot claim that be preferred?
Galang’s ticket purchases in 1992 were also secured.
PRUDENTIAL BANK vs. DON A. ALVIAR & GEORGIA
From the time the PhP450,000 was fully settled, the B. ALVIAR
mortgage had already been cancelled. Therefore, PCSO G.R. No. 150197 (July 28, 2005)
had nothing to register, much less foreclose. PCSO’s
registration of its non-existing mortgaged lien and FACTS: Don A. Alviar and Georgia B. Alviar, are the
subsequent foreclosure of a mortgage that was no longer registered owners of a parcel of land in San Juan, Metro
extant cannot defeat New Dagupan’s title over the subject Manila. On 10 July 1975, they executed a deed of real
property. estate mortgage in favor of petitioner Prudential Bank to
secure the payment of a loan worth P250,000.00. On 4
As to third persons, the property registered under the August 1975, respondents executed the corresponding
Torrens System is for all legal purposes unencumbered promissory note, PN BD#75/C-252, covering the said
or remains to be the property of the person in whose name loan, which provides that the loan matured on 4 August
it is registered notwithstanding the execution of any 1976 at an interest rate of 12% per annum with a 2%
conveyance, mortgage, lease, lien, order or judgment service charge, and that the note is secured by a real
unless the corresponding deed is registered. Take note estate mortgage as aforementioned.
here that it was only in May 1992 that PCSO registered
The real estate mortgage contained the following clause:
its mortgage and by that time, New Dagupan has already
That for and in consideration of certain loans, overdraft
purchased the subject property under a conditional sale.
and other credit accommodations obtained from the
So New Dagupan was considered as purchaser in good Mortgagee by the Mortgagor and/or hereinafter referred
faith and for value and not bound by PCSO’s mortgaged to, irrespective of number, as DEBTOR, and to secure the
lien, even if it was considered that the REM contained a payment of the same and those that may hereafter be
dragnet clause. Why? Because it was not registered. So obtained, the principal or all of which is hereby fixed at
that is one thing that you should also consider, some Two Hundred Fifty Thousand (P250,000.00) Pesos,
mortgagees, lenient lang sila to register the mortgage sa Philippine Currency, as well as those that the Mortgagee
title because sometimes if they already secure that the may extend to the Mortgagor and/or DEBTOR, including
title is already in their possession. But there are also times interest and expenses or any other obligation owing to the
that the mortgagor-owner is conniving surreptitiously, by Mortgagee, whether direct or indirect, principal or
a petition for lost title. And then subsequently sell it to secondary as appears in the accounts, books and records
another person so if tignan niyo yung title, ang nakalagay of the Mortgagee, the Mortgagor does hereby transfer and
convey by way of mortgage unto the Mortgagee, its
diyan, issued in lieu of a lost title. But also, that already
successors or assigns, the parcels of land which are
serves as an additional warning on the part of the
described in the list inserted on the back of this document,
purchaser. In Land Titles, walang jurisdiction ang court to and/or appended hereto, together with all the buildings
issue a new title if the title was not really lost. But you also and improvements now existing or which may hereafter
have to consider if there was a purchaser in good faith. be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens
In this case, it was clear that New Dagupan was a and encumbrances. (this is a blanket mortgage clause
purchaser in good faith. PCSO did not present any or dragnet clause)
evidence that New Dagupan had any knowledge of the
mortgage in its favor even if it was not registered. On 22 October 1976, Don Alviar executed another
promissory note, PN BD#76/C-345 for P2,640,000.00,
Q: What is this reliance on the security test?
secured by D/A SFDX #129, signifying that the loan was
A: As held by the Supreme Court in the case of Prudential secured by a "hold-out" on the mortgagor’s foreign
vs Alviar, the Reliance on Security test is when a finding currency savings account with the bank under Account
No. 129, and that the mortgagor’s passbook is to be
a different security was taken for the second loan no intent
surrendered to the bank until the amount secured by the 1) Whether or not the blanket mortgage clause or dragnet
"hold-out" is settled. clause is valid - VALID
2) Whether or not the blanket mortgage clause applies
On 27 December 1976, respondent spouses executed for even to subsequent advancements for which other
Donalco Trading, Inc., of which the husband and wife securities were intended - NO
were President and Chairman of the Board and Vice 3) Whether or not the foreclosure of the property was
President, respectively, PN BD#76/C-430 covering proper - NO
P545,000.000. As provided in the note, the loan is
secured by "Clean-Phase out TOD CA 3923," which HELD: A "blanket mortgage clause," also known as a
means that the temporary overdraft incurred by Donalco "dragnet clause" in American jurisprudence, is one which
Trading, Inc. with petitioner is to be converted into an is specifically phrased to subsume all debts of past or
ordinary loan. future origins. Such clauses are "carefully scrutinized
and strictly construed." Mortgages of this character
On 16 March 1977, petitioner wrote Donalco Trading, Inc., enable the parties to provide continuous dealings, the
informing the latter of its approval of a straight loan of nature or extent of which may not be known or
P545,000.00, the proceeds of which shall be used to anticipated at the time, and they avoid the expense
liquidate the outstanding loan of P545,000.00 TOD. The and inconvenience of executing a new security on
letter likewise mentioned that the securities for the loan each new transaction.
were the deed of assignment on two promissory notes A "dragnet clause" operates as a convenience and
executed by Bancom Realty Corporation with Deed of accommodation to the borrowers as it makes available
Guarantee in favor of A.U. Valencia and Co. and the additional funds without their having to execute additional
chattel mortgage on various heavy and transportation security documents, thereby saving time, travel, loan
equipment. closing costs, costs of extra legal services, recording
fees, et cetera. Indeed, it has been settled in a long line
On 06 March 1979, respondents paid of decisions that mortgages given to secure future
petitioner P2,000,000.00, to be applied to the obligations advancements are valid and legal contracts, and the
of G.B. Alviar Realty and Development, Inc. and for the amounts named as consideration in said contracts do
release of the real estate mortgage for the P450,000.00 not limit the amount for which the mortgage may
loan covering the two lots located at Vam Buren and stand as security if from the four corners of the
Madison Streets, North Greenhills, San Juan, Metro instrument the intent to secure future and other
Manila. The payment was acknowledged by petitioner indebtedness can be gathered.
who accordingly released the mortgage over the two
properties. On the basis of the blanket mortgage clause contained in
the real estate mortgage, petitioner and respondents
On 15 January 1980, petitioner moved for the extrajudicial intended the real estate mortgage to secure not only
foreclosure of the mortgage on the property covered by the P250,000.00 loan from the petitioner, but also future
TCT No. 438157. Per petitioner’s computation, credit facilities and advancements that may be obtained
respondents had the total obligation of P1,608,256.68, by the respondents.
covering the three promissory notes plus assessed past
due interests and penalty charges. The public auction Under American jurisprudence, two schools of thought
sale of the mortgaged property was set on 15 January have emerged on this question. One school advocates
1980. that a "dragnet clause" so worded as to be broad
enough to cover all other debts in addition to the one
Respondents filed a complaint for damages with a prayer specifically secured will be construed to cover a
for the issuance of a writ of preliminary injunction with the different debt, although such other debt is secured by
RTC of Pasig, claiming that they have paid their principal another mortgage. The contrary thinking maintains
loan secured by the mortgaged property, and thus the that a mortgage with such a clause will not secure a
mortgage should not be foreclosed. For its part, petitioner note that expresses on its face that it is otherwise
averred that the payment of P2,000,000.00 made on 6 secured as to its entirety, at least to anything other
March 1979 was not a payment made by respondents, but than a deficiency after exhausting the security
by G.B. Alviar Realty and Development Inc., which has a specified therein, such deficiency being an
separate loan with the bank secured by a separate indebtedness within the meaning of the mortgage, in
mortgage. the absence of a special contract excluding it from
the arrangement.
ISSUES:
The latter school represents the better position. The against the party who drafted it, which is the petitioner in
parties having conformed to the "blanket mortgage this case.
clause" or "dragnet clause," it is reasonable to conclude
that they also agreed to an implied understanding Even the promissory notes in issue were made on
that subsequent loans need not be secured by other standard forms prepared by petitioner, and as such are
securities, as the subsequent loans will be secured likewise contracts of adhesion. Being of such nature, the
by the first mortgage. In other words, the sufficiency of same should be interpreted strictly against petitioner and
the first security is a corollary component of the with even more reason since having been accomplished
"dragnet clause." But of course, there is no prohibition, by respondents in the presence of petitioner’s personnel
as in the mortgage contract in issue, against contractually and approved by its manager, they could not have been
requiring other securities for the subsequent loans. Thus, unaware of the import and extent of such contracts.
when the mortgagor takes another loan for which
another security was given it could not be inferred Petitioner, however, is not without recourse. Both the
that such loan was made in reliance solely on the Court of Appeals and the trial court found that
original security with the "dragnet clause," but rather, respondents have not yet paid the P250,000.00, and
on the new security given. This is the "reliance on the gave no credence to their claim that they paid the said
security test." amount when they paid petitioner P2,000,000.00. Thus,
the mortgaged property could still be properly subjected
It was therefore improper for petitioner in this case to to foreclosure proceedings for the unpaid P250,000.00
seek foreclosure of the mortgaged property because loan, and as mentioned earlier, for any deficiency after
of non-payment of all the three promissory notes. D/A SFDX#129, security for PN BD#76/C-345, has been
While the existence and validity of the "dragnet clause" exhausted, subject of course to defenses which are
cannot be denied, there is a need to respect the existence available to respondents.
of the other security given for PN BD#76/C-345. The
foreclosure of the mortgaged property should only be N.B. In the absence of clear, supportive evidence of a
for the P250,000.00 loan covered by PN BD#75/C-252, contrary intention, a mortgage containing a "dragnet
and for any amount not covered by the security for clause" will not be extended to cover future advances
the second promissory note. While the "dragnet unless the document evidencing the subsequent
clause" subsists, the security specifically executed advance refers to the mortgage as providing security
for subsequent loans must first be exhausted before therefor.
the mortgaged property can be resorted to.
Q: Do you have a real estate mortgage here?
It is important to note that the mortgage contract, as A: Yes.
well as the promissory notes subject of this case, is Q: So first, do you have a valid blanket mortgage
a contract of adhesion, to which respondents’ only clause?
participation was the affixing of their signatures or A: Yes. There is a valid blanket mortgage clause but the
"adhesion" thereto. A contract of adhesion is one in Supreme Court said here that it has been held that in the
which a party imposes a ready-made form of contract absence clear, supportive evidence of a contrary
which the other party may accept or reject, but which intention, a mortgage containing a "dragnet clause" will
the latter cannot modify. not be extended to cover future advances unless the
document evidencing the subsequent advance refers to
The real estate mortgage in issue appears in a standard the mortgage as providing security therefor.
form, drafted and prepared solely by petitioner, and So the Supreme Court said here that bank improperly
which, according to jurisprudence must be strictly foreclosed the mortgaged property just because of the
construed against the party responsible for its nonpayment of the three promissory notes. Since, while
preparation. If the parties intended that the "blanket there was an existence of the dragnet clause, it cannot be
mortgage clause" shall cover subsequent denied that there was already the payment for the
advancement secured by separate securities, then 250,000. Since there was already the payment, then the
the same should have been indicated in the mortgage foreclosure of the mortgaged property is invalid.
contract. Consequently, any ambiguity is to be Q: How about the subsequent loans covered in the
taken contra proferentum, that is, construed against the REM with that dragnet clause? Would it also be
party who caused the ambiguity which could have covered?
avoided it by the exercise of a little more care. To be more A: The SC said that the other promissory notes had their
emphatic, any ambiguity in a contract whose terms are own security which was executed by the spouses.
susceptible of different interpretations must be read
Q: What then should the mortgagee do, if the reliance solely on the original security, original REM with
subsequent obligations were secured by separate a dragnet clause. But on the new security given. So in
mortgages and at the same there was a previously case there is default on that subsequent loan, ano yung
executed REM with a dragnet clause? una mong habulin? Yung specific property with regard to
A: The SC said that the mortgagee should foreclose the that. If there was chattel mortgage, yan unang i-foreclose.
security on the different mortgages executed since, while Kung may holdout agreement, meaning ihold yung
there is a valid dragnet or blanket mortgage clause, it
account ng mortgagor, yun muna. If that is not sufficient,
doesn’t mean that it will affect all the subsequent
that is now the time that you can now go after, you can
transactions made by the mortgagor.
now foreclose the properties covered by the first
PRUDENTIAL vs ALVIAR: Here take note, that with mortgage with a dragnet clause.
regard to the 250,000 loan, there was a dragnet mortgage
clause. Take a look at the provisions: to secure the So take note of this. 2 schools of thought were discussed
payment of the same and those that may hereafter be but the SC emphasized and preferred the 2 nd school of
obtained. So, dragnet clause yan. The principal or all of thought applying on the reliance on the security test.
which is hereby fixed at 250,000 Pesos as well as those February 16, 2016 (Jala)
that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other Still with real estate mortgage. We have already
obligation owing to the Mortgagee. Also notice the last discussed 2127. Under Article 2127, take note of what is
phrase in that paragraph, you have: also covered are considered as a “dragnet clause” or a dragnet mortgage
after-acquired properties, together with all the buildings clause and we have emphasized that this is a valid
and improvements now existing or which may hereafter provision in a real estate mortgage which provides
continuous dealings with regard to mortgaged properties.
be erected or constructed thereon.
The purpose of this is to avoid expense and
Now in this case, it was correct that there was a valid inconvenience of executing a new security of each new
REM, containing a blanket or dragnet mortgage clause. transaction. It is specifically phrased to subsume all debts
However it must be emphasized, that with regard to the of past and future origins. As to interpretation, it is strictly
construed against the one who prepared it and carefully
subsequent loans, it was secured by different contracts or
scrutinized specially if it is a contract of adhesion.
agreements. So the REM not only secured the 250,000
but also the future credit facilities so in this case, the We have also discussed the security test which was also
subsequent loans obtained by the respondents. However, mentioned in the case of Asiatrust vs. Tuble...
these subsequent loans were secured by other securities.
There was a holdout on one of the promissory notes with ASIA TRUST DEVELOPMENT BANK vs. CARMELO
regard to the savings account. And another promissory H. TUBLE
note was subject, secured by a “clean phase-out” deed of
assignment as well. There was also a chattel mortgage. FACTS: Carmelo H. Tuble, who served as the vice-
president of petitioner Asia trust Development Bank
Please read this case. Why? Because the SC here availed himself of the car incentive plan and loan
discussed two schools of thought with this kind of privileges offered by the bank. He was also entitled to
arrangement. You have REM with a dragnet clause so it the Senior Managers Deferred Incentive Plan (DIP)
covers future obligations; and you have these subsequent
obligations which are covered by specific securities Tuble acquired a Nissan Vanette through the
whether mortgage and other forms of collateral as what company’s car incentive plan. The arrangement was
happened in this case. made to appear as a lease agreement requiring only
the payment of monthly rentals. Accordingly, the lease
So here, the SC applied the “reliance on security test”. would be terminated in case of the employee’s
There is an implied understanding that subsequent loans resignation or retirement prior to full payment of the
need not be secured by other securities. Especially if what price.
you have is a REM with a dragnet clause. As the
subsequent loans will be secured by the first mortgage. As regards the loan privileges, Tuble obtained three
separate loans.
However, when the mortgagor makes another loan for
a.) First, a real estate loan evidenced by the January
which another security is given as in the facts of this case,
18 1993 Promissory note with maturity date of January
it could not be inferred that such loan was made in 1, 1999 was secured by a mortgage over his property
covered by transfer certificate. should not have been included given that it was already
b.) Second was a consumption loan, evidenced by the returned. The CA affirmed the RTC.
January 10, 1994
c.) Third, a salary loan. ISSUES:
ISSUE 1: Whether or not the bank is entitled to include
He resigned on March 30, 1995 and was subsequently these items in the redemption price: the 18% annual
given the option to either return the vehicle without any interest on the bid price of P421,800.
further obligation or retain the unit or pay its remaining
book value. RULING: The 18% Annual Interest on the Bid Price of
P421,800
Tuble had the following obligations to the bank after his
retirement The Applicable Law
a.) The purchase or return of the Nissan The bank argues that instead of referring to the Rules
b.) 100,000 as consumption loan of Court to compute the redemption price, the courts a
c.) 421,800 as real estate loan quo should have applied the General Banking Law,
d.) 16,250 as salary loan considering that petitioner is a banking institution.
Moreover, the bank also owed Tuble his pro-rata share The statute referred to requires that in the event of
in the DIP which was to be issued after the bank had judicial or extrajudicial foreclosure of any mortgage on
given the resigned employees clearance and 25,797 real estate that is used as security for an obligation to
representing his final salary and corresponding 13th any bank, banking institution, or credit institution, the
month pay. mortgagor can redeem the property by paying the
amount fixed by the court in the order of execution, with
He claimed that since he and the bank were debtors interest thereon at the rate specified in the mortgage.18
and creditors of each other, the offsetting of loans could
legally take place. He then asked the bank to simply Petitioner is correct.
compute his DIP and apply his receivables to his loans.
The bank refused and sent him a demand letter and From the plethora of cases, the SC held that the
required him to return the Nissan Vanette. General Banking Act – being a special and subsequent
legislation – has the effect of amending Section 6 of Act
On August 14, 1995, Tuble wrote the bank again to No. 3135, insofar as the redemption price is concerned,
follow up his request to offset the loans. This was not when the mortgagee is a bank. Thus, the amount to be
immediately acted upon, and it was only on October 13, paid in redeeming the property is determined by the
1995 that the bank finally allowed the offsetting of his General Banking Act, and not by the Rules of Court in
various claims and liabilities. As a result, his liabilities Relation to Act 3135.
were reduced to 970 thousand plus the unreturned
value of the vehicle. The Remedy of Foreclosure
Firstly, at the time respondent resigned, which was
The bank then filed a complaint for replevin against chronologically before the foreclosure proceedings, he
tuble. The judgement was favorable for the bank. To had several liabilities to the bank. Secondly, when the
collect the liabilities of Tuble, it also filed a petition for bank later on instituted the foreclosure proceedings, it
extra-judicial foreclosure of real estate mortgage over foreclosed only the mortgage secured by the real
his property. It was based on his real estate loan. estate loan of P421,800.22 It did not seek to include, in
the foreclosure, the consumption loan under
He redeemed the property. With this payment, he was Promissory Note No. 0143 or the other alleged
released from his accountabilities and had his obligations of respondent. Thirdly, on 28 February
clearance. The bank then issued the clearance 1996, the bank availed itself of the remedy of
necessary for the release of his DIP share. Tuble foreclosure and, in doing so, effectively gained the
received a manager’s check in the amount of 166,049 property.
representing his share in the DIP funds.
As a result of these established facts, one evident
Tuble paid the redemption price but disputed its conclusion surfaces: the Real Estate Mortgage
costing. He filed a complaint for recovery of a sum of Contract on the secured property is already
money and damages before the RTC. The RTC ruled extinguished.
in favor of Tuble. They held that the value of the car
In foreclosures, the mortgaged property is subjected to

the proceedings for the satisfaction of the obligation. As The Court finds that there is no specific mention of
a result, payment is effected by abnormal means interest to be added in case of either default or
whereby the debtor is forced by a judicial proceeding to redemption. The Real Estate Mortgage Contract itself
comply with the presentation or to pay indemnity. is silent on the computation of the redemption price.
Although it refers to the Promissory Notes as
Once the proceeds from the sale of the property are constitutive of Tuble’s secured obligations, the said
applied to the payment of the obligation, the obligation contract does not state that the interest to be charged
is already extinguished. in case of redemption should be what is specified in the
Promissory Notes.
Thus, in Spouses Romero v. Court of Appeals, the SC
held that the mortgage indebtedness was extinguished Thus, an ambiguity results as to which interest shall be
with the foreclosure and sale of the mortgaged applied, for to apply an 18% interest per annum based
property, and that what remained was the right of on Promissory Note No. 0143 will negate the existence
redemption granted by law. of the 0% interest charged by Promissory Note No.
0142. Notably, it is this latter Promissory Note that
Consequently, since the Real Estate Mortgage refers to the principal agreement to which the security
Contract is already extinguished, petitioner can no attaches.
longer rely on it or invoke its provisions, including the
dragnet clause stipulated therein. It follows that the In resolving this ambiguity, the SC refer to a basic
bank cannot refer to the 18% annual interest charged principle in the law of contracts: "Any ambiguity is to
in Promissory Note No. 0143, an obligation allegedly be taken contra proferentem, that is, construed
covered by the terms of the Contract. against the party who caused the ambiguity which
could have avoided it by the exercise of a little
Neither can the bank use the consummated contract to more care."
collect on the rest of the obligations, which were not
included when it earlier instituted the foreclosure Therefore, the ambiguity in the mortgage deed whose
proceedings. It cannot be allowed to use the same terms are susceptible of different interpretations must
security to collect on the other loans. To do so would be be read against the bank that drafted it.
akin to foreclosing an already foreclosed property.
Furthermore, the Court refuses to be blindsided by the
Rather than relying on an expired contract, the dragnet clause in the Real Estate Mortgage Contract to
bank should have collected on the excluded loans automatically include the consumption loan, and its
by instituting the proper actions for recovery of corresponding interest, in computing the redemption
sums of money. Simply put, petitioner should have price.
run after Tuble separately, instead of hostaging the
same property to cover all of his liabilities. In the absence of clear and supportive evidence of
a contrary intention, a mortgage containing a
The Dragnet Clause dragnet clause will not be extended to cover future
In any event, assuming that the Real Estate Mortgage advances, unless the document evidencing the
Contract subsists, the SC ruled that the dragnet clause subsequent advance refers to the mortgage as
therein does not justify the imposition of an 18% annual providing security therefor.
interest on the redemption price.
In this regard, the Court adopted the "reliance on the
The Court has recognized that, through a dragnet security test", the test as follows:
clause, a real estate mortgage contract may
exceptionally secure future loans or A mortgage with a "dragnet clause" is an "offer" by
advancements. But an obligation is not secured by the mortgagor to the bank to provide the security
a mortgage, unless, that mortgage comes fairly of the mortgage for advances of and when they
within the terms of the mortgage contract. were made. Thus, it was concluded that the "offer"
was not accepted by the bank when a subsequent
Moreover, the mortgage agreement, being a contract of advance was made because (1) the second note
adhesion, is to be carefully scrutinized and strictly was secured by a chattel mortgage on certain
construed against the bank, the party that prepared the vehicles, and the clause therein stated that the note
agreement. was secured by such chattel mortgage; (2) there
was no reference in the second note or chattel compensation set by the parties for the use
mortgage indicating a connection between the real or forbearance of money.
estate mortgage and the advance; (3) the b.) Compensatory interest refers to the
mortgagor signed the real estate mortgage by her penalty or indemnity for damages imposed
name alone, whereas the second note and chattel by law or courts. This is due only if the
mortgage were signed by the mortgagor doing obligor is proven to have defaulted in
business under an assumed name; and (4) there paying the loan.
was no allegation by the bank, and apparently no
proof, that it relied on the security of the real estate A default must exist before the bank can collect the
mortgage in making the advance. (Emphasis compensatory legal interest of 12% per annum. Tuble
supplied) denies being in default since by way of legal
compensation, he effectively paid his liabilities on time.
The second loan agreement, or Promissory Note No.
0143, referring to the consumption loan makes no The court held that there was no legal compensation.
reference to the earlier loan with a real estate In order for legal compensation to take effect, article
mortgage. Neither does the bank make any allegation 1279 requires that the debts be liquidated and
that it relied on the security of the real estate mortgage demandable.
in issuing the consumption loan to Tuble.
a. Requisites for legal compensation:
Tuble was Asia Trust’s previous vice-president, as one i.) That each one of the obligors be bound
of the senior officers, the consumption loan was given physically, and that he be at the same time a
to him not as an ordinary loan, but as a form of principal creditor of the other.
accommodation or privilege. The bank’s grant of the ii.) That both debts consist in a sum of money,
salary loan to Tuble was apparently not motivated by or if the things due are consumable, they be of the
the creation of a security in favor of the bank, but by the same kind, and also of the same quality if the
fact the he was a top executive of petitioner. latter has been stated.
iii.) That the two debts be due
Thus, the bank cannot claim that it relied on the iv.) That they be liquidated and demandable
previous security in granting the consumption loan to v.) That over neither of them there be any
Tuble. For this reason, the dragnet clause will not be retention, or controversy, commenced by third
extended to cover the consumption loan. It follows, persons and communicated n due time to the
therefore, that its corresponding interest – 18% per debtor.
annum – is inapplicable.
Liquidated debts are those who exact amount has
ISSUE 2: Whether or not the bank is entitled to interest already been determined. In this case, the receivable
charges on Promissory Note 0142 of Tuble, including his DIP share was not yet
determined. It was the bank’s policy to compute and
RULING: In addition to the 18% annual interest, the issue the computation only after the retired employee
bank also claims a 12% per annum on the consumption had been cleared by the bank. Thus, Tuble incorrectly
loan. Notwithstanding that promissory note contains no invoked legal compensation.
stipulation on interest payments, the bank still claims
that Tuble is liable to pay the legal interest pursuant to Let’s just summarize it. You have here a real estate
article 2209 of the family code: mortgage here and the real estate mortgage was the
accessory contract to the first promissory note.
Article 2209 – If the obligation consists in the payment
of a sum of money and the debtor incurs in delay, the Did the Real Estate Mortgage include a dragnet clause?
indemnity for damages, there being no stipulation shall Did it cover the subsequent amount that were covered in
be the payment of the interest agreed upon and in the the redemption price in excess of the 421 800?
absence of stipulation, the legal interest, which is six Is Tuble entitled to the refund of the excess of the
per cent per annum. redemption price?
While Article 2209 allows the recovery of interest sans This case is also relevant to the application of the General
stipulation, this charge is provided not as a form of Banking Act. The main law with regard to extrajudicial
monetary interest but as one of compensatory interest. foreclosure is Act 3135 but we also have to take into
a.) Monetary interest refers to the consideration other special laws. One of which is the
General Banking Act. Because it has already been foreclosed. To do so would

In this case, it was emphasized that the General Banking be akin to foreclosing an already foreclosed property.
Act has a specific provision which amends sec. 6 of Act
No. 3135 with regards to redemption. The amount to be Rather than relying on an expired contract, the bank
retrieved in redeeming the property is determined by the should have filed another action for recovery of sums of
redemption (-----) in the General Banking Act. money and do not add on the redemption price. Petitioner
should have run after Tuble separately, instead of
It foreclosed only the mortgage secured by the real estate hostaging the same property to cover all of his liabilities.
loan of P421,800. We have already learned that Real
Estate Mortgage covers only what was only provided in Tuble, therefore, had the right to redeem the security by
the contract. In this case, what happened was that they paying the redemption price.The right of redemption of
foreclosed it, they provided for the unpaid obligation which foreclosed properties was a statutory privilege he
was 421 800. In the foreclosures, the mortgaged property enjoyed. Redemption is by force of law, and the purchaser
is subjected to the proceedings for the satisfaction of the at public auction is bound to accept it.
obligation that was mentioned in that foreclosure
proceeding. As a result, payment is effected by abnormal Also notice here that Section 47 of the General Banking
means whereby the debtor is forced by a judicial Law was cited with regard to the redemption proceeding.
proceeding to comply with the presentation or to pay
indemnity. The bank cannot alter that right by imposing additional
charges and including other loans. Verily, the freedom to
Since there is a foreclosure sale, Once the proceeds from stipulate the terms and conditions of an agreement is
the sale of the property are applied to the payment of the limited by law.
obligation, the obligation is already extinguished. The
mortgage indebtedness was extinguished with the It is also pointed out that the power to decide whether or
foreclosure and sale of the mortgaged property, and that not to foreclose is the prerogative of the mortgagee;
what remained was the right of redemption granted by however, once it has made the decision by filing a petition
law. In this case, the right of redemption in favor of Tuble. for extrajudicial foreclosure with the sheriff, the acts of the
sheriff shall thereafter be governed by the provisions of
Since the Real Estate Mortgage Contract is already the mortgage law, specifically Act 3135 and
extinguished, the bank here can no longer rely on it or supplemented by other special laws, and not by the
invoke its provisions, like for example yung dragnet instructions of the mortgagee.
clause. It follows that the bank cannot refer to the 18%
annual interest charged in the other promissory note, an Also take note here that the dragnet clause does not
obligation allegedly covered by the terms of the Contract. justify the imposition of the 18% interest which was
imposed on the other promissory note.
What does it mean here? While it is true that the real
estate contract has dragnet clause (so it includes future There is no specific mention of interest to be added in
obligation) the fact that this mortgage covered by this real case of either default or redemption. That is why di rin
estate mortgage contract was already foreclosed, the pwede dun idagdag ng bank doon sa redemption price.
property was already sold, obligation was already The said contract does not state that the interest to be
extinguished for any other liabilities or unpaid obligations charged in case of redemption should be what is specified
of the debtor, hindi mo na pwedeng ipatong dun sa in the Promissory Notes.
redemption price yung unpaid obligation. Ang redemption
price, from the term itself “redeem”, so it will only include Also take note that it is the bank that prepared the real
the purchase price at the time of the foreclosure sale plus estate mortgage, so the ambiguities therein must be read
the applicable charges and fees as well as the legal against the bank that drafted it.
interest in relation to the price during the foreclosure sale.
Also take note that the Supreme Court made mention of
You cannot include any other unpaid obligation of the “the reliance on the security test”. If you say “____ test”
debtor and any other additional interest in another then take note of its nature. A mortgage with a "dragnet
obligation of the principal debtor. The bank cannot include clause" is an "offer" by the mortgagor to the bank to
those which were not included when it earlier instituted provide the security of the mortgage for advances of and
the foreclosure proceedings. It cannot be allowed to use when they were made. Thus, it was concluded that the
the same security to collect on the other loans. why? "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 loan and buy her house and lot since she was to
the clause therein stated that the note was secured by emigrate.
such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection An employee at SSS said, however, that SSS did not
between the real estate mortgage and the advance; (3) approve of members transferring their mortgaged
the mortgagor signed the real estate mortgage by her homes.
name alone, whereas the second note and chattel
mortgage were signed by the mortgagor doing business But the Spouses Vega (Vegas) could make a private
under an assumed name; and (4) there was no allegation arrangement with Reyes provided that they pay the
by the bank, and apparently no proof, that it relied on the monthly amortizations on time. Vegas agreed for
security of the real estate mortgage in making the Reyes to execute in their favor a deed of assignment of
advance. real property with assumption of mortgage and paid
Reyes P20,000 after she undertook to update the
These 4 instances were mentioned in relation to “the amortizations before leaving the country. The Vegas
reliance on security test”. took possession of the house in January 1981. Reyes
did not execute the deed of assignment. She left the
Article 2128. The mortgage credit may be alienated or country and left her sister (Julieta Ofilada) a special
assigned to a third person, in whole or in part, with the power of attorney to convey ownership of property.
formalities required by law.
Sometime between 1983 and 1984, Ofilada executed
The subject here in 2128 is a mortgage credit. The right the deed of assignment in favor of the Vegas, kept the
of the morgagee itself over the property mortgaged may original and gave the Vegas two copies, one to be given
be alienated or assigned to a third person, whether in to the Home Development Mortgage Fund and kept the
whole or in part. So you have a mortgagee. You will other. A storm in 1984 resulted in flood and destroyed
assign his rights to another person. That means that if the their personal copy.
debtor mortgagor fails to pay his obligation, the assignee
can actually foreclose the property and not necessarily In 1992, the Vegas learned that Reyes did not update
the mortgagee anymore because of the assignment which the amortizations because they received a notice to
took place. Reyes from the SSS. They told the SSS that they
already gave the payment to Reyes but, since it
The alienation or assignment was valid even if it is not appeared indifferent, on January 6, 1992, the Vegas
registered. A deed of assignment is essentially a updated the amortization and paid P115,738.48 to the
consensual contract even in the absence of a registration, SSS. They negotiated seven additional remittances
it is considered valid, however, registration of such and the SSS accepted P8,681 more from the Vegas.
assignment would be important to affect third person.
On April 16, 1993, PDC filed an action for sum of
How about the mortgaged itself, can it be alienated? Yes. money against Reyes before the RTC of Manila,
In a mortgage, the mortgagee can transfer his right as a claiming that Reyes borrowed from Apex Mortgage and
mortgagee. The mortgagor himself, being the absolute Loans Corporation (Apex) P46,500 to buy the lot and
owner of the property, when he mortgaged the property, construct a house on it.
he only subjected it to a mere encumbrance. There is no
transfer of ownership to which, therefore, he can also Apex assigned Reyes' credit to PDC on December 29,
alienate the same. Later on we will learn that the 1992.
mortgagee cannot prevent the mortgagor from selling the
property. RTC: Reyes must pay the PDC the loan of P46,398
plus interest and penalties beginning April 11, 1979 as
SPOUSES ANTONIO & LETICIA VEGA VS SSS & well as attorney's fees and costs. Unable to pay, RTC
PILAR DEVELOPMENT CORPORATION issued a writ of execution against Reyes and its Sheriff
levied on the property in Pilar Village.
FACTS: Magdalena Reyes owned a piece of titled land
in Pilar Village, Las Piñas CIty. On August 17, 1979, On Feb 16, 1994, the Vegas requested the SSS to
she got a housing Loan from SSS for which she acknowledge their status as subrogees and to give
mortgaged her land. them an update of the account so they could settle it in
full. SSS did not reply. RTC sheriff published a notice
Late 1979, Reyes asked the Sps Vega to assume the for the auction sale of the property on Feb 24, March 3
and 10, 1994. He also gave notice to the Vegas on was invalid because it was done without the knowledge
March 20. The Vegas filed an affidavit of third party and consent of the SSS as required under the
claimant and a motion to quash the levy on the mortgage agreement.
property. However, RTC directed the sheriff to proceed
with the execution. But Article 1237 cannot apply in this case since Reyes
consented to the transfer of ownership of the
The Vegas got a telegram informing them that the SSS mortgaged property to the Vegas. Reyes also agreed
intended to foreclose on the property to satisfy the for the Vegas to assume the mortgage and pay the
unpaid debt of P38,789.58. The Vegas requested from balance of her obligation to SSS. Of course, paragraph
the SSS in writing for the exact amount of the 4 of the mortgage contract covering the property
indebtedness and for assurance that they would be required Reyes to secure SSS’ consent before selling
entitled to the discharge of the mortgage and delivery the property. But, although such a stipulation is valid
of the proper subrogation documents upon payment. and binding, in the sense that the SSS cannot be
They also sent a P37,521.95 manager's check that compelled while the loan was unpaid to recognize the
SSS refused to accept. sale, it cannot be interpreted as absolutely forbidding
her, as owner of the mortgaged property, from selling
The Vegas filed an action for consignation, damages, the same while her loan remained unpaid. Such
and injunction with application for preliminary injunction stipulation contravenes public policy, being an undue
and TRO against SSS, PDC, the RTC sheriff and the impediment or interference on the transmission of
Register of Deeds before the RTC in Las Piñas. While property.
the case was pending, SSS released the mortgage to
PDC. A writ of possession evicted the Vegas from the Besides, when a mortgagor sells the mortgaged
property. RTC decided in favor of the Vegas. CA property to a third person, the creditor may demand
reversed. from such third person the payment of the principal
obligation. The reason for this is that the mortgage
ISSUE :WON Reyes validly sold her SSS-mortgaged credit is a real right, which follows the property
property to the Vegas wherever it goes, even if its ownership changes. Article
2129 of the Civil Code gives the mortgagee, here the
HELD: Reyes acquired the property in this case SSS, the option of collecting from the third person in
through a loan from the SSS in whose favor she possession of the mortgaged property in the concept of
executed a mortgage as collateral for the loan. owner. More, the mortgagor-owner’s sale of the
Although the loan was still unpaid, she assigned the property does not affect the right of the registered
property to the Vegas without notice to or the consent mortgagee to foreclose on the same even if its
of the SSS. The Vegas continued to pay the ownership had been transferred to another person. The
amortizations apparently in Reyes’ name. Meantime, latter is bound by the registered mortgage on the title
Reyes apparently got a cash loan from Apex, which he acquired.
assigned the credit to PDC. This loan was not secured
by a mortgage on the property but PDC succeeded in After the mortgage debt to SSS had been paid,
getting a money judgment against Reyes and had it however, the latter had no further justification for
executed on the property. Such property was still in withholding the release of the collateral and the
Reyes’ name but, as pointed out above, the latter had registered title to the party to whom Reyes had
disposed of it in favor of the Vegas more than 10 years transferred her right as owner.
before PDC executed on it.
Under the circumstance, the Vegas had the right to sue
The question is: was Reyes’ disposal of the property in for the conveyance to them of that title, having been
favor of the Vegas valid given a provision in the validly subrogated to Reyes’ rights.
mortgage agreement that she could not do so without
the written consent of the SSS? When the property was sold by Reyes to spouses Vega,
did it acquire the consent of SSS? Did it invalidate the
The CA ruled that, under Article 1237 of the Civil Code, sale?
the Vegas who paid the SSS amortizations except the Is Pilar Development corporation a buyer in good faith?
last on behalf of Reyes, without the latter’s knowledge
or against her consent, cannot compel the SSS to This is very common with regard to real estate properties
subrogate them in her rights arising from the mortgage. wherein they enter into a loan in SSS or sometimes Pag-
Further, said the CA, the Vegas’ claim of subrogation ibig na loan and then a property will be subject to a
mortgage. Sometimes di na nila kaya bayaran ang circumstance, the Vegas had the right to sue for the
amortization so what they will do is Deed of Sale with conveyance to them of that title, having been validly
Assumption of Mortgage. subrogated to Reyes’ rights.
Usually, as in this case, SSS or these entities do not But for purposes of binding third persons, if nakamortgage
recognize deed of sale with assumption of mortgage. In yan sya sa SSS it is always better to have your sale
other words, sa record sa kanilang office, sino yung annotated in the title because we have an innocent
registered owner ng property, it will remain as such until purchaser for value.
there is full payment of the obligation. In other words,
walang liability ang SSS kung kanino man gibenta However, in this case, the Pilar Development Corporation
subsequently yung property as long as, doon sa kanila, cannot be considered as a buyer in good faith because
the property is still subject to a mortgage and they will they had notice of the Vega’s claim of the property prior
annotate the mortgage in their respective titles. to the sale.
In this case, as what happened, in the real estate Article 2129. The creditor may claim from a third
mortgage in favor of SSS, there was a stipulation that the person in possession of the mortgaged property, the
property cannot be sold unless there is a consent on the payment of the part of the credit secured by the
part of SSS before selling the property. As you will see, property which said third person possesses, in the
later on, the mortgagee cannot prevent the mortgagor terms and with the formalities which the law
from selling the property because in mortgage there is establishes.
only encumbrance. Walang transfer of ownership.
It is possible that the mortgaged property be still in
This requisite of getting the consent of the mortgagee is possession of the mortgagor although delivery of
actually a circumvention of that. You are not preventing possession of the property to the mortgagee is not
the mortgagor from selling the property, but from requiring required for the validity of the mortgage It is also possible
the mortgagor to secure the consent of the mortgagee, that the property be delivered to the possession of the
the Supreme Court held that such stipulation contradicts mortgagee.
public policy being an undue interference or impediment
on the transmission of the property. Another scenario is that the property in in the possession
of third person. This third person maybe a buyer of the
So the Supreme court held here, there was a valid property. The obligation or requirement on the part of the
mortgage in favor of SSS, there was a valid sale in favor debtor or mortgagor to deliver possession of the
of Reyes despite that there was no consent on the part of mortgaged property to the mortgagee but nothing
SSS when the property was sold. prohibits him from delivering the to the creditor-
mortgagee.
The mortgage credit, although it is true that it is a real right
-it follows where ever it goes , after obligation or mortgage As a general rule,it is not required that possession is
debt has been paid to SSS, SSS has no more reason to transferred to the creditor morgagee but they can stipulate
withhold the release of the collateral or the mortgage and that possession be transferred to the creditor.
the registered title of the property, to whom Reyes can
transfer his right as owner. What if the property is in the possession of a third person
and the debtor defaults in his payment? Remember again
For purposes of (---) illegal practice, what you usually that the mortgage is a real right. It attaches to the
happens is that you enter into a deed of sale with property. It follows the property wherever it goes. On the
assumption of mortgage and the mortgagor will execute part of the creditor-mortgagee, as long as it has been
an SPA in favor of the buyer. Ang mangyari nyan, annotated, it will bind the person in possession of the
nakapangalan parin yan doon sa SSS doon sa mortgagor property. The creditor may claim the payment on the part
- sa previous owner. Ang nagabayad ng amortization is of the credits secured by the property even if it is already
yung buyer doon sa mortgage. Pagma-full payment na in the possession of a third person. The property may be
yan, (---) yung SPA for the release of the title and the proceeded against by the creditor and as payment of the
collateral, among others. obligation.
Here, they were able to show that the sale, and that Under 2129, the creditor can go after the third person with
should already be sufficient for the SSS to release the regard to the property, but prior demand is required first
collateral and the title to spouses Vega. Under the from the debtor or the principal debtor of the obligation.
Before you proceed against the third person in relation to order of payment, the first mortgagee is preferred.
recovery of possession or for purposes of the foreclosure Wherein the proceeds of the property being sold would be
of the property, you must first make a demand from the first used to pay off the first mortgagee. Any excess will
debtor. now go to the second mortgagee.
If the property is foreclosed, (the mortgagee can do this Sometimes, what will happen is that the second
even if the property is in the hands of a third person) and mortgagee will pay the obligation to the first mortgagee.
the proceeds from the foreclosure sale are not sufficient What is the effect? Kung mabayaran na ang first
to pay the entire obligation, the third person in possession mortgagee, maextinguish na ang first obligation, isa na
of the property will not be liable for any deficiency. Ang lang ang mortgage sa property.
obligation lang nya is up to the surrender to the highest
bidder of the property. With regard to acceptance of payment, the creditor cannot
be compelled to accept payment from a third person,
Also, it is possible for the third person in possession of the unless that third person has interest in the obligation or
property na sya mismo ang magbayad sa obligation ng authorized by the parties such payment or third person is
principal debtor. Why will he do that? Para dili na samok. an heir or assignee of the principal debtor.
Wala na ang foreclosure proceeding, we still be in
possession of the property. The remedy for him is to go The second mortgagee is still considered as a person who
after the principal debtor for the reimbursement of what has interest in the obligation. So if he voluntarily pays to
he has paid. the first mortgagee-creditor the obligation, he can compel
the first mortgagee to accept such payment because as a
Illustration: A mortgaged his land worth 500 000 in favor second mortgagee, he has an interest in the obligation.
of B, the mortgagee, to secure a debt of 600 000. A then
sold the land to C (that is a valid sale). Obligation of A to In right of first refusal in a real estate mortgage is also
pay the debt is not affected by the sale on due date if A valid and it is not a violation of article 2130. What is the
fails to pay upon demand by creditor-morgagee B. B may right of first refusal? In sales, if the owner wants to sell his
foreclose the mortgage, provided it is annotated prior to property, he will first offer the sale to the one who is
the sale. B has the right to claim from C the payment of granted the right of first refusal.
only 500 000 to the extent of the value of the property
which is part of credit secured by the property sold to C. In a real estate mortgage, pwede sila magstipulate a right
The third person in possession of the property shall not of first refusal that if the mortgagor would want to sell his
be liable for any deficiency in the absence of any contrary property, he should first offer it to the creditor-mortgagee.
stipulation. If this third person pays, whether it is 500 000 Hindi sya pinagbawalan na ibenta. Pero pag ibenta nya,
or the whole 600 000, he can then proceed to A for offer nya muna first sa creditor mortgagee.
reimbursement.
Mortgagor has every right to sell the mortgaged property
Article 2130. A stipulation forbidding the owner from without first securing the consent of the mortgagee. The
alienating the immovable mortgaged shall be void. right of first refusal does not violate this provision and is
considered as perfectly valid. The offer here must be
Any stipulation prohibiting the mortgagor from selling or under the same terms and conditions if you try to offer it
alienating the property will be void as ownership remains to a third person. Otherwise, that subsequent contract can
with the mortgagor. It is also possible for the mortgagor to be subject to rescission or damages.
have the property mortgaged again. Second mortgage.
How can that be possible? Sometimes the value of the In relation to land registration cases, for a mortgage to be
first mortgage does not cover the entire property, taking valid as against to a third person, it must be registered.
into consideration na mayron pang portion na pwedeng i- That registration would constitute as a notice to the whole
mortgage. world that such property is encumbered or subject to a
mortgage. Any person dealing with the property has the
A property is already mortgaged to the first mortgagor, it obligation to look at the title and see for himself whether
can be subsequently mortgaged to a second mortgagor or not the property is encumbered.
and any stipulation prohibiting any subsequent mortgage
is not allowed. As a general rule, he is not obliged to look beyond the title
itself. There are other encumbrances or liens upon the
The rights of the second mortgagee is subordinate to the property not appearing on the title that the person dealing
first mortgagee. If the debtor cannot pay his debts in the
with the property is generally not bound by such liens or ISSUES:

encumbrances unless there is actual knowledge. 1.WON the mortgage to Gonzales is valid. YES
2.WON Gonzales is an innocent purchaser/ mortgagee
If the property is mortgaged and the mortgage is not for value. YES
registered, and then subsequently sold to another person,
as long as the subsequent buyer is in good faith, he will HELD:
not be bound by the said mortgage. So pwede ibenta, and Mojica’s Title is Void Since the TCT of the property was
the subsequent buyer can also have a better right than not actually lost but was in the possession of Pineda,
that of the unregistered mortgagee. the reconstitution proceeding and the second TCT
issue in favor of Mojica by virtue of the sale were void.
The mortgage that is not registered is only valid as
between the parties - mortgagor or morgtagee and not as However, the prior mortgage of the Property by the
against a third person. If this person-buyer has actual Spouses Benitez to Pineda and Sayoc did not prevent
knowledge of the circumstances of this mortgage or the Spouses Benitez, as owners of the Property, from
encumbrances with respect to the property, even if the selling the Property to Mojica. A mortgage is merely
mortgage does not appear to the title, then he will not be an encumbrance on the property and does not
considered as an innocent purchaser for value. It is either extinguish the title of the debtor who does not lose his
registration or actual knowledge to be considered as an principal attribute as owner to dispose of the property.
innocent purchaser for value. The law even considers void a stipulation forbidding the
owner of the property from alienating the mortgaged
PINEDA VS. CA immovable.
FACTS: Spouses Benitez mortgaged a house and lot Since the Spouses Benitez were the undisputed
in favor of Juanita P. Pineda (“Pineda”) and Leila P. owners of the Property, they could validly sell and
Sayoc (“Sayoc”) which was not registered . With the deliver the Property to Mojica. The execution of the
consent of Pineda, spouses Benitez sold the house, notarized deed of sale between the Spouses Benitez
which was part of the Property, to Olivia G. Mojica and Mojica had the legal effect of actual or physical
(“Mojica”). On the same date, Mojica filed a petition for delivery. Ownership of the Property passed from the
the issuance of a second owner’s duplicate alleging Spouses Benitez to Mojica. The nullity of the second
that she “purchased a parcel of land” and the “owner’s owner’s duplicate of TCT did not affect the validity of
duplicate copy was lost.” The same was granted. the sale as between the Spouses Benitez and Mojica.
The lot was also subsequently sold to Mojica. Mojica Gonzales is an Innocent Purchaser for Value The nullity
executed a deed of mortgage over the same property of MOjica’s title does not automatically carry with it the
in favor of Gonzales which deed was registered. nullity of the annotation of Gonzales’ mortgage. The
Pineda and Sayoc filed a complaint against the rule is that a mortgage annotated on a void title is valid
Spouses Benitez and Mojica. The complaint prayed for if the mortgagee registered the mortgage in good faith.
the cancellation of the second owner’s duplicate.
During the pendency of the case, Pineda caused the Gonzales registered her mortgage in good faith.
annotation of a notice of lis pendens. The Court ruled Gonzales had no actual notice of the prior unregistered
that the second owner’s duplicate was void. mortgage in favor of Pineda and Sayoc. To bind third
parties to an unregistered encumbrance, the law
Meanwhile, Mojica defaulted in paying the obligation to requires actual notice. The fact that Mojica, who sold
Gonzales so the latter foreclosed the mortgaged and the Property to Gonzales, had actual notice of the
purchased it at the auction sale. A new TCT was issued unregistered mortgage did not constitute actual notice
in the name of Gonzales. to Gonzales, absent proof that Gonzales herself had
actual notice of the prior mortgage. Thus, Gonzales
Pineda and Sayoc filed a motion with the trial court for acquired her rights as a mortgagee in good faith.
the issuance of an order requiring Gonzales to
surrender the owner’s duplicate of TCT to the ROD. When Mojica defaulted in paying her debt, Gonzales
caused the extrajudicial foreclosure of the mortgaged
The Trial Court declared the title of Gonzales as void Property. Gonzales purchased the mortgaged
and ordered the reinstatement of the TC in the name of Property as the sole bidder at the public auction sale.
Spouses Benitez. The CA ruled in favor of Gonzales For Mojica’s failure to redeem the foreclosed Property
within the prescribed period, Gonzales consolidated
her title to the Property. Absent anyevidence to the The nullity of the second documents of title, the title in
contrary, the sale at public auction of the Property to possession of Pineda, did not affect the validity of the sale
Gonzales was valid. Thus, the title or ownership of the as between spouses Benitez and Mojica. The rule is that
Property passed from Mojica to Gonzales. At this point, a mortgage annotated on a void title is valid if the
therefore, Gonzales became the owner of the Property. mortgagee registered the mortgage in good faith.
When Gonzales purchased the Property at the auction
sale, Pineda and Sayoc had already annotated the lis However, the first mortgage here in favor of Pineda and
pendens on the original of TCT 8361, which remained Sayoc was not registered. With regard to the title of
valid. However, the mortgage of Gonzales was validly walang jurisdiction because the title was not really lost,
registered prior to the notation of the lis pendens. The However, being the owner, she could validly mortgage it
subsequent annotation of the lis pendens could not to Gonzales, and nothing therein, prior to the sale in favor
defeat the rights of the mortgagee or the purchaser at of Gonzales, indicated that there was a prior mortgage
the auction sale who derived their rights under a prior over the same property. Actually the lis pendens was
mortgage validly registered. The settled rule is that the annotated after the sale. So Gonzales could be
auction sale retroacts to the date of the registration of considered to have registered the mortgage in good faith.
the mortgage, putting the auction sale beyond the
reach of any intervening lis pendens, sale or To bind third parties to an unregistered encumbrance, the
attachment. law requires actual notice. Since there was no
registration, there must have been proof, at the very least
The mortgage between Pineda and Sayoc, was it that Gonzales had actual knowledge of this previous
considered valid? Was it registered? mortgage, but there was no proof thereto.
Was Mojica considered an innocent purchaser for value
with regard to that mortgage? When the property was sold to Gonzales, there was no
Was there a valid sale in favor of Mojica? actual notice of the unregistered mortgage, absent proof
When Mojica mortgaged the property to Gonzales, was that Gonzales herself had actual notice of the prior
there a valid mortgage? mortgage. Thus, Gonzales acquired her rights as a
Was Gonzales considered as an innocent purchaser? mortgagee in good faith.
Yes, because he had no knowledge of the previous
mortgage in favor of Pineda and Sayoc because it was When Gonzales purchased the Property at the auction
not registered. sale, that was the time when Pineda and Sayoc had
already annotated the lis pendens. The mortgage of
The relevance of registration of mortgage is emphasized Gonzales was validly registered prior to the notation of
in this case. Notice here that Mojica, the buyer of the the lis pendens. The subsequent annotation of the lis
property, filed a petition for lost title. In land titles, the court pendens could not defeat the rights of the mortgagee or
had no jurisdiction in that instance because the title was the purchaser at the auction sale who derived their rights
not actually lost. It was in the possession of the first under a prior mortgage validly registered. A contrary rule
mortgagees, Pineda and Sayoc. The Trial Court ruled that would make a prior registration of a mortgage or any lien
the reconstitution proceedings are considered void. meaningless
However, when we say void yung title, dili sya valid na
issuance sa registry of deeds. But it does not detract form In essence, what do you have here? It is actually Pineda
the fact that there was a valid sale in favor of Mojica. and Sayoc who will suffer regarding the property as being
negligent in not registering their mortgage. Ang nawala
What is void is the transfer certificate of title and not the lang naman sa kanila ay yun lang right to foreclose the
title over the properties. Therefore, it was a valid sale in property. They can still go to Spouses Benitez for their
favor of Mojica- there was a contract of sale, there was unpaid obligation to which they will file collection for sum
constructive delivery, ownership was transferred. of money but they cannot foreclose the property anymore
sold to Gonzales who is considered as a mortgagee and
The prior mortgage of the Property by the Spouses buyer in good faith.
Benitez to Pineda and Sayoc did not prevent the Spouses
Benitez, as owners of the Property, from selling the Another Example: the property is already sold and the
Property to Mojica. A mortgage is merely an sale is notarized but it is not register. Nauna yung benta.
encumbrance on the property and does not extinguish the But the contract of sale was not annotated.Subsequently
title of the debtor who does not lose his principal attribute the registered owner mortgaged the property. That
as owner to dispose of the property. mortgage will now be registered. In that instance,who will
have a better right, the mortgagee or the buyer? It would
be the mortgagee as long as he had no knowledge of the If the obligation of the registered owner of the property is
prior sale. This is the effect of registration. He can already due and demandable, and he fails to pay the
foreclose the property as long as he is considered a obligation, can the mortgagee foreclose the property? In
mortgagee in good faith. this instance, we have a previous sale by the registered
owner in favor of another person but the sale was not
Can you mortgage after-acquired property? We have registered.
already discuss this before, one of the requisites of a
mortgage is that you must be the absolute owner thereof. After the sale, the same registered owner subjected the
How about after acquired properties? At the time of the property to a mortgage and this mortgage is not
mortgage, these properties are not yet (---). How will you registered. Can the purchaser of the property oppose at
say that you are the absolute owner thereof? the time of the foreclosure sale? Can he question the
validity of the mortgage? Now in this case, even if the
As a general rule, after acquired properties cannot be mortgage was registered, we could not say that the
mortgaged because at the time of the mortgage, it is mortgage is valid. Why? Kasi kulang ang requisites sa
required that the mortgagor is the owner of the property. 2085, that the mortgagor must be the absolute owner
However if you are talking of certain inventories or thereof.
properties that would be subsequently installed with the
properties subject of a mortgage, or inventories that would When the mortgage took place, the registered owner was
be subsequently replenished in ordinary course of not the owner already. Why? Because he had already
business, this maybe allowed. After-acquired properties, sold it to another buyer. So we could say that the
as an exception, can be covered by a real estate mortgage is already null and void because at the time the
mortgage. mortgage was executed, he was no longer the owner of
the property. So notwithstanding the registration of the
February 19, 2016 (Romero) mortgage, the first buyer who has a better right than the
subsequent mortgagee. Remember, registration is not a
(Nota bene: I’ve included notes na kasali sa 2015 TSN mode of acquiring ownership, it is delivery, whether actual
kasi wala na discuss ni ma’am this year. You may or or constructive. However we also take into consideration
may not read it. For added reference lang :p) whether the mortgagee is a mortgagee in good faith or
not.
Art. 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void. (n) We have also discussed after acquired properties. Again
remember the general rule: after acquired properties
Art. 2085. The following requisites are essential to the cannot be mortgaged because at the time of the
contracts of pledge and mortgage: mortgage, it is required that you must be the absolute
(1) That they be constituted to secure the fulfillment owner thereof.
of a principal obligation;
(2) That the pledgor or mortgagor be the absolute For future properties, or properties that will be acquired
owner of the thing pledged or mortgaged; (3) That the after the execution of a mortgage, it means that it was not
persons constituting the pledge or mortgage have the yet in existence. Therefore, you cannot own something
free disposal of their property, and in the absence that does not yet exist. However as an exception, if we
thereof, that they be legally authorized for the are talking about certain inventories, which are ___ in the
purpose. ordinary course of business, such form of after acquired
properties can be subjected to a mortgage. And in fact we
Third persons who are not parties to the principal have also discussed in a case before ung mga properties
obligation may secure the latter by pledging or that are subsequently installed in a real estate property, it
mortgaging their own property. (1857) can also be subjected to the same contract of real estate
mortgage.
What if the property is already sold? There was already a
sale and the deed of sale was duly notarized but the sale Art. 2131. The form, extent and consequences of a
was not registered or not annotated in the title. Let us say mortgage, both as to its constitution, modification
that the same property was mortgaged but who is the and extinguishment, and as to other matters not
mortgagor in that subsequent mortgage? The registered included in this Chapter, shall be governed by the
owner who already sold the property. provisions of the Mortgage Law and of the Land
Registration Law. (1880a)
If you try to look over the articles or provisions applicable Although when we say “without the aid of the
to real estate mortgage under the Civil Code, konti lang court”, we still file it with the executive judge, but
siya. It’s because we also have special laws which are it does not go through the proceedings as if there
specifically applicable to a REM. is a case. Wala na ung required hearing, unlike
that in a judicial foreclosure.
 Rule 68 for judicial foreclosures
 Act 3135 for extrajudicial foreclosures. Judicial Foreclosure vs Extrajudicial Foreclosure (from
 General Banking Law of 2000 or RA 8791, which the 2015 TSN)
to some extent calculates the foreclosure of
mortgages Judicial Extrajudicial
 Land Registration Law or PD 1529. As to the law Rule 68 of the Act 3135
applicable ROC
However with all these laws applicable to a contract of As to right of Has a right of No right of
mortgage, it is clear that the creditor-mortagee is given 2 redemption of redemption (?) redemption but
remedies in case of default on the part of the debtor. the debtor- only equity of
mortgagor redemption
He can either: As to period of 1 year period 90-120 days
1. Collect or file an action for collection for sum of redemption from date of from date of
money and in effect he abandons his right as a registration. entry of
mortgagee. judgment; even
2. To have the mortgage foreclosed. after the 90-120
day period but
These remedies are ALTERNATIVE in nature and before the
therefore one cannot exercise these remedies together. Debtor confirmation of
It’s either collection or foreclosure of mortgage. However mortgagor is a the sale.
if you file an action for collection for sum of money, what juridical entity: 3
you can do with regard to the mortgaged property is months from the Mortagagee is a
subject it to a preliminary attachment, and ___ (7:38) or foreclosure banking
after trial, execute on the property that was already institution, 1 year
mortgaged, or execute on some other properties of the from the date of
debtor. What is clear there is you cannot foreclose the entry of
mortgage and file a collection for sum of money at the judgment
same time. Why? Because that would be splitting the
cause of action, which is a ground for the dismissal of the SPOUSES ROSALES VS. SPOUSES SUBA
cause.
FACTS: On June 13, 1997, RTC rendered a decision in
FORECLOSURE PROCEEDINGS two Civil Cases, the dispositive portion of which reads:
(1) Declaring the Deed of Sale of Exhibit D, G and I,
When we say foreclosure proceedings, foreclosure is the affecting the property in question, as an equitable
remedy available to a mortgagee by which he subjects the mortgage;
mortgaged property to the satisfaction of the obligation to (2) Declaring the parties Erlinda Sibug and Ricardo
secure which the mortgage has given. The mortgage can Rosales, within 90 days from finality of this Decision, to
be foreclosed only when the debt remains unpaid at the deposit with the Clerk of Court, for payment to the parties
time it is already due. Do take note that foreclosure Felicisimo Macaspac and Elena Jiao, the sum of
proceedings have in their favor the presumption of P65,000.00, with interest at nine (9) percent per annum
regularity, and therefore the burden of evidence to rebut from September 30, 1982 until payment is made, plus the
the same is on the party that seeks to challenge the sum of P219.76 as reimbursement for real estate taxes;
proceedings. (3) Directing the parties Felicisimo Macaspac and Elena
Jiao, upon the deposit on their behalf of the amounts
2 kinds of foreclosure: specified in the foregoing paragraph, to execute a deed of
1. Judicial – you file a case before of the court and reconveyance of the property in question to Erlinda Sibug,
it will be governed by Rule 68 of the Rules of married to Ricardo Rosales, and the Register of Deeds of
Court. So it is a special civil action Manila shall cancel Transfer Certificate of Title No.
2. Extrajudicial – governed by Act 3135 and the 150540 in the name of the Macaspacs (Exh. E) and issue
foreclosure is done without the aid of court. new title in the name of Sibug;
(4) For non-compliance by Sibug and Rosales of the is the Philippine National bank or a bank or a banking
directive in paragraph (2) of this dispositive portion, let the institution.
property be sold in accordance with the Rules of Court for
the release of the mortgage debt and the issuance of title “Where a mortgage is foreclosed extrajudicially, Act 3135
to the purchaser. grants to the mortgagor the right of redemption within one
(1) year from the registration of the sheriff’s certificate of
The decision became final and executor. Spouses foreclosure sale.
Rosales, judgment debtors and petitioners failed to
comply with par 2 (deposit with Clerk of Court 65k). This “Where the foreclosure is judicially effected, however, no
prompted Macaspac, as judgment creditor, to file a motion equivalent right of redemption exists. The law declares
for execution. On May 15, 1998, an auction sale of the that a judicial foreclosure sale, ‘when confirmed by an
property was held, wherein petitioners participated. The order of the court, x x x shall operate to divest the rights
property was sold for 285k to spouses Suba of all the parties to the action and to vest their rights in the
(respondents), being the highest bidders. purchaser, subject to such rights of redemption as may be
allowed by law.’ Such rights exceptionally ‘allowed by law’
Respondents thereafter filed with the court a motion for (i.e., even after the confirmation by an order of the court)
writ of possession, contending that the confirmation of the are those granted by the charter of the Philippine National
sale “effectively cut of petitioners’ equity of redemption.” Bank (Act Nos. 2747 and 2938), and the General Banking
RTC ruled that petitioners have no right to redeem since Act (R.A.337). These laws confer on the mortgagor, his
the case is for judicial foreclosure of mortgage. Hence, successors in interest or any judgment creditor of the
respondents as purchasers are entitled to possession. CA mortgagor, the right to redeem the property sold on
affirmed: no right of redemption in judicial foreclosure of foreclosure–after confirmation by the court of the
mortgage. foreclosure sale–which right may be exercised within a
period of one (1) year, counted from the date of
ISSUE: WON petitioners have the right to redeem the registration of the certificate of sale in the Registry of
subject property. NO Property.
HELD: The decision of the trial court, which is final and “But, to repeat, no such right of redemption exists in case
executory, declared the transaction between petitioners of judicial foreclosure of a mortgage if the mortgagee is
and Macaspac an equitable mortgage. The Court defined not the PNB or a bank or banking institution. In such a
an equitable mortgage as “one which although lacking in case, the foreclosure sale, ‘when confirmed by an order
some formality, or form or words, or other requisites of the court, x x x shall operate to divest the rights of all
demanded by a statute, nevertheless reveals the intention the parties to the action and to vest their rights in the
of the parties to charge real property as security for a debt, purchaser.’ There then exists only what is known as the
and contains nothing impossible or contrary to law.” An equity of redemption. This is simply the right of the
equitable mortgage is not different from a real estate defendant mortgagor to extinguish the mortgage and
mortgage, and the lien created thereby ought not to be retain ownership of the property by paying the secured
defeated by requiring compliance with the formalities debt within the 90-day period after the judgment becomes
necessary to the validity of a voluntary real estate final, in accordance with Rule 68, or even after the
mortgage.[6] Since the parties’ transaction is an equitable foreclosure sale but prior to its confirmation.
mortgage and that the trial court ordered its foreclosure,
execution of judgment is governed by Sections 2 and 3, “This is the mortgagor’s equity (not right) of redemption
Rule 68 of the 1997 Rules of Civil Procedure, as which, as above stated, may be exercised by him even
amended. beyond the 90-day period ‘from the date of service of the
order,’ and even after the foreclosure sale itself, provided
In Huerta Alba Resort, Inc. vs. Court of Appeals,[7] we it be before the order of confirmation of the sale. After
held that the right of redemption is not recognized in a such order of confirmation, no redemption can be effected
judicial foreclosure, thus: any longer.”
“The right of redemption in relation to a mortgage–
understood in the sense of a prerogative to re-acquire Clearly, as a general rule, there is no right of redemption
mortgaged property after registration of the foreclosure in a judicial foreclosure of mortgage. The only exemption
sale– exists only in the case of the extrajudicial is when the mortgagee is the Philippine National Bank or
foreclosure of the mortgage. No such right is recognized a bank or a banking institution. Since the mortgagee in
in a judicial foreclosure except only where the mortgagee 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 requisites demanded by the statute for the validity of the
their right, as mortgagor, to extinguish the mortgage and mortgage. But nevertheless, it reveals the intention of the
retain ownership of the property by paying the secured parties to charge the real property as a security for the
debt prior to the confirmation of the foreclosure sale. debt, and contains nothing impossible or contrary to law.
However, instead of exercising this equity of redemption, Since the parties’ transaction is an equitable mortgage,
petitioners chose to delay the proceedings by filing the trial court ordered its foreclosure and therefore it is
several manifestations with the trial court. Thus, they only considered as a judicial foreclosure in which right of
have themselves to blame for the consequent loss of their redemption is not applied, but rather equity of redemption.
property. It appears that the mortgagee here is not a banking
institution, so no right of redemption parin.
Q: Why was it considered as a judicial foreclosure?
A: Because it was foreclosed by virtue of a writ by the Just a quick overview of the judicial foreclosure
court. proceedings under Rule 68 (from last year’s TSN as it was
Q: What is the effect since what you have is a judicial better explained there):
foreclosure?
Q: This case also mentioned an exception, even if we 1. The mortgagee will file a petition for judicial
have a judicial foreclosure, equity of redemption is not foreclosure in the court that has jurisdiction over
applicable. When would that be? the area where the property is situated
A: When the mortgagee is a banking institution. 2. The court will conduct a trial. If, after the trial, the
Q: Ok, so when the mortgagee is a banking institution, court finds merit in the petition, it will render
equity of redemption is not available. So what is the judgment ordering the mortgagor or debtor to pay
remedy available? What is the redemption period here? the obligation within a period not less than 90
A: 1 year from the date of registration. There is a right of days but not more than 120 days from the finality
redemption. of judgment
3. Within this 90 to 120 day period, the mortgagor
So when we have judicial foreclosure, the general rule is has the chance to pay the obligation to prevent
that there is an equity of redemption. The right of the his property from being sold. This is called the
defendant mortgagor to extinguish the mortgage and EQUITY OF REDEMPTION period.
retain ownership of the property by paying the secured 4. If the mortgagor fails to pay within 90-120 days
debt within the 90 day period after the judgment becomes given to him by the court, the property shall be
final, in accordance with Rule 68, or even after the sold to the highest bidder at the public auction in
foreclosure sale but prior to its confirmation. The law is order to satisfy the judgment.
very clear. 5. There will be a judicial confirmation of the sale.
After the confirmation of the sale, the purchaser
SEC 2, RULE 68 shall be entitled to the possession of the property,
and all the rights of the mortgagor with respect to
General rule: No right of redemption if what you have is a the property are severed or terminated. The
judicial foreclosure. Essentially the right of redemption is equity of redemption period actually extends until
the one available if EXTRAJUDICIAL FORECLOSURE the sale is confirmed. Even after the lapse of the
takes place wherein the mortgagor can redeem within 1 90-120 day period, the mortgagor can still
year after the confirmation of the sale. redeem the property, so long as there has been
no confirmation of the sale yet. Therefore the
Exception: With regard to judicial foreclosure, if it is a equity of redemption can be considered as the
banking institution, then we have the right of redemption, right of the mortgagor to redeem the property
1 year from the date of the confirmation of the sale. before the confirmation of the sale.
6. The confirmation of the sale is a hearing where
SEC 47 of the GENERAL BANKING LAW provides that the parties will appear and the mortgagor can
right of redemption is within 1 year from the sale of the assail the validity of the option or question the
real estate, but take note that when we say “1 year from legality thereof.
the sale”, this means 1 year from the registration of the 7. There will be execution of the judgment,
sale. application of the proceeds and the issuance or
execution of the sheriff certificate.
In the case of Spouses Rosales, what we have there is an 8. Thereafter, a registration of the certified true copy
equitable mortgage. We already know that an equitable of the final order of the court confirming the sale.
mortgage is one that lacks some formalities or other
What happens if the sale or certificate sale is registered? default. In case the obligation is not paid, the
The mortgagee can now seek for the consolidation of the property can be sold extrajudicially and the
title in the __ (18:31). Now with regard to judicial proceeds may be applied as payment for the
foreclosure sale, there is this hearing for confirmation of obligation. Make sure that there is a clause
the sale, where the parties will appear and the mortgagor inserted therein that gives the mortgagee the
will try his best to assail the validity of the auction sale, in power to extrajudicially foreclose the property.
other words he will question the validity thereof. Otherwise, you have to file a judicial foreclosure
proceeding.
Do remember that equity redemption need not stop on the 2. In the absence of that authorization, the remedy
120th day, for it is possible that even after the sale, there available to the mortgagee is judicial foreclosure.
can still be a redemption or equity of redemption. This will Or he can file an action for collection of sum of
run until there is a confirmation of the sale. If, as the money.
mortgagor, you exercise this equity of redemption before
the confirmation of the sale, you will pay the amount of Between the two, extrajudicial foreclosure proceeding is
the obligation and NOT the purchase price. So that is more preferred. Why? Because there are lesser expenses
equity of redemption, 90-120 days from entry of judgment and lesser time spent.
or at any time before the sale is confirmed upon the
discretion of the court. What is the effect if the debtor has already died but he has
a duly executed REM? In a contract of agency, if the
Distinguish it sa right of redemption which is 1 year from principal dies, the power given to the representative is
registration of order confirming the sale, which is automatically invoked. In other words, the contract of
applicable even if it is in a judicial foreclosure, if what you agency is deemed extinguished upon the death of the
have is a mortgagee that is a banking institution. principal. Because agency is personal in nature, that is
the general rule. But what about here in a REM?
Now in a judicial foreclosure proceeding, who can Essentially if the mortgagor authorizes the mortgagee to
redeem? foreclose the property in case of default, there is a
1. The mortgagor contract of agency. But even if the debtor dies, it will not
2. One who is in privity of title with the mortgagor extinguish the authority given to the mortgagee to
3. The successor in interest of the mortgagor foreclose. Why? Because there is no extinguishment of
4. A person with whom the debtor has transferred the authority because the power given to the mortgagee
his right is for his benefit or for his interest. So notwithstanding the
5. A person with whom the debtor has contained his death of the mortgagor, the mortgagee may still
interest in the subject matter extrajudicially foreclose the property. The agency in that
6. One who succeeds to the interest of the debtor case may be considered as an agency coupled with
7. One who is a joint debtor or joint owner of the interest.
subject matter
8. The wife, as regards the husband’s homestead, (discussion below copied from the 2015 TSN, kasi hindi
may also redeem the property. Of course, as na discuss ni ma’am. Taas sad ni and basi mugawas sa
successors in interest, we also have the exam)
compulsory heirs
Judicial foreclosure is under special civil action. Extra
What if the price in the auction sale is not sufficient to pay judicial foreclosure is under Act 3135.
the obligation? So may deficiency pa. The creditor- Act 3135 is an act to regulate the sale of property under
mortgagee can still recover within 10 years from the time special powers inserted in or annexed to real estate
the right of action accrues, may recover the same even mortgages. We have here an extrajudicial foreclosure.
during the period of redemption. Usually the deficiency
judgment is incorporated in the judicial foreclosure For you to be able to promptly advance an execution
proceeding. foreclosure of real estate mortgage, make sure that in the
same contract of real estate mortgage or attached thereto
Now extrajudicial foreclosure is governed by Act 3135. there is a special power or authority given by the
When can you apply for an extrajudicial foreclosure? mortgagor to the mortgagee to foreclose or sell the
subject property in case the debtor fails to pay. In the
1. Look at the real estate mortgage. Make sure that absence of that authority you cannot apply for
in the REM, the mortgagor authorized the extrajudicial foreclosure. The only remedy would be by
mortgagee to foreclose the property in case of judicial foreclose or an action for sum of money.
Section 3 provides for the notice and publication General rule: The creditor, trustee or other person,
requirement. This must be strictly complied otherwise, authorized to act for the creditor, may participate in the
failure to comply with this provision would result to the bidding and purchase under the same conditions as any
nullity of the foreclosure proceeding. other bidder
Exception: it has been expressly provided in the mortgage
Evidence there will be Affidavit of publication as well that they cannot participate.
issues with regard to this notice. Section 6 provides for the right of redemption.
Section 4 with regard to the time of the public auction
under the direction of the sheriff, justice or auxiliary justice SECTION 6. In all cases in which an extrajudicial sale
but usually sheriff. is made under the special power hereinbefore
referred to, the debtor, his successors in interest or
SECTION 1. When a sale is made under a special any judicial creditor or judgment creditor of said
power inserted in or attached to any real-estate debtor, or any person having a lien on the property
mortgage hereafter made as security for the payment subsequent to the mortgage or deed of trust under
of money or the fulfillment of any other obligation, the which the property is sold, may redeem the same at
provisions of the following election shall govern as to any time within the term of one year from and after
the manner in which the sale and redemption shall be the date of the sale; and such redemption shall be
effected, whether or not provision for the same is governed by the provisions of sections four hundred
made in the power. and sixty-four to four hundred and sixty-six,
inclusive, of the Code of Civil Procedure, in so far as
SECTION 2. Said sale cannot be made legally outside these are not inconsistent with the provisions of this
of the province in which the property sold is situated; Act.
and in case the place within said province in which
the sale is to be made is subject to stipulation, such It says the debtor “may redeem the same at any time
sale shall be made in said place or in the municipal within the term of one year from and after the date of the
building of the municipality in which the property or sale “. Notice that the law states “date f the sale” but the
part thereof is situated. Supreme Court has held that that refers to the registration
of certificate of sale. So one year from registration of the
SECTION 3. Notice shall be given by posting notices sale.
of the sale for not less than twenty days in at least
three public places of the municipality or city where SECTION 7. In any sale made under the provisions of
the property is situated, and if such property is worth this Act, the purchaser may petition the Court of First
more than four hundred pesos, such notice shall also Instance of the province or place where the property
be published once a week for at least three or any part thereof is situated, to give him possession
consecutive weeks in a newspaper of general thereof during the redemption period, furnishing
circulation in the municipality or city. bond in an amount equivalent to the use of the
property for a period of twelve months, to indemnify
the debtor in case it be shown that the sale was made
SECTION 4. The sale shall be made at public auction,
without violating the mortgage or without complying
between the hours or nine in the morning and four in
with the requirements of this Act. Such petition shall
the afternoon; and shall be under the direction of the
be made under oath and filed in form of an ex parte
sheriff of the province, the justice or auxiliary justice
motion in the registration or cadastral proceedings if
of the peace of the municipality in which such sale
the property is registered, or in special proceedings
has to be made, or a notary public of said
in the case of property registered under the Mortgage
municipality, who shall be entitled to collect a fee of
Law or under section one hundred and ninety-four of
five pesos each day of actual work performed, in
the Administrative Code, or of any other real property
addition to his expenses.
encumbered with a mortgage duly registered in the
office of any register of deeds in accordance with any
SECTION 5. At any sale, the creditor, trustee, or other existing law, and in each case the clerk of the court
persons authorized to act for the creditor, may shall, upon the filing of such petition, collect the fees
participate in the bidding and purchase under the specified in paragraph eleven of section one hundred
same conditions as any other bidder, unless the and fourteen of Act Numbered Four hundred and
contrary has been expressly provided in the ninety-six, as amended by Act Numbered Twenty-
mortgage or trust deed under which the sale is made. eight hundred and sixty-six, and the court shall, upon
approval of the bond, order that a writ of possession

issue, addressed to the sheriff of the province in Essentially that’s act 3135. This is an old law but we have
which the property is situated, who shall execute said an update here. A new circular was issued by the
order immediately. Supreme Court A.M. NO. 99-10-05-0 as amended by
resolution of June 30, 2001 and August 7, 2002.
Section 7 we have here possession by the purchaser
during the redemption period. Purchaser during the public Application for extrajudicial foreclosure shall be filed with
auction can possess the property by furnishing a bond the executive judge through the clerk of court who is also
equivalent to the use of the property for a period of 12 the ex officio sheriff.
months to indemnify the debtor in case it be shown that When we say extrajudicial it is technically without the aid
the sale was made without violating the mortgage or of court. But you still need to apply to the court.
without complying with the requirements.
If you are the highest bidder you file a petition. If you want Requirements for filing of the fees and the procedure for
to acquire possession during the redemption period you the issuance of the certificate. Notice that it is provided
have to furnish a bond. But if the redemption period has therein the general banking law under Section 47 of RA
already lapsed, then no bond is requires as the sale is 8791.
considered as absolute. The petition for possession shall We mentioned that while in extrajudicial foreclosure the
be considered in the form of an ex parte motion in general rule is that the redemption period is one year
registration or cadastral proceeding if the property is period.
registered.
The exception is the mortgagor is a juridical person he
SECTION 8. The debtor may, in the proceedings in has the right to redeem the property until but not after the
which possession was requested, but not later than registration of the sale in which no case shall be more
thirty days after the purchaser was given possession, than 3 months after foreclosure whichever comes earlier.
petition that the sale be set aside and the writ of If the sale is registered one month after the foreclosure,
possession cancelled, specifying the damages the property can no longer be redeemed if the mortgagor
suffered by him, because the mortgage was not is a juridical person.
violated or the sale was not made in accordance with Also emphasized therein the importance of notices;
the provisions hereof, and the court shall take noncompliance therewith shall constitute as a violation of
cognizance of this petition in accordance with the the law.
summary procedure provided for in section one
hundred and twelve of Act Numbered Four hundred Another circular was issued, Circular No. 7-2002,
and ninety-six; and if it finds the complaint of the reiterating what we mentioned in the earlier administrative
debtor justified, it shall dispose in his favor of all or matter but this time we also included the fees to be paid.
part of the bond furnished by the person who We have there an example of a notice of extrajudicial
obtained possession. Either of the parties may appeal sale.
from the order of the judge in accordance with
section fourteen of Act Numbered Four hundred and That’s a quick overview of Act 3135. Again take note that
ninety-six; but the order of possession shall continue there must be an authority given in favor of the mortgagee
in effect during the pendency of the appeal. so that the mortgagee can sell the property to a
foreclosure sale in case the debtor fails to pay when the
So here he can file an action to question the public obligation becomes due. In the absence of special power
auction. or authority, extrajudicial foreclosure is not available. The
remedies available are to judicially foreclose the property
or to file a collection for sum of money.
SECTION 9. When the property is redeemed after the
purchaser has been given possession, the redeemer
Remember if judicially foreclose a property most probably
shall be entitled to deduct from the price of
it would have to incur more expenses since you have to
redemption any rentals that said purchaser may have
get a lawyer and pay legal fees and it would take much
collected in case the property or any part thereof was
longer. So you still have to schedule a hearing.
rented; if the purchaser occupied the property as his
own dwelling, it being town property, or used it
In extrajudicial you just have to comply with the
gainfully, it being rural property, the redeemer may
requirement of notice and publication and the payment of
deduct from the price the interest of one per centum
fees which are obviously lesser than judicial foreclosure.
per month provided for in section four hundred and
sixty-five of the Code of Civil Procedure.
(2016 lecture continues here :P) paid within said period, the mortgagee shall have the right
to declare the mortgage due and may immediately
Also you will notice that extrajudicial foreclosure foreclose the same judicially or extrajudicially, in
proceedings require publication, and the publication is accordance with law.
MANDATORY and must be strictly complied with. For
example, the publication indicates the date for the public On 30 June 1993, after her efforts to collect proved futile,
auction sale. The sale must happen on the date as respondent Carmencita San Diego filed a petition for the
published. If the public auction sale happens on a extrajudicial foreclosure of the mortgage. Property was
different, then that is a ground to question the validity or a sold in a public auction with Carmencita San Diego as the
ground for the nullity of the public auction sale. highest bidder for P2,000,000.00.
Another instance, which we had discussed in a case With the petitioners having failed to redeem their property
before, if the publication contains the correct distinction of within the 1-year redemption period from the date of
the property pero nabaliktad ang title number. So that is inscription of the sheriff’s certificate of sale, as provided
also a ground for the nullity of the foreclosure for in Act No. 3135, as amended, the San Diegos caused
proceedings. the consolidation of title over the foreclosed property in
their names.
However take note that personal notice to the mortgagor
is not required under the law unless if the mortgage Then, on 09 November 1994, petitioners filed their
contract itself provides that in case of foreclosure, the complaint for annulment of the extrajudicial foreclosure
mortgagor must be informed. and auction sale, with damages. Petitioners alleged that
(1) said foreclosure and auction sale were null and void
Under Act 3135, publication of notice in a newspaper as for failure to comply with the requirements of notice and
required therein is more than sufficient compliance. Now publication, as mandated by Act 3135, as amended; (2)
with regard to foreclosure, as we have mentioned, sa the mortgaged property was illegally foreclosed in the light
extrajudicial foreclosure, what we have is a right of of the settled rule that an action to foreclose a mortgage
redemption and as a general rule, equity of redemption must be limited to the amount mentioned in the mortgage
does NOT exist in an extrajudicial foreclosure proceeding. document, in this case, P1,000,000.00, which amount
was allegedly bloated by respondent Carmencita San
What happens in this right of redemption? Within the Diego to P1,950,000.00; and (3) the San Diegos’
redemption period, which is 1 year from the execution of application for consolidation of title was premature
the sale, which by the way, must be construed from the because the husband, Benjamin San Diego, allegedly
date of the registration of the sale (because even after the granted them an extension of the period of redemption up
foreclosure sale, if the sale has not yet been confirmed, to 11 November 1994.
then it will not pass title to the buyer. And where is there
confirmation? 1 year from the registration of the said TC- the latter’s cause of action is already barred by
sale). Now if you redeem the property, you pay the laches on account of their failure or neglect for an
mortgagee the purchase price plus expenses and interest unreasonable length of time to do that which, by
incurred in relation thereto. exercising due diligence, could or should have been done
earlier. Also that petitioners’ inaction constituted a waiver
SPOUSES LANDRITO VS. CA on their part.
FACTS : In July 1990, spouses Landrito obtained a loan ISSUE: WON the extra-judicial foreclosure and public
of P350,000.00 from respondent Carmencita San Diego. auction sale of the subject parcel of land are valid and
To secure payment thereof, petitioners executed on 02 lawful when the amount stated in letter-request or the
August 1990 a deed of real estate mortgage over their petition for extrajudicial foreclosure and in the notice of
parcel of land located at Bayanan, Muntinlupa, Rizal. sheriff sale doubled the amount stipulated in the
Amendment of Real Estate Mortgage. NO
After making substantial payments, petitioners again
obtained and were granted by Carmencita San Diego an HELD: At the time of the foreclosure sale on 11 August
additional loan of One Million Pesos. To secure this 1993, petitioners were already in default in their loan
additional loan, the parties executed on 13 September obligation.
1991 an "Amendment of Real Estate Mortgage",
whereunder they stipulated that the loan shall be paid Much earlier, or on 27 April 1993, a final notice of demand
within six (6) months from 16 September 1991, and if not for payment had been sent to them, despite which they
still failed to pay. Hence, respondent Carmencita San

Diego’s resort to extrajudicial foreclosure, provided no In a long line of cases, this Court has consistently ruled
less in the parties’ "Amendment of Real Estate Mortgage". that the one-year redemption period should be counted
not from the date of foreclosure sale, but from the time the
The rule has been, and still is, that in real estate certificate of sale is registered with the Register of Deeds.
mortgage, when the principal obligation is not paid when Here, it is not disputed that the sheriff’s certificate of sale
due, the mortgagee has the right to foreclose on the was registered on 29 October 1993.
mortgage and to have the mortgaged property seized and
sold with the view of applying the proceeds thereof to the From the foregoing, it is clear as day that even the
payment of the obligation. complaint filed by the petitioners with the trial court on 09
November 1994 was instituted beyond the 1-year
Here, the validity of the extrajudicial foreclosure on 11 redemption period. In fact, petitioners no less
August 1993 was virtually confirmed by the trial court acknowledged that their complaint for annulment of
when it dismissed petitioners’ complaint, and rightly so, extrajudicial foreclosure and auction sale was filed about
what with the fact that petitioners failed to exercise their eleven (11) days after the redemption period had already
right of redemption within the 1-year period therefore expired on 29 October 19947. They merely harp on the
counted from the registration of the sheriff’s certificate of alleged increase in the redemption price of the mortgaged
sale. property as the reason for their failure to redeem the
same. However, and as already pointed out herein, they
We do not take issue with petitioners’ submission that a chose not, despite notice, to appear during the
mortgage may be foreclosed only for the amount foreclosure proceedings. Of course, petitioners presently
appearing in the mortgage document, more so where, as insist that they requested for and were granted an
here, the mortgage contract entered into by the parties is extension of time within which to redeem their property,
evidently silent on the payment of interest. relying on a handwritten note allegedly written by Mrs.
San Diego’s husband on petitioners’ statement of
It appears from the evidence on record that despite due account, indicating therein the date 11 November 1994 as
notice and publication of the same in a newspaper of the last day to pay their outstanding account in full. Even
general circulation, petitioners did not bother to attend the assuming, in gratia argumenti, that they were indeed
foreclosure sale nor raise any question regarding the granted such an extension, the hard reality, however, is
propriety of the sale. It was only on November 9, 1994, or that at no time at all did petitioners make a valid offer to
more than one year from the registration of the Sheriff’s redeem coupled with a tender of the redemption price.
Certificate of Sale, that [petitioners] filed the instant For, in Lazo v. Republic Surety & Insurance Co., Inc., this
complaint. Clearly, [petitioners] had slept on their rights Court has made it clear that it is only where, by voluntary
and are therefore guilty of laches, which is defined as the agreement of the parties, consisting of extensions of the
failure or neglect for an unreasonable or explained length redemption period, followed by commitment by the debtor
of time to do that which, by exercising due diligence, could to pay the redemption price at a fixed date, will the
or should have been done earlier, failure of which gives concept of legal redemption be converted into one of
rise to the presumption that the person possessed of the conventional redemption.
right or privilege has abandoned or has declined to assert
the same. POLICY: Period of redemption is not a prescriptive
period but a condition precedent provided by law to
The law on redemption of mortgaged property is clear. restrict the right of the person exercising redemption.
Republic Act No. 3135 (An Act to Regulate the Sale of Correspondingly, if a person exercising the right of
Property Under Special Powers Inserted In Or Annexed redemption has offered to redeem the property within the
to Real Estate Mortgages), as amended by Republic Act period fixed, he is considered to have complied with the
No. 4118, provides in Section 6 thereof, thus: condition precedent prescribed by law and may thereafter
bring an action to enforce redemption. If the period is
"Sec. 6. In all cases in which an extrajudicial sale is made allowed to lapse before the right of redemption is
under the special power hereinbefore referred to, the exercised, then the action to enforce redemption will not
debtor, his successors in interest or any judicial creditor prosper, even if the action is brought within the ordinary
or judgment creditor of said debtor, or any person having prescriptive period. Moreover, the period within which to
a lien on the property subsequent to the mortgage or deed redeem the property sold at a sheriff’s sale is not
of trust under which the property is sold, may redeem the suspended by the institution of an action to annul the
same at any time within the term of one year from and foreclosure sale.
after the date of the sale; xxx"
the sale, together with the tender of the same amount,

Q: Can we say that the 1 year redemption period will be which in this case, the petitioners never did.
interrupted when you file an action for annulment of the
foreclosure proceeding before the expiration thereof? Do take note that the period of redemption is not a
A: No. The filing of the annulment will not interrupt the prescriptive but a condition precedent provided by law to
running of the 1 year redemption period. restrict the right of the person exercising the redemption.
If the person exercising the redemption. If a person
Now here the sale was registered on Oct 29 1993, so from exercising the right of redemption has offered to redeem
that time, the 1 year redemption period will begin to run the property within a period fixed, he is considered to have
and under the facts of this case, the complaint for complied with the condition precedent prescribed by law
annulment of the extrajudicial proceedings was filed 11 and may thereafter bring an action to enforce redemption.
days after the redemption period. If, on the other hand, the period is allowed to lapse before
the right of redemption is exercised, then the action to
Now what were the grounds here for the nullity of the said enforce redemption will not prosper, even if the action is
foreclosure sale? It was considered that laches has brought within the ordinary prescription period. Moreover
worked against the petitioners, because despite notice to the period within which to redeem the property sold at a
them of the extrajudicial foreclosure proceedings, they sheriffs sale is not suspended by the institution of an
failed to attend the proceedings and there voiced out what action to annul the foreclosure sale. In this case,
they are now claiming. Truly, laches has worked against petitioners have lost any right or interest over the subject
them. The petitioners failed to exercise their right of property primarily because of their failure to redeem the
redemption within the 1 year period therefor counted from same in the manner and within the period prescribed by
the registration of the sheriffs certificate of sale. So not law.
counted from foreclosure but from the time the certificate
of sale is registered. So you have here a right of redemption under Act 3135,
however you also have to take note of what is provided in
However take note that the filing of an action for the the General Banking Law of 2000 wherein it was the basis
annulment of the extrajudicial foreclosure proceeding will here of the exceptions in judicial foreclosures, wherein
not interrupt the 1 year redemption period. So even if the you have a mortgagee as a banking institution, what you
action here was filed before Oct 29, 1994, the right to have is a right of redemption 1 year from the date of the
redeem the property will still end on Oct 29 1994. Further registration of the sale.
with regard to extension, it must be clear that there was
really a commitment on the part of the mortgagee to such However Sec 47 of the General Banking Law of 2000 or
extension. Even assuming, in gratia argumenti, that they 8791 also provides that:
were indeed granted such an extension, the hard reality,
however, is that at no time at all did petitioners make a Sec. 47. Foreclosure of Real Estate Mortgage. - In the
valid offer to redeem coupled with a tender of redemption event of foreclosure, whether judicially or extra-judicially,
price. This is one of the distinctions here. When we talk of any mortgage on real estate which is security for any
about right of redemption or equity of redemption under loan or other credit accommodation granted, the
the law in relation to mortgage, these are forms of legal mortgagor or debtor whose real property has been sold
redemption, in the sense that you can compel the creditor for the full or partial payment of his obligation shall have
mortgagee to accept your redemption price. However if the right within one year after the sale of the real estate,
the parties will subsequently agree for the extension of the to redeem the property by paying the amount due under
period beyond the period provided in the right of the mortgage deed, with interest thereon at rate specified
redemption or equity of redemption, what we have there in the mortgage, and all the costs and expenses incurred
is a conventional redemption, which must be voluntary by the bank or institution from the sale and custody of said
agreed upon by the parties. In this case, the petitioners property less the income derived therefrom. However, the
assert that there was a conventional redemption. They purchaser at the auction sale concerned whether in a
were given an extension of time to redeem the property judicial or extra-judicial foreclosure shall have the right to
however there was no evidence that both parties agreed enter upon and take possession of such property
to such extension. Therefore the legal redemption was not immediately after the date of the confirmation of the
converted to a conventional redemption. auction sale and administer the same in accordance with
law. Any petition in court to enjoin or restrain the conduct
Under the facts of this case, or in circumstances like this, of foreclosure proceedings instituted pursuant to this
what is the best thing that a mortgagor should do? provision shall be given due course only upon the filing by
Redeem the property within 1 year from the registration of the petitioner of a bond in an amount fixed by the court
conditioned that he will pay all the damages which the mortgagor and the bank as a mortgagee. If the
bank may suffer by the enjoining or the restraint of the redemption period expires, then the clerk will now archive
foreclosure proceeding. the records in relation to the said foreclosure proceeding.
Notwithstanding Act 3135, juridical persons whose GOLDENWAY MERCHANDISING CORPORATION vs.
property is being sold pursuant to an extrajudicial EQUITABLE PCI BANK
foreclosure, shall have the right to redeem the
property in accordance with this provision until, but FACTS: Goldenway Merchandising Corporation
not after, the registration of the certificate of (petitioner) executed a Real Estate Mortgage in favor of
foreclosure sale with the applicable Register of Deeds Equitable PCI Bank (respondent) over its real properties
which in no case shall be more than three (3) months situated in Valenzuela, Bulacan (now Valenzuela City).
after foreclosure, whichever is earlier. Owners of The mortgage secured the P2,000,000.00 loan granted by
property that has been sold in a foreclosure sale prior respondent to petitioner and was duly registered.
to the effectivity of this Act shall retain their
redemption rights until their expiration. As Goldenway failed to settle its loan obligation, Equitable
extrajudicially foreclosed the mortgage. During the public
So what is that? That is an exception to an extrajudicial auction, the mortgaged properties were sold for
foreclosure proceeding, wherein if the mortgagor is a P3,500,000.00 to Equitable and a Certificate of Sale was
juridical person, you do not apply the 1 year redemption issued.
period. So here we have a bank as a mortgagee but the
mortgagor is a juridical person, partnership or corporation. Goldenway’s counsel offered to redeem the foreclosed
If it is an individual person, you apply the right of properties by tendering a check in the amount of
redemption but if the mortgagee is a bank and the P3,500,000.00. It’s counsel met with Equitable’s counsel
mortgagor is a juridical person, you do not have the 1 year reiterating their intention to exercise the right of
period but rather you can redeem until the registration of redemption. However, Goldenway was told that such
the certificate of foreclosure sale or 3 months after the redemption is no longer possible because the certificate
foreclosure, or whichever is earlier. So what do you mean of sale had already been registered.
by that? If the sale was registered 1 month after the
foreclosure sale (??), wala na, hindi ka na pwede Goldenway filed a complaint for specific performance and
magredeem. But what if na register siya 4 months after damages against Equitable, asserting that it is the one-
the sale? Hindi na rin pwede kasi lampas na sa 3 months. year period of redemption under Act No. 3135 which
should apply and not the shorter redemption period
So what happens in an extrajudicial foreclosure provided in R.A. No. 8791. Goldenway argued that
proceeding, you file an application with the executive applying Section 47 of R.A. 8791 to the real estate
judge which has jurisdiction over the property through the mortgage executed in 1985 would result in the impairment
clerk of court, then comply with the requirement of posting of obligation of contracts and violation of the equal
of notice of sale and publication of notice of sale for once protection clause under the Constitution.
a week at for at least 3 consecutive weeks in a newspaper
of general circulation. Thereafter the clerk of court will Additionally, Goldenway faulted Equitable for allegedly
issue a receipt and certificate of payment and the failing to furnish it and the Office of the Clerk of Court with
application will be raffled among the sheriffs. The sheriff a Statement of Account as directed in the Certificate of
is the one who will handle the auction sale. Sale, due to which Goldenway was not apprised of the
assessment and fees incurred by Equitable, thus
The sale must have at least 2 bidders. Usually this depriving Goldenway of the opportunity to exercise its
includes the creditor-mortgagee. If in the 1st sale, siya right of redemption.
lang ang bidder than another sale will take place. In the
2nd place, if siya parin ang bidder, then the creditor- Equitable pointed out that Goldenway cannot claim that it
mortgagee will be considered as the highest bidder. was unaware of the redemption price which is clearly
Thereafter the certificate of sale will be approved by the provided in Section 47 of R.A. No. 8791, and that
executive judge or by the vice executive judge in his Goldenway had all the opportune time to redeem the
absence, and a certificate is issued to the winning bidder. foreclosed properties. As to the check payment tendered
From the time that the sale is registered, the 1 year right by Goldenway, Equitable said that even assuming
of redemption will begin to run. However take note of the arguendo such redemption was timely made, it was not
3 month period or the registration of the sale, whichever for the amount as required by law.
comes earlier, if what you have is a juridical person as a
RTC rendered its decision dismissing the complaint. CA accordance with the Rules of Court, or extrajudicially in
which affirmed RTC’s decision. accordance with Act No. 3135, as amended.
In the present petition, Goldenway contended that Section However, Section 47 of R.A. No. 8791 otherwise
47 of R.A. No. 8791 is inapplicable considering that the known as "The General Banking Law of 2000" which
contracting parties expressly and categorically agreed took effect on June 13, 2000, amended Act No. 3135.
that the foreclosure of the real estate mortgage shall be in Said provision reads:
accordance with Act No. 3135. It contended that the right
of redemption is part and parcel of the Deed of Real SECTION 47. Foreclosure of Real Estate Mortgage. — In
Estate Mortgage itself and attaches thereto upon its the event of foreclosure, whether judicially or
execution. extrajudicially, of any mortgage on real estate which is
security for any loan or other credit accommodation
It also argues that applying Section 47 of R.A. No. 8791 granted, the mortgagor or debtor whose real property has
to the present case would be a substantial impairment of been sold for the full or partial payment of his obligation
its vested right of redemption under the real estate shall have the right within one year after the sale of the
mortgage contract. Such impairment would be violative of real estate, to redeem the property by paying the amount
the constitutional proscription against impairment of due under the mortgage deed, with interest thereon at the
obligations of contract. rate specified in the mortgage, and all the costs and
expenses incurred by the bank or institution from the sale
ISSUES: Whether or not the redemption period and custody of said property less the income derived
should be the 1-year period provided under Act 3135, therefrom. However, the purchaser at the auction sale
and not the shorter period under RA 8791 as the concerned whether in a judicial or extrajudicial foreclosure
parties expressly agreed that foreclosure would be in shall have the right to enter upon and take possession of
accordance with Act 3135. (The shorter period under such property immediately after the date of the
RA 8791 should apply.) confirmation of the auction sale and administer the same
in accordance with law. Any petition in court to enjoin or
May the foregoing amendment be validly applied in restrain the conduct of foreclosure proceedings instituted
this case when the real estate mortgage contract was pursuant to this provision shall be given due course only
executed in 1985 and the mortgage foreclosed when upon the filing by the petitioner of a bond in an amount
R.A. No. 8791 was already in effect? Yes fixed by the court conditioned that he will pay all the
damages which the bank may suffer by the enjoining or
HELD: The law governing cases of extrajudicial the restraint of the foreclosure proceeding.
foreclosure of mortgage is Act No. 3135,14 as amended
by Act No. 4118. Section 6 thereof provides: Notwithstanding Act 3135, juridical persons whose
property is being sold pursuant to an extrajudicial
SEC. 6. In all cases in which an extrajudicial sale is made foreclosure, shall have the right to redeem the property in
under the special power hereinbefore referred to, the accordance with this provision until, but not after, the
debtor, his successors-in-interest or any judicial creditor registration of the certificate of foreclosure sale with
or judgment creditor of said debtor, or any person having the applicable Register of Deeds which in no case shall
a lien on the property subsequent to the mortgage or deed be more than three (3) months after foreclosure,
of trust under which the property is sold, may redeem the whichever is earlier. Owners of property that has been
same at any time within the term of one year from and sold in a foreclosure sale prior to the effectivity of this Act
after the date of the sale; and such redemption shall be shall retain their redemption rights until their expiration.
governed by the provisions of sections four hundred and
sixty-four to four hundred and sixty-six, inclusive, of the Under the new law, an exception is thus made in the case
Code of Civil Procedure, in so far as these are not of juridical persons which are allowed to exercise the right
inconsistent with the provisions of this Act. of redemption only "until, but not after, the registration of
the certificate of foreclosure sale" and in no case more
The one-year period of redemption is counted from the than 3 months after foreclosure, whichever comes first.
date of the registration of the certificate of sale. In this
case, the parties provided in their real estate mortgage Petitioner’s contention that Section 47 of R.A. 8791
contract that upon petitioner’s default and the latter’s violates the constitutional proscription against impairment
entire loan obligation becoming due, respondent may of the obligation of contract has no basis. The purpose of
immediately foreclose the mortgage judicially in the non-impairment clause of the Constitution is to
safeguard the integrity of contracts against unwarranted
interference by the State. There is an impairment if a Q: Wasn’t it contended that this General Banking Law was
subsequent law changes the terms of a contract between unconstitutional? The first issue with regard to
the parties, imposes new conditions, dispenses with those unconstitutionality is that this was in violation of the non-
agreed upon or withdraws remedies for the enforcement impairment clause. When was the REM executed?
of the rights of the parties. A: It was executed on 1985, before the effectivity of the
General Banking Law of 2000.
Section 47 did not divest juridical persons of the right to Q: When was the property foreclosed?
redeem their foreclosed properties but only modified the A: In 2001, when the General Banking Law already took
time for the exercise of such right by reducing the one- effect.
year period originally provided in Act No. 3135. The new Q: Was the contention of Goldenway correct that there
redemption period commences from the date of was a violation of the non-impairment clause with the
foreclosure sale, and expires upon registration of the application of this General Banking Law?
certificate of sale or three months after foreclosure,
whichever is earlier. There is likewise no retroactive So as a general rule, it would be Act 3135 which should
application of the new redemption period because Section be applied in cases of extrajudicial foreclosure of
47 exempts from its operation those properties foreclosed mortgages. So under Act 3135, it is already clear that the
prior to its effectivity and whose owners shall retain their 1 year period of redemption is counted from the date of
redemption rights under Act No. 3135. registration of the certificate of sale. However as an
exemption we also take into consideration when we can
We agree with the CA that the legislature clearly intended apply the General Banking Law provisions.
to shorten the period of redemption for juridical persons
whose properties were foreclosed and sold in accordance The General Banking Law, which took effect on June 13,
with the provisions of Act No. 3135. 2000, it provides for the period wherein if what you have
are juridical persons whose properties are being sold
The difference in the treatment of juridical persons and pursuant to an extrajudicial foreclosure which shall have
natural persons was based on the nature of the properties the right to redeem the property in accordance with Sec
foreclosed – whether these are used as residence, for 47 “until but not after the registration of the certificate of
which the more liberal one-year redemption period is foreclosure sale with the applicable Register of Deeds,
retained, or used for industrial or commercial purposes, in which in no case shall be more than 3 months after
which case a shorter term is deemed necessary to reduce foreclosure, whichever is earlier.”
the period of uncertainty in the ownership of property and
enable mortgagee-banks to dispose sooner of these With this law, an exception is made in case of juridical
acquired assets. persons, which are allowed to exercise the right of
redemption (or here we call it equity of redemption) until
It must be underscored that the General Banking Law of but not after the registration of foreclosure sale, and in no
2000 sought to reform the General Banking Act of 1949 case more than 3 months after foreclosure, whichever
to maintain a safe and sound banking system. The comes first.
amendment introduced by Section 47 embodied one of
such safe and sound practices aimed at ensuring the The Supreme Court held that there was no violation of the
solvency and liquidity of our banks. non-impairment clause of the Constitution. There is an
impairment if a subsequent law changes the terms of the
The right of redemption must be exercised in the manner contract between the parties, imposes new conditions,
prescribed by the statute, and within the prescribed time dispenses with those agreed upon or withdraws remedies
limit, to make it effective. Furthermore, as with other for the enforcement of the rights of the parties. But Sec 47
individual rights to contract and to property, it has to give did not divest juridical persons of the right to redeem their
way to police power exercised for public welfare. foreclosed properties but only modified the time for the
exercise of such right by reducing the one-year period
Having ruled that the assailed Section 47 of R.A. No. 8791 originally provided in Act 3135.
is constitutional, we find no reversible error committed by
the CA in holding that petitioner can no longer exercise There was also no violation when it was reduced. Why?
the right of redemption over its foreclosed properties after Because again when it was foreclosed, the General
the certificate of sale in favor of respondent had been Banking Law was already in effect. There is also no
registered. infringement of the equal protection clause as it is not
intended to prohibit legislation, which is limited to the
object in which it is directed or by the territory in which it
is to operate. It does not require absolute equality, but not after the registration of the certificate of sale
merely that all persons be treated alike under like whichever is earlier as covered under the General
conditions both as to privileges conferred and liabilities Banking Law.
imposed.
General Rule for Extrajudicial Foreclosure: Right
So in this case, natural persons can be different treated of Redemption within one year from the date of
differently from a juridical person, such as a corporation, registration of the certificate of sale
like the petitioner in this case. Do remember, the right of
redemption, being statutory, it must be exercised in the Exception: Mortgagor is a JURIDICAL entity
manner prescribed by the statute, and within the under Sec. 47 of Gen. Banking Law, he does not
prescribed time limit, to make it effective. So there is no have a right of redemption but what he has is until
reversible error committed by the CA in holding that the registration of the certificate of sale, to
petitioner can no longer exercise the right of redemption redeem the property, but not beyond three
over its foreclosed properties after the certificate of sale months after the foreclosure, whichever is earlier.
in favor of respondent had been registered. This is also known as EQUITY OF
REDEMPTION.
February 22, 2016 (Gementiza)
EXTRAJUDICIAL FORECLOSURE
How to redeem foreclosed property?
You must redeem it during the period provided by
Three main laws:
law; Payment must be made to the redemptioner, or the
1. Act No. 3135
sale officer. You must pay the purchase price plus interest
2. Civil Code Provisions
per month and taxes thereon. This interest can be
3. Other Special Law, e.g. General banking law of
amended due to the 6% interest. Dati 1% ito kasi 12% PA
2005
ang legal interest. Written notice of redemption must be
served on officer who made the sale and a duplicate in
What happens in an extrajudicial foreclosure?
the register of deed.
It is a proceeding which is not governed by the
ordinary court process. Instead of filing the case, what you
As to deficiency –
file is an application for extrajudicial foreclosure of the
property with the executive judge who (court which) has
What happens if the bid price is not sufficient to pay off
jurisdiction over the said property.
the obligation?
It must comply with the requirements of
Under Judicial foreclosure, the Mortgagee (ME)
1. Posting of notice of sale; or
can recover the deficiency from the Mortgagor(MR) as
2. Publication of the notice of sale once a week
long as it is ordered by the court. There has to be a
for at least three weeks in a newspaper of general
deficiency judgement by the court.
circulation.
Under Extrajudicial foreclosure, Act 3135 and
Civil Code did not state that the ME is entitled to
Thereafter, the Clerk of Court shall issue a receipt
deficiency. It is not expressly stated by the law, but it is
and certificate of payment. The application for foreclosure
IMPLIEDLY allowed. The SC held in several cases that
will be shuffled among the sheriffs, and the sheriff will be
the absence of a specific provision allowing it does not
the one who will take over the foreclosure proceedings or
prevent the ME from recovering the deficiency.
public auction sale.
As to excess –
During the public auction, there must be at least
two bidders. Should this not be met, another public
What happens if the property was sold, and the proceeds
auction shall be held. If there will still be no bidders,
is more than the obligation?
pwede na * creditor mortgagee.
In both Judicial and Extrajudicial FS, the excess
shall be returned to the MR.
The certificate of sale will then be approved by
the executive judge and the Certificate will be registered
As to inadequacy of the price –
with the registry of deeds. Then the certificate of sale will
then be issued to the winning bidder, again from the time
If the price is grossly inadequate, can it be a ground for
of the registration of sale one year as a right of
the nullity of the auction sale?
redemption. However, if the mortgagor is a juridical entity,
they have three month period after foreclosure but again
Recall under Obli/Con and Sales, the mere gross

inadequacy of the price is not a ground for the nullity of How about consolidation of title? If it is
the contract, but there are some instances wherein it can consolidated in the name of the buyer, he has the right to
be a ground for rescission. possess the property.
But in a foreclosure sale and the price is grossly In Extrajudicial Foreclosure, there is a true
inadequate, what is the general rule? mortgage - be it equitable mortgage or REM.
If in a foreclosure sale the price is grossly What is the effect after the property has been sold
inadequate, can you ask for the recession or the to the highest bidder and the sale has already been
annulment of the forclosure sale on the ground that the confirmed by the sheriff? The buyer can seek
price is grossly inadequate? consolidation of title. Same thing if what we have is a
Pacto de Retro sale – if the period to redeem has expired,
Since there is a right of redemption kung you can have the title consolidated in your name.
extrajudicial or equity of redemption in judicial foreclosure,
inadequacy of the price will not justify the recession In Equitable Mortage, buyer is not entitled to the
because if the price is inadequate then it will be favorable possession thereof. When will he be entitled? After he is
to the mortgagor to redeem the property, mas madali nya declared as the highest bidder, certificate is confirmed,
maredeem ang property. Gross inadequacy of the price is and if it consolidated under his name.
not a ground for recession if there is a right or equity of
redemption. UNIONBANK OF THE PHILIPPINES VS. THE COURT
OF APPEALS and FERMINA S. DARIO and
How about in equitable mortgage? REYNALDO S. DARIO
Art. 1602. The contract shall be presumed to be an
equitable mortgage, in any of the following cases: FACTS: This case stemmed from a real estate mortgage
(1) When the price of a sale with right to repurchase is executed by spouses Leopoldo and Jessica Dario
unusually inadequate; (hereafter mortgagors) in favor of UNIONBANK to secure
(2) When the vendor remains in possession as lessee or a P3 million loan, including interest and other charges.
otherwise; The mortgage covered a Quezon City property in
(3) When upon or after the expiration of the right to Leopoldo Dario’s name and was annotated on the title on
repurchase another instrument extending the period of 18 December 1991. For non-payment of the principal
redemption or granting a new period is executed; obligation, UNIONBANK extrajudicially foreclosed the
(4) When the purchaser retains for himself a part of the property mortgaged on 12 August 1993 and sold the
purchase price; same at public auction, with itself posting the highest bid.
(5) When the vendor binds himself to pay the taxes on the
thing sold; On 4 October 1994, one week before the one-year
(6) In any other case where it may be fairly inferred that redemption period expired, the DARIOs filed a complaint
the real intention of the parties is that the transaction shall with the RTC of Quezon City against the mortgagors,
secure the payment of a debt or the performance of any UNIONBANK, the Register of Deeds and the City Sheriff
other obligation. of Quezon City. The complaint was for annulment of sale
In any of the foregoing cases, any money, fruits, or other and real estate mortgage with reconveyance and prayer
benefit to be received by the vendee as rent or otherwise for restraining order and prohibitory injunction. A notice of
shall be considered as interest which shall be subject to lis pendens was annotated on the title.
the usury laws. (n)
On 10 October 1994, RTC issued a temporary restraining
What is your remedy as a mortgagor? Have the contract order (TRO) enjoining the redemption of property within
reformed to a REM. the statutory period and its consolidation under
UNIONBANK’s name.
What if ME files a case against you using a deed
of sale and he demands delivery of possession of the In the meantime, without notifying the DARIOs,
property? You, as MR, your defense is that you have an UNIONBANK consolidated its title over the foreclosed
equitable mortgage. You will show proof that the real property on 24 October 1994. TCT No. 41828 was
intent or purpose of the party in entering the DOS or the cancelled and TCT No. 120929 in UNIONBANK’s name
Pacto de Retro sale is a REM. Therefore, the buyer who was issued in its stead.
is actually a ME, is not entitled to possess the property.
The DARIOs filed an amended complaint on 9 December UNIONBANK’s contention: came to this Court claiming to
1994, alleging that they, not the mortgagors, are the true be a mortgagee in good faith and for value with a right to
owners of the property mortgaged and insisting on the consolidate ownership over the foreclosed property with
invalidity of both the mortgage and its subsequent the redemption period having expired and there having
extrajudicial foreclosure. They claimed that the original been no redemptioners. UNIONBANK contends that the
title, TCT No. 61571, was entrusted to a certain Atty. TRO which provisionally enjoined the tolling of the
Reynaldo Singson preparatory to its administrative redemption period was automatically dissolved upon
reconstitution after a fire gutted the Quezon City Hall dismissal of the complaint on 17 October 1994.
building. Mortgagor Leopoldo, private respondent Conformably, consolidation of title in its name and the
Fermina’s son, obtained the property from Atty. Singson, issuance of TCT No. 120929 rendered further
had the title reconstituted under his name without the proceedings on the application for injunction academic.
DARIOs’ knowledge, executed an ante-dated deed of Moreover, the alleged fraudulent mortgage was facilitated
sale in his favor and mortgaged the property to through the DARIOs’ negligence so they must bear the
UNIONBANK. loss. It also contends that since the DARIOs had filed
several pleadings, due process, being an opportunity to
The CA upheld Judge Capulong’s order admitting the be heard either through pleadings or oral arguments, was
amended complaint on 24 April 1995, UNIONBANK observed.
thereafter elevated its cause to this Court.
Dario’s contention: that UNIONBANK’s consolidation of
Meanwhile, on 9 February 1995 UNIONBANK filed its the title in its name was in bad faith, vitiated a standing
answer ad cautelam asserting its status as an innocent court order, is against the law, thus void ab initio. The
mortgagee for value whose right or lien upon the property application for preliminary injunction was not rendered
mortgaged must be respected even if the mortgagor moot and academic by consolidation, which took place
obtained his title through fraud. It also averred that the during the lifetime of the TRO, and did not follow the
action had become “moot and academic by the proper legal procedure due to the surreptitious manner it
consolidation of the foreclosed property on 24 October was accomplished. By treating the application for
1994” in its name, resulting to the issuance of TCT No. preliminary injunction as moot and academic and denying
120929 by the Register of Deeds of Quezon City. the motion for indirect contempt without hearing, the RTC
In its 19 August 1995 Order, the RTC held the mortgagors order ran afoul with the requirements of due process.
and the City Sheriff of Quezon City in default and
sustained UNIONBANK’s contention that the act sought ISSUE: Whether or not the consolidation of title in
to be enjoined had been enforced, negating the need of UNIONBANK’s name proper. YES
hearing the application for preliminary injunction.
HELD: UNIONBANK’s consolidation of title over the
After considering the arguments presented by the parties, property on 24 October 1994 was proper, though
the CA ruled that despite its knowledge that the ownership precipitate. Contrary to the DARIOs’ allegation
of the property was being questioned, UNIONBANK took UNIONBANK violated no standing court order. The only
advantage of the DARIOs’ procedural error by bar to consolidation was the temporary restraining order
consolidating title to the property, which “smacked of bad issued by Justice Lipana-Reyes on 10 October 1994
faith” and “evinced a reprobate disposition of the part of which effectively halted the tolling of the redemption
its counsel to advance his client’s cause by fair means or period 7 days short of its expiration. When the DARIOs’
foul.” As a result thereof the transfer of title was vitiated original complaint was dismissed on 17 October 1994 for
by non-adherence to procedural due process. failure to append a certification of non-forum shopping,
the TRO, as an ancillary order that cannot stand
On 26 June 1997, CA nullified the consolidation of independent of the main proceeding, became functus
ownership, ordered the Register of Deeds to cancel the officio. Thus the tolling of the 12-month redemption
certificate of title in UNIONBANK’s name and to reinstate period, interrupted by the filing of the complaint and the
TCT No. 41828 with the notice of lis penden sannotated TRO, recommenced and eventually expired 7 days
at the back. The CA also set aside the portion of the thereafter or on 24 October 1994, the date of the disputed
assailed RTC Orders that declared the DARIOs’ prayer consolidation.
for writ of preliminary injunction as moot and academic.
UNIONBANK’s motion for reconsideration of the above- The motion for reconsideration and to amend complaint
mentioned decision was likewise rejected for lack of merit filed by private respondent on 20 October 1994 was of no
on 7 April 1998. moment, this Court recognizing that “a dismissal,
discontinuance or non-suit of an action in which a
restraining order or temporary injunction has been of a certificate of title in favor of the purchaser becomes
granted operates as a dissolution of the restraining order ministerial upon the Register of Deeds.
or temporary injunction,” regardless of whether the period
for filing a motion for reconsideration of the order DOCTRINE: In real estate mortgage, when the principal
dismissing the case or appeal therefrom has expired. The obligation is not paid when due, the mortgages has the
rationale therefor is that even in cases where an appeal right to foreclose the mortgage and to have the property
is taken from a judgment dismissing an action on the seized and sold with a view to applying the proceeds to
merits, the appeal does not suspend the judgment, hence the payment of the principal obligation. Foreclosure may
the general rule applies that a temporary injunction be effected either judicially or extrajudicially. In a public
terminates automatically on the dismissal of the action. bidding during extra-judicial foreclosure, the creditor-
mortgagee, trustee, or other person authorized to act for
We disagree with the appellate court’s observation that the creditor may participate and purchase the mortgaged
consolidation deprived the DARIOs of their property property as any other bidder. Thereafter the mortgagor
without due process. It is settled that the buyer in a has one year within which to redeem the property from
foreclosure sale becomes the absolute owner of the and after registration of sale with the Register of Deeds.
property purchased if it is not redeemed during the period In case of non-redemption, the purchaser at foreclosure
of one year after the registration of the sale. Consolidation sale shall file with the Register of Deeds, either a final
took place as a matter of right since there was no deed of sale executed by the person authorized by virtue
redemption of the foreclosed property and the TRO of the power of attorney embodied in the deed or
expired upon dismissal of the complaint. UNIONBANK mortgage, or his sworn statement attesting to the fact of
need not have informed private respondent that it was non-redemption; whereupon, the Register of Deeds shall
consolidating its title over the property, upon the issue a new certificate of title in favor of the purchaser
expiration of the redemption period, without the judgment after the owner’s duplicate of the certificate has been
debtor having made use of his right of redemption, the previously delivered and cancelled. Thus, upon failure to
ownership of the property sold becomes consolidated in redeem foreclosed realty, consolidation of title becomes
the purchaser. Notice to the mortgagors and with more a matter of right on the part of the auction buyer, and the
reason, to the DARIOs who are not even parties to the issuance of a certificate of title in favor of the purchaser
mortgage contract nor to the extrajudicial sale is not becomes ministerial upon the Register of Deeds.
necessary.
Was the title consolidated in the name of
In real estate mortgage, when the principal obligation is Unionbank? Was it proper? YES
not paid when due, the mortgage has the right to foreclose
the mortgage and to have the property seized and sold UNIONBANKs consolidation of title over the
with a view to applying the proceeds to the payment of the property on 24 October 1994 was proper, though
principal obligation. Foreclosure may be effected either precipitate. Contrary to private respondents allegation
judicially or extrajudicially. UNIONBANK violated no standing court order. The only
bar to consolidation was the temporary restraining order
In a public bidding during extra-judicial foreclosure, the issued by Justice Lipana-Reyes on 10 October 1994
creditor-mortgagee, trustee, or other person authorized to which effectively halted the tolling of the redemption
act for the creditor may participate and purchase the period 7 days short of its expiration.When private
mortgaged property as any other bidder. Thereafter the respondents original complaint was dismissed on 17
mortgagor has one year within which to redeem the October 1994 for failure to append a certification of non-
property from and after registration of sale with the forum shopping, the TRO, as an ancillary order that
Register of Deeds. In case of non-redemption, the cannot stand independent of the main proceeding,
purchaser at foreclosure sale shall file with the Register became functus officio. Thus the tolling of the 12-month
of Deeds, either a final deed of sale executed by the redemption period, interrupted by the filing of the
person authorized by virtue of the power of attorney complaint and the TRO, recommenced and eventually
embodied in the deed or mortgage, or his sworn expired 7 days thereafter or on 24 October 1994, the date
statement attesting to the fact of non-redemption; of the disputed consolidation.
whereupon, the Register of Deeds shall issue a new
certificate of title in favor of the purchaser after the In the case at bar, the consolidation of ownership
owner’s duplicate of the certificate has been previously over the mortgaged property in favor of UNIONBANK and
delivered and cancelled. Thus, upon failure to redeem the issuance of a new title in its name during the pendency
foreclosed realty, consolidation of title becomes a matter of an action for annulment and reconveyance will not
of right on the part of the auction buyer, and the issuance cause irreparable injury to private respondents who are
plaintiffs in the said action that will merit the protection of The remedy of petitioners is to have the sale set aside
the court through the writ of preliminary injunction. This is and the writ of possession cancelled in accordance with
because as purchaser at a public auction, UNIONBANK Section 8 of Act No. 3135, as amended:
is only substituted to and acquires the right, title, interest
and claim of the judgment debtors or mortgagors to the SEC. 8. The debtor may, in the proceedings in which
property at the time of levy. Perforce, the judgment in the possession was requested, but not later than thirty days
main action for reconveyance will not be rendered after the purchaser was given possession, petition that
ineffectual by the consolidation of ownership and the the sale be set aside and the writ of possession cancelled,
issuance of title in the name of UNIONBANK. specifying the damages suffered by him, because the
~ mortgage was not violated or the sale was not made in
CUA LAI CHU, CLARO G. CASTRO, and JUANITA accordance with the provisions hereof.
CASTRO vs. HON. HILARIO L. LAQUI
“The right to possession of a purchaser at an extrajudicial In the present case, the certificate of sale of the
foreclosure sale is not affected by a pending case foreclosed property was annotated on TCT No. 22990 on
7 June 2002. The redemption period thus lapsed on 7
questioning the validity of the foreclosure proceeding. The
June 2003, one year from the registration of the sale.
latter is not a bar to the former.” When private respondent applied for the issuance of a writ
of possession on 18 August 2004, the redemption period
FACTS: November 1994: Philippine Bank of had long lapsed. Since the foreclosed property was not
Communication (respondent) loaned P3,200,000 to the redeemed within one year from the registration of the
petitioners. To secure the loan, petitioners executed in extrajudicial foreclosure sale, private respondent had
favor of private respondent a Deed of Real Estate acquired an absolute right, as purchaser, to the writ of
Mortgage. possession. It had become the ministerial duty of the
lower court to issue the writ of possession upon mere
August 1997: the mortgage was amended, and the loan motion pursuant to Section 7 of Act No. 3135, as
was increased by P1,800,000, making the amount amended.
P5,000,000. For failure of petitioners to pay the full
amount of the outstanding loan upon demand, private Moreover, once ownership has been
respondent applied for the extrajudicial foreclosure of the consolidated, the issuance of the writ of possession
real estate mortgage. becomes a ministerial duty of the court, upon proper
application and proof of title. In the present case, when
TRIAL COURT: Granted respondent’s motion for a private respondent applied for the issuance of a writ of
declaration of general default and allowed them to present possession, it presented a new transfer certificate of title
evidence ex parte. issued in its name dated 8 July 2003. The right of private
respondent to the possession of the property was thus
COURT OF APPEALS: Petitioners appealed. However, founded on its right of ownership. As the purchaser of the
it was dismissed since the counsel for petitioners failed to property at the foreclosure sale, in whose name title over
indicate the updated PTR Number in the said petition, the property was already issued, the right of private
which is a ground for outright dismissal under B.M 1132. respondent over the property had become absolute,
The court held that a proceeding for the issuance of a writ vesting in it the corollary right of possession.
of possession is ex parte in nature.
Any question regarding the validity of the
ISSUE: Whether the writ of possession was properly extrajudicial foreclosure sale and the resulting
issued despite the pendency of a case questioning the cancellation of the writ may be determined in a
validity of the extrajudicial foreclosure sale even when subsequent proceeding as outlined in Section 8 of Act No.
petitioners were declared in default. 3135, as amended. Such question should not be raised
as a justification for opposing the issuance of a writ of
HELD: The Supreme Court held that since the private possession since under Act No. 3135, as amended, the
respondent had purchased the property at the foreclosure proceeding for this is ex parte.
sale, their right over the said property became absolute,
vesting in it the corollary right of possession. Further, the right to possession of a purchaser at
an extrajudicial foreclosure sale is not affected by a
Petitioners cannot oppose or appeal the court’s order pending case questioning the validity of the foreclosure
granting the writ of possession in an ex parte proceeding. proceeding. The latter is not a bar to the former. Even
pending such latter proceeding, the purchaser at a

foreclosure sale is entitled to the possession of the HELD: No. The petitioner, as defaulting mortgagor, was
foreclosed property. not entitled under Act 3135, as amended, and its pertinent
jurisprudence to any prior notice of the application for the
When is the highest bidder entitled to possess the issuance of the writ of possession.
property?
After consolidation, he is entitled to possess. A writ of possession, which commands the sheriff to place
When can he consolidate? a person in possession of real property, may be issued in:
After the lapse of 1 year.
~ (1) Land registration proceedings under Section 17 of Act
MALLARI vs. GOVERNMENT SERVICE INSURANCE No. 496;
SYSTEM (2) Judicial foreclosure, provided the debtor is in
possession of the mortgaged property, and no third
FACTS: In 1968, the petitioner obtained two loans person, not a party to the foreclosure suit, had intervened;
totaling P34,000.00 from respondent GSIS. To secure the (3) Extrajudicial foreclosure of a real estate mortgage,
performance, he mortgaged two parcels of land registered pending redemption under Section 7 of Act No. 3135, as
under his and his wife Marcelina Mallari’s names. amended by Act No. 4118; and
However, he paid GSIS about ten years after contracting (4) Execution sales, pursuant to the last paragraph of
the obligations only P10,000.00 and P20,000.00. Section 33, Rule 39 of the Rules of Court.31
Nearly three years later (1984), GSIS applied for the Anent the redemption of property sold in an extrajudicial
extrajudicial foreclosure of the mortgage by reason of foreclosure sale made pursuant to the special power
his failure to settle his account. He requested an referred to in Section 132 of Act No. 3135,33 as amended,
updated computation of his outstanding account. He the debtor, his successor-in-interest, or any judicial
persuaded the sheriff to hold the publication of the creditor or judgment creditor of said debtor, or any person
foreclosure to await action on his pending request for final having a lien on the property subsequent to the mortgage
accounting (that is, taking his payments of P30,000.00 or deed of trust under which the property is sold has the
made in 1978 into account). GSIS responded to his right to redeem the property at anytime within the term of
request. It finally commenced extrajudicial foreclosure one year from and after the date of the sale, such
proceedings against him because he had meanwhile redemption to be governed by the provisions of Section
made no further payments. 464 to Section 466 of the Code of Civil Procedure, to the
extent that said provisions were not inconsistent with the
The petitioner sued GSIS (prelim injunction). The RTC provisions of Act 3135.34
decided in his favor, nullifying the extrajudicial foreclosure
and auction sale. GSIS appealed to the CA, which In this regard, we clarify that the redemption period
reversed the RTC. Petitioner elevated the CA decision to envisioned under Act 3135 is reckoned from the date of
this Court via petition for review on certiorari. the registration of the sale, not from and after the date of
the sale, as the text of Act 3135 shows. Although the
This Court denied his petition for review and motion for original Rules of Court (effective on July 1, 1940)
reconsideration. As a result, the CA decision became final incorporated Section 464 to Section 466 of the Code of
and executory, rendering unassailable both the Civil Procedure as its Section 25 (Section 464); Section
extrajudicial foreclosure and auction sale. 26 (Section 465); and Section 27 (Section 466) of Rule
39, with Section 27 still expressly reckoning the
Because of the petitioner’s request for an extension of redemption period to be "at any time within twelve months
time to vacate the properties, GSIS acceded to the after the sale;" and although the Revised Rules of Court
request. Yet, the petitioner did not voluntarily vacate the (effective on January 1, 1964) continued to provide in
properties, but instead filed a MR and/or to quash the writ Section 30 of Rule 39 that the redemption be made from
of execution and motion to hold GSIS in contempt of court the purchaser "at any time within twelve (12) months after
for painting the fence of the properties during the the sale,"35 the 12-month period of redemption came to
pendency of his said motion. be held as beginning "to run not from the date of the sale
but from the time of registration of the sale in the Office of
ISSUE: W/N the petitioner, as defaulting mortgagor, was the Register of Deeds."36 This construction was due to the
not entitled under Act 3135, as amended, and its pertinent fact that the sheriff’s sale of registered (and unregistered)
jurisprudence to any prior notice of the application for the lands did not take effect as a conveyance, or did not bind
issuance of the writ of possession.
the land, until the sale was registered in the Register of such assessments, taxes, or liens. (30a) (Emphasis
Deeds.37 supplied).
Desiring to avoid any confusion arising from the conflict Accordingly, the mortgagor or his successor-in-interest
between the texts of the Rules of Court (1940 and 1964) must redeem the foreclosed property within one year from
and Act No. 3135, on one hand, and the jurisprudence the registration of the sale with the Register of Deeds in
clarifying the reckoning of the redemption period in judicial order to avoid the title from consolidating in the purchaser.
sales of real property, on the other hand, the Court has By failing to redeem thuswise, the mortgagor loses all
incorporated in Section 28 of Rule 39 of the current Rules interest over the foreclosed property.38 The purchaser,
of Court (effective on July 1, 1997) the foregoing judicial who has a right to possession that extends beyond the
construction of reckoning the redemption period from the expiration of the redemption period, becomes the
date of the registration of the certificate of sale, to wit: absolute owner of the property when no redemption is
made,39 that it is no longer necessary for the purchaser to
Sec. 28. Time and manner of, and amounts payable on, file the bond required under Section 7 of Act No. 3135, as
successive redemptions; notice to be given and filed. — amended, considering that the possession of the land
The judgment obligor, or redemptioner, may redeem the becomes his absolute right as the land’s confirmed
property from the purchaser, at any time within one (1) owner.40 The consolidation of ownership in the
year from the date of the registration of the certificate of purchaser’s name and the issuance to him of a new TCT
sale, by paying the purchaser the amount of his purchase, then entitles him to demand possession of the property at
with one per centum per month interest thereon in any time, and the issuance of a writ of possession to him
addition, up to the time of redemption, together with the becomes a matter of right upon the consolidation of title
amount of any assessments or taxes which the purchaser in his name.
may have paid thereon after purchase, and interest on
such last named amount at the same rate; and if the The court can neither halt nor hesitate to issue the writ of
purchaser be also a creditor having a prior lien to that of possession. It cannot exercise any discretion to determine
the redemptioner, other than the judgment under which whether or not to issue the writ, for the issuance of the writ
such purchase was made, the amount of such other lien, to the purchaser in an extrajudicial foreclosure sale
with interest becomes a ministerial function.41 Verily, a marked
distinction exists between a discretionary act and a
Property so redeemed may again be redeemed within ministerial one. A purely ministerial act or duty is one that
sixty (60) days after the last redemption upon payment of an officer or tribunal performs in a given state of facts, in
the sum paid on the last redemption, with two per centum a prescribed manner, in obedience to the mandate of a
thereon in addition, and the amount of any assessments legal authority, without regard to or the exercise of his own
or taxes which the last redemptioner may have paid judgment upon the propriety or impropriety of the act
thereon after redemption by him, with interest on such done. If the law imposes a duty upon a public officer and
last-named amount, and in addition, the amount of any gives him the right to decide how or when the duty shall
liens held by said last redemptioner prior to his own, with be performed, such duty is discretionary, not ministerial.
interest. The property may be again, and as often as a The duty is ministerial only when its discharge requires
redemptioner is so disposed, redeemed from any neither the exercise of official discretion nor the exercise
previous redemptioner within sixty (60) days after the last of judgment.42
redemption, on paying the sum paid on the last previous
redemption, with two per centum thereon in addition, and The proceeding upon an application for a writ of
the amounts of any assessments or taxes which the last possession is ex parte and summary in nature, brought
previous redemptioner paid after the redemption thereon, for the benefit of one party only and without notice being
with interest thereon, and the amount of any liens held by sent by the court to any person adverse in interest. The
the last redemptioner prior to his own, with interest. relief is granted even without giving an opportunity to be
heard to the person against whom the relief is sought. 43
Written notice of any redemption must be given to the Its nature as an ex parte petition under Act No. 3135, as
officer who made the sale and a duplicate filed with the amended, renders the application for the issuance of a
registry of deeds of the place, and if any assessments or writ of possession a non-litigious proceeding.44
taxes are paid by the redemptioner or if he has or acquires
any lien other than that upon which the redemption was It is clear from the foregoing that a non-redeeming
made, notice thereof must in like manner be given to the mortgagor like the petitioner had no more right to
officer and filed with the registry of deeds; if such notice challenge the issuance of the writ of execution cum writ of
be not filed, the property may be redeemed without paying possession upon the ex parte application of GSIS. He
could not also impugn anymore the extrajudicial the part of the auction buyer, and the issuance of a
foreclosure, and could not undo the consolidation in GSIS certificate of title in favor of the purchaser becomes
of the ownership of the properties covered by TCT No. ministerial upon the Register of Deeds.
284272-R and TCT No. 284273-R, which consolidation
was already irreversible. Hence, his moves against the In the case at bar, the consolidation of ownership
writ of execution cum writ of possession were tainted by over the mortgaged property in favor of UNIONBANK and
bad faith, for he was only too aware, being his own lawyer, the issuance of a new title in its name during the pendency
of the dire consequences of his non-redemption within the of an action for annulment and reconveyance will not
period provided by law for that purpose. cause irreparable injury to private respondents who are
plaintiffs in the said action that will merit the protection of
the court through the writ of preliminary injunction. This is
Considering the ministerial duty of the action to issue
because as purchaser at a public auction, UNIONBANK
writ of possession, can a pending action questioning
is only substituted to and acquires the right, title, interest
the validity of the foreclosure stop the issuance of the
and claim of the judgment debtors or mortgagors to the
writ? NO.
property at the time of levy. Perforce, the judgment in the
In Unionbank vs CA - It is settled that the buyer in main action for reconveyance will not be rendered
a foreclosure sale becomes the absolute owner of the ineffectual by the consolidation of ownership and the
property purchased if it is not redeemed during the period issuance of title in the name of UNIONBANK.
of one year after the registration of the sale.
Consolidation took place as a matter of right since More importantly, with the main action for
there was no redemption of the foreclosed property reconveyance pending before the RTC, the notice of lis
and the TRO expired upon dismissal of the pendens, which despite consolidation remains annotated
complaint. UNIONBANK need not have informed private on UNIONBANKs transfer certificate of title subject to the
respondent that it was consolidating its title over the outcome of the litigation, sufficiently protects private
property, upon the expiration of the redemption period, respondents interest over the property. A
without the judgment debtor having made use of his right transferee pendente lite stands exactly in the shoes of the
of redemption, the ownership of the property sold transferor and is bound by any judgment or decree which
becomes consolidated in the purchaser. Notice to the may be rendered for or against the transferor. Once a
mortgagors and with more reason, to private respondents notice of lis pendens has been duly registered, any
who are not even parties to the mortgage contract nor to cancellation or issuance of the title of the land involved as
the extrajudicial sale is not necessary. well as any subsequent transaction affecting the same,
would have to be subject to the outcome of the
In real estate mortgage, when the principal obligation litigation. In other words, upon the termination of the
is not paid when due, the mortgage has the right to litigation there can be no risk of losing the property or any
foreclose the mortgage and to have the property seized part thereof as a result of any conveyance of the land or
and sold with a view to applying the proceeds to the any encumbrance that may be made thereon posterior to
payment of the principal obligation. Foreclosure may be the filing of the notice of lis pendens.
effected either judicially or extrajudicially. In Cua Lai Chu vs. Laqui, the court stated that
In a public bidding during extra-judicial foreclosure, under Act No. 3135, as amended, a writ of possession is
the creditor-mortgagee, trustee, or other person issued ex parte as a matter of course upon compliance
authorized to act for the creditor may participate and with the requirements. It is not a judgment on the merits
purchase the mortgaged property as any other that can amount to res judicata, one of the essential
bidder. Thereafter the mortgagor has one year within elements in forum shopping.
which to redeem the property from and after registration
of sale with the Register of Deeds. In case of non- In Mallari vs CA, the court stated that the
redemption, the purchaser at foreclosure sale shall file petitioner, as defaulting mortgagor, was not entitled under
with the Register of Deeds, either a final deed of sale Act 3135, as amended, and its pertinent jurisprudence to
executed by the person authorized by virtue of the power any prior notice of the application for the issuance of the
of attorney embodied in the deed or mortgage, or his writ of possession.
sworn statement attesting to the fact of non-redemption;
whereupon, the Register of Deeds shall issue a new A writ of possession, which commands the sheriff
certificate of title in favor of the purchaser after the owners to place a person in possession of real property, may be
duplicate of the certificate has been previously delivered issued in:
and cancelled. Thus, upon failure to redeem foreclosed (1) land registration proceedings under Section
realty, consolidation of title becomes a matter of right on 17 of Act No. 496;
(2) judicial foreclosure, provided the debtor is in Verily, a marked distinction exists between a
possession of the mortgaged property, and no third discretionary act and a ministerial one. A purely
person, not a party to the foreclosure suit, had intervened; ministerial act or duty is one that an officer or tribunal
(3) extrajudicial foreclosure of a real estate performs in a given state of facts, in a prescribed manner,
mortgage, pending redemption under Section 7 of Act No. in obedience to the mandate of a legal authority, without
3135, as amended by Act No. 4118; and regard to or the exercise of his own judgment upon the
(4) execution sales, pursuant to the last propriety or impropriety of the act done. If the law imposes
paragraph of Section 33, Rule 39 of the Rules of Court. a duty upon a public officer and gives him the right to
decide how or when the duty shall be performed, such
In this regard, we clarify that the redemption duty is discretionary, not ministerial. The duty is
period envisioned under Act 3135 is reckoned from the ministerial only when its discharge requires neither the
date of the registration of the sale, not from and after the exercise of official discretion nor the exercise of judgment.
date of the sale, as the text of Act 3135 shows. Although The proceeding upon an application for a writ of
the original Rules of Court (effective on July 1, 1940) possession is ex parte and summary in nature, brought
incorporated Section 464 to Section 466 of the Code of for the benefit of one party only and without notice being
Civil Procedure as its Section 25 (Section 464); Section sent by the court to any person adverse in interest. The
26 (Section 465); and Section 27 (Section 466) of Rule relief is granted even without giving an opportunity to be
39, with Section 27 still expressly reckoning the heard to the person against whom the relief is sought. Its
redemption period to be "at any time within twelve months nature as an ex parte petition under Act No. 3135, as
after the sale;" and although the Revised Rules of Court amended, renders the application for the issuance of a
(effective on January 1, 1964) continued to provide in writ of possession a non-litigious proceeding.
Section 30 of Rule 39 that the redemption be made from
the purchaser "at any time within twelve (12) months after It is clear from the foregoing that a non-
the sale," the 12-month period of redemption came to be redeeming mortgagor like the petitioner had no more right
held as beginning "to run not from the date of the sale but to challenge the issuance of the writ of execution cum writ
from the time of registration of the sale in the Office of the of possession upon the ex parte application of GSIS. He
Register of Deeds." This construction was due to the fact could not also impugn anymore the extrajudicial
that the sheriff’s sale of registered (and unregistered) foreclosure, and could not undo the consolidation in GSIS
lands did not take effect as a conveyance, or did not bind of the ownership of the properties covered by TCT No.
the land, until the sale was registered in the Register of 284272-R and TCT No. 284273-R, which consolidation
Deeds. was already irreversible. Hence, his moves against the
Accordingly, the mortgagor or his successor-in- writ of execution cum writ of possession were tainted by
interest must redeem the foreclosed property within one bad faith, for he was only too aware, being his own lawyer,
year from the registration of the sale with the Register of of the dire consequences of his non-redemption within the
Deeds in order to avoid the title from consolidating in the period provided by law for that purpose.
purchaser. By failing to redeem thuswise, the mortgagor
loses all interest over the foreclosed property. The Petition denied. Mallari was subject to disciplinary
purchaser, who has a right to possession that extends action.
beyond the expiration of the redemption period, becomes ~
the absolute owner of the property when no redemption is There are other laws to consider, such as
made, that it is no longer necessary for the purchaser to 1. Homestead law – if the property subject of
file the bond required under Section 7 of Act No. 3135, as Homestead patent is sold or mortgaged, the
amended, considering that the possession of the land homestead * the property, but the period is 5
becomes his absolute right as the land’s confirmed owner. years from the registration of sale.
The consolidation of ownership in the purchaser’s name
and the issuance to him of a new TCT then entitles him to 2. Tenancy Clause (or laws?)
demand possession of the property at any time, and the
issuance of a writ of possession to him becomes a matter PHILBANCOR FINANCE, INC. AND VICENTE HIZON,
of right upon the consolidation of title in his name. JR. VS. COURT OF APPEALS
The court can neither halt nor hesitate to issue FACTS: On July 14, 1992, private respondents Alfredo
the writ of possession. It cannot exercise any discretion to Pare, Pablo Galang and Amado Vie, filed with the
determine whether or not to issue the writ, for the Provincial Agrarian Reform Adjudication Board (PARAB)
issuance of the writ to the purchaser in an extrajudicial a complaint for maintenance of possession with
foreclosure sale becomes a ministerial function.
redemption and tenancy right of pre-emption against years from the registration of the sale and shall have
petitioners Philbancor Finance, Inc. and Vicente Hizon, Jr. priority over any other right of legal redemption.
Hizon is the owner of the disputed agricultural lands In this case, the certificate of sale of the subject property,
located in San Fernando, Pampanga and that private which was sold at public auction, was registered with the
respondents are the legitimate and bona fide tenants on ROD of Pampanga on July 31, 1985. The 2-year
the lots for more than fifty (50) years. redemption period thus expired on July 31, 1987. The
complaint for redemption was filed by respondents only
In October 1983, Hizon, without their knowledge, on July 14, 1992, five (5) years after expiration of the
mortgaged the disputed lots to Philbancor Finance, Inc. redemption period prescribed by law. Private respondents
Hizon failed to pay his obligations to Philbancor, which may still continue possession of the lots Nonetheless,
eventually led to the sale of the mortgaged lots to the private respondents may continue in possession and
latter. The certificate of sale of the subject property, which enjoyment of the land in question as legitimate tenants
was sold at public auction, was registered with the ROD because the right of tenancy attaches to the landholding
of Pampanga on July 31, 1985. by operation of law. The leasehold relation is not
extinguished by the alienation or transfer of the legal
Private respondents came to know of the transaction only possession of the landholding. SC GRANTED petition.
when they were notified by Philbancor to vacate the lots,
and Philbancor threatened to take from them the actual or February 26, 2016 (Batacan)
physical possession of the agricultural lots.
Act 3135 again this is the rule applied to govern the
Philbancor alleged, among others, that it has no tenancy execution of foreclosures. Let’s go over the provisions of
or agricultural relationship with private respondents Act 3135. If you take a look at these, it’s actually short.
considering that it acquired ownership over the disputed
lots by virtue of an extra-judicial foreclosure sale pursuant Section 1. When a sale is made under a special power
to Act 3135, as amended; that it is not an agricultural inserted in or attached to any real-estate mortgage
lessor as contemplated in Section 10 of R.A. No. 3844, as hereafter made as security for the payment of money
amended; that assuming private respondents have the or the fulfillment of any other obligation, the
right to redeem the lots in question, such right has already provisions of the following election shall govern as to
expired in accordance with Section 12 of R.A. 3844, which the manner in which the sale and redemption shall be
states that the right of redemption may be exercised effected, whether or not provision for the same is
within two (2) years from the registration of the sale. made in the power.
Decision was rendered in favor of private respondents. Now again Sec 1 herein emphasizes the need to have a
special power of attorney inserted in the real-estate
ISSUE: Whether or not the private respondents could mortgage authorizing the mortgagee to sell the property,
still exercise their right of redemption of the parcels to extra-judicially foreclose and sell the property upon
of land sold at public auction due to foreclosure of the default on the part of the principal debtor. Do take note
mortgages thereon considering that they invoked that in the absence of that SPA in the REM, the
their right to redeem only on July 14, 1992, seven extrajudicial foreclosure cannot take place. The remedy
years after the date of registration of the certificate of available on the part of the mortgagee is for judicial
sale with the Register of Deeds. – NO foreclosure of the property, or mag file sya ng collection
for sum of money.
HELD: Redemption period already elapsed R.A. No. 3844
(Agricultural Reform Act), Section 12, provides as follows: Sec. 2. Said sale cannot be made legally outside of
the province in which the property sold is situated;
In case the landholding is sold to a third person without and in case the place within said province in which
the knowledge of the agricultural lessee, the latter shall the sale is to be made is subject to stipulation, such
have the right to redeem the same at a reasonable price sale shall be made in said place or in the municipal
and consideration. Provided, that the entire landholding building of the municipality in which the property or
sold must be redeemed. Provided further, that where part thereof is situated.
there are two or more agricultural lessees, each shall be
entitled to said right of redemption only to the extent of the
Under Sec 2, take note that the sale cannot be made
area actually cultivated by him. The right of redemption legally outside of the province in which the property sold
under this section may be exercised within two (2) is situated. Recall our discussion – where do you file your
application for extrajudicial foreclosure? File with the RTC signed an agreement to postpone the 12 August 1986
where the property is located, not the residence of neither auction sale. ERHC, however, disputes the authority of
the mortgagee or the principal debtor but the location of Jaime Nuevas who signed the agreement for ERHC.
the subject property.
On 22 December 1986, ERHC filed with the Regional Trial
Sec. 3. Notice shall be given by posting notices of the Court of Iriga City a complaint for annulment of the
sale for not less than twenty days in at least three foreclosure sale of the personal and real properties.
public places of the municipality or city where the
property is situated, and if such property is worth ERHC alleged that the foreclosure was void mainly
more than four hundred pesos, such notice shall also because (1) DBP failed to comply with the procedural
be published once a week for at least three requirements prescribed by law; and (2) the foreclosure
consecutive weeks in a newspaper of general was premature.
circulation in the municipality or city.
DBP’s CONTENTION: DBP maintains that it complied
Now under Sec 3, you have there the requirement of with the mandatory posting requirement under applicable
notice. Notice shall be given by posting notices of the sale laws. DBP insists that the non-execution of the certificate
for not less than twenty days in at least three public places of posting of the auction sale notices did not invalidate the
of the municipality or city where the property is situated, foreclosure. DBP also maintains that when upon their
and if such property is worth more than four hundred (DBP and ERHC) agreement to postpone the auction
pesos, such notice shall also be published once a week sale, there was no more need to publish the notice for the
for at least three consecutive weeks in a newspaper of September 11, 1986 auction sale.
general circulation in the municipality or city. So yan yung
requirement of notice and publication, and such was the ISSUE: W/N DBP complied with the posting and
issue in the case of DBP vs CA. publication requirements under applicable laws for a valid
foreclosure.
DEVELOPMENT BANK OF THE PHILIPPINES VS CA
and EMERAL RESORT HOTEL CORP. HELD: POSTING REQUIREMENT: COMPLIED WITH
This Court ruled in Cristobal v. Court of Appeals that a
FACTS: Emerald Resort Hotel Corporation ("ERHC") certificate of posting is not required, much less considered
obtained a loan from petitioner Development Bank of the indispensable for the validity of an extrajudicial
Philippines ("DBP"). To secure the loan, ERHC foreclosure sale of real property under Act No. 3135. In
mortgaged its personal and real properties to DBP. On 18 the present case, the foreclosing sheriffs failed to execute
March 1981, DBP approved a restructuring of ERHC’s the certificate of posting of the auction sale notices.
loan subject to certain conditions. However, this fact alone does not prove that the sheriffs
failed to post the required notices. As held before, "the
On 5 June 1986, alleging that ERHC failed to pay its loan, fact alone that there is no certificate of posting attached
DBP filed with the Office of the Sheriff, Regional Trial to the sheriff's records is not sufficient to prove the lack of
Court of Iriga City, an Application for Extra-judicial posting."
Foreclosure of Real Estate and Chattel Mortgages.
Based on the records, DBP presented sufficient evidence
Deputy Provincial Sheriffs Abel Ramos and Ruperto to prove that the sheriffs posted the notices of the
Galeon issued the required notices of public auction sale extrajudicial sale. A careful examination of these two
of the personal and real properties. However, Sheriffs documents clearly shows that the foreclosing sheriffs
Ramos and Galeon failed to execute the corresponding posted the required notices of sale.
certificates of posting of the notices. On 10 July 1986, the
auction sale of the personal properties proceeded. Deputy Sheriff Galeon also testified that he, together with
Sheriff Ramos, actually posted the notices of sale.
The Office of the Sheriff scheduled on 12 August 1986 the Indisputably, there is clear and convincing evidence of the
public auction sale of the real properties. The Bicol posting of the notices of sale. What the law requires is the
Tribune published on 18 July 1986, 25 July 1986 and 1 posting of the notice of sale, which is present in this case,
August 1986 the notice of auction sale of the real and not the execution of the certificate of posting.
properties. However, the Office of the Sheriff postponed
the auction sale on 12 August 1986 to 11 September 1986 Moreover, ERHC bore the burden of presenting evidence
at the request of ERHC. DBP did not republish the notice that the sheriffs failed to post the notices of sale. In the
of the rescheduled auction sale because DBP and ERHC absence of contrary evidence, as in this case, the
presumption prevails that the sheriffs performed their rescheduled auction sale will only be valid if the
official duty of posting the notices of sale. Consequently, rescheduled date of auction is clearly specified in the prior
we hold that the non-execution of the certificate of posting notice of sale. The absence of this information in the prior
cannot nullify the foreclosure of the chattel and real estate notice of sale will render the rescheduled auction sale
mortgages in the instant case. void for lack of reposting or republication. If the notice of
auction sale contains this particular information, whether
PUBLICATION REQUIREMENT: NOT COMPLIED or not the parties agreed to such rescheduled date, there
The Court held recently in Ouano v. Court of Appeals is no more need for the reposting or republication of the
that republication in the manner prescribed by Act No. notice of the rescheduled auction sale.
3135 is necessary for the validity of a postponed In the instant case, there is no information in the notice of
extrajudicial foreclosure sale. Another publication is auction sale of any date of a rescheduled auction sale.
required in case the auction sale is rescheduled, and the Even if such information were stated in the notice of sale,
absence of such republication invalidates the foreclosure the reposting and republication of the notice of sale would
sale. The Court also ruled in Ouano that the parties have still be necessary because Circular No. 7-2002 took effect
no right to waive the publication requirement in Act No. only on 22 April 2002. There were no such guidelines in
3135. effect during the questioned foreclosure.
Publication, therefore, is required to give the foreclosure Clearly, DBP failed to comply with the publication
sale a reasonably wide publicity such that those requirement under Act No. 3135. There was no
interested might attend the public sale. To allow the publication of the notice of the rescheduled auction sale
parties to waive this jurisdictional requirement would of the real properties. Therefore, the extrajudicial
result in converting into a private sale what ought to be a foreclosure of the real estate mortgage is void.
public auction. QUESTIONS:
 What was missing here that was made as a basis to
The Court also ruled on DBP’s argument that Sec. 24, question the validity of the foreclosure proceedings?
Rule 39 of the Rules of Court does not apply in the present – The certificate of posting of the notice
case. Act No. 3135, as amended by Act No. 4118  What does the law require? – Only the posting and
otherwise known as "An Act to Regulate the Sale of notice and not necessarily the certificate of the
Property under Special Powers Inserted in or Annexed to posting of the notices of the sale
Real Estate Mortgages" applies in cases of extrajudicial  What is the effect for that failure to publish the date
foreclosure sale. A different set of law applies to each for that second auction sale? – Null and void
class of sale mentioned. The cited provision in the
Rules of Court hence does not apply to an DISCUSSION:
extrajudicial foreclosure sale. Take note what is required under Sec 3: posting and
publication. Posting, in other words, you post the notice of
As to DBP’s contention that ERHC’s act of requesting sale in 3 public places, usually dito sa atin - court, place
postponement of the 12 August 1986 auction sale estops or barangay for the property situated, and I think in a
ERHC from challenging the absence of publication of the specific mall. Pero what is important here is “public
notice of the rescheduled auction sale, the records are places”. If you look at the said provision, it does not
bereft of any evidence that ERHC requested the require that there must be certificate of posting. Sino mag
postponement without need of republication of the notice issue ng certificate of posting? Ang sheriff. I-certify nya
of sale. that there were notices posted in the following 3 public
areas. Yun yung wala dito na in question. However such
The form of the notice of extrajudicial sale is now certificate of posting is not required, much less considered
prescribed in Circular No. 7-200226 issued by the Office of indispensable for the validity of an extrajudicial
the Court Administrator on 22 January 2002. Section 4(a) foreclosure sale of real property under Act No. 3135. The
of Circular No. 7-2002 provides that: fact alone that there is no certificate of posting attached
XXX to the sheriff's records is not sufficient to prove the lack of
"In the event the public auction should not take place posting. Here they were able to prove that such notices of
on the said date, it shall be held on sale were duly published in 3 public places. What the law
___________,______ without further notice." requires is the posting of the notice of sale, and not the
execution of the certificate of posting. Further, the
The last paragraph of the prescribed notice of sale allows presumption prevails that the sheriffs performed their
the holding of a rescheduled auction sale without official duty of posting the notices of sale.
reposting or republication of the notice. However, the
But how about the requirement sa publication? There was However in this case, DBP as mortagee failed to comply
a publication here on the sale scheduled on Aug. 12, 1986 with the republication requirement. Walang another
but no auction took place on the said date. Why? Because scheduled date provided in the notice in case the first
the parties here agreed to the postponement of the sale. auction fails. So here, what is the effect? The sale is
Now it is required under the law that if you schedule a considered void. The extrajudicial foreclosure of the REM
different date for the auction sale, you must still comply is therefore considered void.
with the (re)publication.
Now in this case of DBP, the case of Ouano was also
Republication in the manner prescribed by Act No. 3135 mentioned.
is necessary for the validity of a postponed extrajudicial
foreclosure sale. Another publication is required in case ALFREDO OUANO vs CA and HEIRS OF JULIETA
the auction sale is rescheduled, and the absence of such OUANO (G.R. No. 129729, March 4, 2003)
republication invalidates the foreclosure sale.
FACTS: On June 8, 1977, Julieta M. Ouano (Julieta), now
In this case there was no waiver of the right to deceased, obtained a loan from the PNB in the amount of
republication xxx republication is required to give the P104,280.00. As security for said loan, she executed a
foreclosure sale a reasonably wide publicity, public real estate mortgage over two parcels of land located at
auction yan sya, such that those interested might attend Opao, Mandaue City. She defaulted on her obligation. On
the public sale. To allow the parties to waive this September 29, 1980, PNB filed a petition for extrajudicial
jurisdictional requirement would result in converting into a foreclosure with the City Sheriff of Mandaue City.
private sale what ought to be a public auction.
On November 4, 1980, the sheriff prepared a notice of
Also the last paragraph of the prescribed notice of sale sale setting the date of public auction of the two parcels
allows the holding of a rescheduled auction sale without of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m. He
reposting or republication of the notice. However, the caused the notice to be published in the Cebu Daily
rescheduled auction sale will only be valid if the Times, a newspaper of general circulation in Mandaue
rescheduled date of auction is clearly specified in the prior City, in its issues of November 13, 20 and 27, 1980. He
notice of sale. The absence of this information in the prior likewise posted copies thereof in public places in
notice of sale will render the rescheduled auction sale Mandaue City and in the place where the properties are
void for lack of reposting or republication. If the notice of located.
auction sale contains this particular information, whether
or not the parties agreed to such rescheduled date, there However, the sale as scheduled and published did not
is no more need for the reposting or republication of the take place as the parties, on four separate dates,
notice of the rescheduled auction sale. executed Agreements to Postpone Sale (Agreements).
These Agreements were addressed to the sheriff,
What is important is that you inform the public of the requesting the latter to defer the auction sale to another
scheduled auction sale. The Court seeks to minimize the date at the same time and place, "without any further
expenses which the mortgagee incurs in publishing the republication of the Notice."
notice of extrajudicial sale. as long as the intention of the
law is complied with. As the interested parties as well as There was however no sale that took place and was
the public are informed of the schedule of the next auction repeatedly postponed and in all these postponements, no
sale, if the first auction sale does not proceed. Therefore, new notice of sale was issued, nor was there any
the purpose of a notice of sale, which is to notify the republication or reposting of notice for the rescheduled
mortgagor and the public of the foreclosure sale, is dates.
satisfied.
Finally, on May 29, 1981, the sheriff conducted the
Now this requirement is to deter the practice of some auction sale, awarding the two parcels of land to PNB, the
mortgagors in requesting postponement of the auction only bidder. He executed a Certificate of Sale certifying
sale of real properties, then later attacking the validity of the sale for and in consideration of P195, 510.50.
the foreclosure for lack of republication. This practice will
only force mortgagees to deny outright requests for Julieta failed to redeem the properties within the one year
postponement by mortgagors since it will only mean period from registration of sale. PNB later conveyed the
added publication expense on the part of mortgagees. So properties to Alfredo Ouano, the brother of Julieta.
pwede nila isahin.
On March 28, 1983, Julieta sent demand letters to PNB mortgagee's right to foreclose a mortgage must be
and petitioner, pointing out irregularities in the foreclosure exercised according to the clear mandate of the law.
sale.On April 18, 1983, Julieta filed a complaint with the Every requirement of the law must be complied with, lest
Regional Trial Court (RTC) of Cebu for the nullification of the valid exercise of the right would end. PNB's inaction
the May 29, 1981 foreclosure sale. on the scheduled date of sale and belated filing of
requests to postpone may be deemed as an
ISSUE: W/N the requirements of Act No. 3135 were abandonment of the petition to foreclose it filed with the
complied with in the May 29, 1981 foreclosure sale. sheriff. Consequently, its right to foreclose the mortgage
based on said petition lapsed.
HELD: The governing law for extrajudicial foreclosures is
Act No. 3135 as amended by Act No. 4118. The provision In a vain attempt to uphold the validity of the aforesaid
relevant to this case is Section 3, which provides: waiver, petitioner asserts that the Court of Appeals should
SEC. 3. Notice shall be given by posting notices of the have applied Rule 39, Section 24 of the Rules of Court,
sale for not less than twenty (20) days in at least three which allows adjournment of execution sales by
public places of the municipality or city where the property agreement of the parties. The cited provision in the Rules
is situated, and if such property is worth more than four of Court hence does not apply to an extrajudicial
hundred pesos, such notice shall also be published once foreclosure sale. Act No. 3135, as amended by Act No.
a week for at least three consecutive weeks in a 4118 otherwise known as "An Act to Regulate the Sale of
newspaper of general circulation in the municipality of Property under Special Powers Inserted in or Annexed to
city. Real Estate Mortgages" applies in cases of extrajudicial
foreclosure sale. A different set of law applies to each
In a number of cases, we have consistently held that class of sale mentioned.
failure to advertise a mortgage foreclosure sale in
compliance with statutory requirements constitutes a Next, petitioner maintains that Julieta's act of requesting
jurisdictional defect invalidating the sale. Consequently, the postponement and repeatedly signing the
such defect renders the sale absolutely void and no title Agreements had placed her under estoppel, barring her
passes. from challenging the lack of publication of the auction
sale.
Petitioner, however, insists that there was substantial
compliance with the publication requirement, considering We rule otherwise. Julieta did request for the
that prior publication and posting of the notice of the first postponement of the foreclosure sale to extend the period
date were made. to settle her obligation. However, the records do not show
that she requested the postponement without need of
In Tambunting v. Court of Appeals, we held that republication and reporting of notice of sale.
republication in the manner prescribed by Act No. 3135 is
necessary for the validity of a postponed extrajudicial In addition, we observe herein that the Agreements
foreclosure sale. prepared by the counsel of PNB were in standard forms
of the bank, labeled as "Legal Form No. We therefore held
Publication, therefore, is required to give the foreclosure that said agreement partakes of the nature of a contract
sale a reasonably wide publicity such that those of adhesion, i.e., one in which one of the contracting
interested might attend the public sale. To allow the parties imposes a ready-made form of contract which the
parties to waive this jurisdictional requirement would other party may accept or reject, but cannot modify. One
result in converting into a private sale what ought to be a party prepares the stipulation in the contract, while the
public auction. other party merely affixes his signature or his "adhesion"
thereto, giving no room for negotiation, and depriving the
Moreover, assuming arguendo that the written waivers latter of the opportunity to bargain on equal footing. As
are valid, we find noticeable flaws that would nevertheless such, their terms are construed strictly against the party
invalidate the foreclosure proceedings. The Agreements who drafted it.
are clearly defective for having been belatedly executed
and filed with the sheriff. The party who may be said to be More importantly, the waiver being void for being contrary
at fault for this failure, and who should bear the to the express mandate of Act No. 3135, such cannot be
consequences, is no other than PNB, the mortgagee in ratified by estoppel. Estoppel cannot give validity to an act
the case at bar. It is the mortgagee who causes the that is prohibited by law or one that is against public
mortgaged property to be sold, and the date of sale is policy. Neither can the defense of illegality be waived.
fixed upon his instruction. We have held that the
QUESTIONS:
 Isn’t it that there was an agreement between the Again the principal object of this notice of sale in a
parties here for the scheduling of the sale? Can we foreclosure of mortgage is not so much to notify the
not say that this agreement is binding against them? mortgagor as to inform the public generally of the nature
– Such an agreement is not binding because the and condition of the property to be sold, and of the time,
agreements only waived further republication of the place, and terms of the sale. Notices are given to secure
notice of sale. Nothing in the Agreements indicates bidders and prevent a sacrifice of the property. Clearly,
that the parties likewise dispensed with the reposting the statutory requirements of posting and publication are
of the notices of sale. mandated, not for the mortgagors benefit, but for the
o **Ma’am J: So.. While they agreed to the public or third persons. In fact, personal notice to the
rescheduling, it could not be waived because mortgagor in extrajudicial foreclosure proceedings is not
of the requirement under Act 3135. Assuming even necessary, unless stipulated. As such, it is imbued
there was a waiver, that was only with the with public policy considerations and any waiver thereon
postponement of the sale but not with regard would be inconsistent with the intent and letter of Act No.
to the requisites of republication and posting 3135.
of notices of the sale
 Now how about the contention here that Rule 39 of Publication, therefore, is required to give the foreclosure
the Rules of Court should also be applicable in this sale a reasonably wide publicity such that those
instance? – The provision in the Rules of Court does interested might attend the public sale. To allow the
not apply to an extrajudicial foreclosure sale. Rule 39 parties to waive this jurisdictional requirement would
covers execution sales. Moreover, even assuming result in converting into a private sale what ought to be a
that the provision applies, all it authorizes is the public auction.
adjournment of the execution sale by agreement of
the parties. Nowhere does it state that republication Now with regard to the assertion that Rule 39 will apply,
and reposting of notice for the postponed sale may be the SC emphasized that there are three different kinds of
waived. Thus, it cannot, by any means, sanction the sales under the law, namely: an ordinary execution sale,
waiver in the case at bar. a judicial foreclosure sale, and an extrajudicial foreclosure
 Is the action of Julieta barred by laches? – No. Julieta sale. An ordinary execution sale is governed by the
did request for the postponement of the foreclosure pertinent provisions of Rule 39 of the Rules of Court. Rule
sale to extend the period to settle her obligation. 68 of the Rules of Court applies in cases of judicial
However, it does not show that she requested the foreclosure sale. On the other hand, Act No. 3135 applies
postponement without need of republication and in cases of extrajudicial foreclosure sale. A different set of
reposting of notice of sale. To request postponement law applies to each class of sale mentioned. Rule 39 does
of the sale is one thing; to request it without need of not apply to an extrajudicial foreclosure sale.
compliance with the statutory requirements is
another. Even assuming that Rule 39 applies, all it authorizes is
the adjournment of the execution sale by agreement of
DISCUSSION: the parties. Nowhere does it state that republication and
So take note of how the provisions in Act 3135 are reposting of notice for the postponed sale may be waived.
interpreted. Especially in this requirement of publication Thus, it cannot, by any means, sanction the waiver in the
and posting. They must be strictly complied with, and that case at bar.
even slight deviations therefrom will invalidate the notice
and render the sale at least voidable. The SC has And as to the request that was granted for the
consistently held that failure to advertise a mortgage postponement of the sale, although the parties have
foreclosure sale in compliance with statutory agreed for the several postponements, again the records
requirements constitutes a jurisdictional defect do not show that she requested the postponement without
invalidating the sale. Consequently, such defect renders need of republication and reposting of notice of sale. To
the sale absolutely void and no title passes. request postponement of the sale is one thing; to request
it without need of compliance with the statutory
Now here, the requirement is that there must have been requirements is another.
republication because of the several postponements of
the date of sale. Such republication is necessary for the Also take note; assuming there is a waiver, even if we
validity of a postponed extrajudicial foreclosure sale. A consider here the legal agreement that was executed by
statute requiring it being held applicable to subsequent the parties which was in a standard form, it is a contract
sales. of adhesion, therefore construed strictly against the party
who drafted it. correspondence relative to the mortgage including

notifications of extrajudicial actions shall be sent to
More importantly, the waiver being void for being contrary petitioner Ramirez at his given address, to wit:
to the express mandate of Act No. 3135, such cannot be N) All correspondence relative to this MORTGAGE,
ratified by estoppel. Estoppel cannot give validity to an act including demand letters, summons, subpoenas or
that is prohibited by law or one that is against public notifications of any judicial or extrajudicial actions shall be
policy. Neither can the defense of illegality be waived. sent to the MORTGAGOR at the address given above or
at the address that may hereafter be given in writing by
Julieta cannot be guilty of laches. Her prompt actions the MORTGAGOR to the MORTGAGEE, and the mere
upon discovering her cause of action negate the claim act of sending any correspondence by mail or by personal
that she has abandoned her right to claim the properties. delivery to the said address shall be valid and effective
Besides, this defense lacks merit in light of the Civil Code notice to the MORTGAGOR for all legal purposes and the
stating that an action or defense for the declaration of the fact that any communication is not actually received by
inexistence of a contract does not prescribe. the MORTGAGOR, or that it has been returned unclaimed
to the MORTGAGEE, or that no person was found at the
Alright let’s go over the provisions of Act 3135. address given, or that the address is fictitious or cannot
be located, shall not excuse or relieve the MORTGAGOR
Sec. 4. The sale shall be made at public auction, from the effects of such notice.
between the hours or nine in the morning and four in
the afternoon; and shall be under the direction of the Manila Bank filed a request for extrajudicial foreclosure of
sheriff of the province, the justice or auxiliary justice real estate mortgage on the ground that Ramirez failed to
of the peace of the municipality in which such sale pay his loan despite demands. During the auction sale on
has to be made, or a notary public of said September 8, 1994, respondent was the only bidder for
municipality, who shall be entitled to collect a fee of the mortgaged properties.
five pesos each day of actual work performed, in
addition to his expenses. Ramirez sued respondent for annulment of sale and
prayed that the certificate of sale be annulled on the
Sec 4, you have here when sale may be conducted. It ground, among others, that paragraph N of the real estate
just provides for the hours and who will conduct it, so the mortgage was violated for he was not notified of the
sheriff. And then you have the fee. I think the fee now is foreclosure and auction sale.
necessarily changed because 5 pesos pa yang andyan.
In its answer, respondent claimed that the foreclosure
Sec. 5. At any sale, the creditor, trustee, or other proceedings were valid.
persons authorized to act for the creditor, may
participate in the bidding and purchase under the ISSUE: W/N Paragraph N of the Real Estate Mortgage
same conditions as any other bidder, unless the was violated by Manila Bank and What is its effect?
contrary has been expressly provided in the
mortgage or trust deed under which the sale is made. HELD: YES. Paragraph N was violated by Manila
Bank.
Sec 5 you have therein that the creditor, trustee, or other
The Court ruled that when respondent failed to send the
persons authorized to act for the creditor, may participate
notice of extrajudicial foreclosure sale to Ramirez, it
in the bidding. You already know this in the cases that you
committed a contractual breach of said paragraph N
have discussed.. And purchase under the same
sufficient to render the extrajudicial foreclosure sale on
conditions as any other bidder, unless the contrary has
September 8, 1994 null and void.
been expressly provided in the mortgage or trust deed.
Now going back to the requirement of posting under Sec
In Carlos Lim, et al. v. Development Bank of the
3, we also have the case of Ramirez.
Philippines, we held that unless the parties stipulate,
personal notice to the mortgagor in extrajudicial
JOSE RAMIREZ vs THE MANILA BANKING CORP. foreclosure proceedings is not necessary because
(G.R. No. 198800, December 11, 2013) Section 3 of Act No. 3135 only requires the posting of the
notice of sale in three public places and the publication of
FACTS: Jose T. Ramirez mortgaged two parcels of land that notice in a newspaper of general circulation. In this
located at Bayanbayanan, Marikina City in favor of The case, the parties stipulated in paragraph N of the real
Manila Banking Corporation to secure his P265,000 loan. estate mortgage that all correspondence relative to the
The real estate mortgage provides that all
mortgage including notifications of extrajudicial actions to, the debtor, his successors in interest or any
shall be sent to mortgagor Ramirez at his given address. judicial creditor or judgment creditor of said debtor,
Respondent had no choice but to comply with this or any person having a lien on the property
contractual provision it has entered into with Ramirez. The subsequent to the mortgage or deed of trust under
contract is the law between them. Hence, we cannot which the property is sold, may redeem the same at
agree with the bank that paragraph N of the real estate any time within the term of one year from and after
mortgage does not impose an additional obligation upon the date of the sale; and such redemption shall be
it to provide personal notice of the extrajudicial governed by the provisions of sections four hundred
foreclosure sale to the mortgagor Ramirez. and sixty-four to four hundred and sixty-six,
inclusive, of the Code of Civil Procedure, in so far as
As we explained in Metropolitan Bank v. Wong, the bank’s these are not inconsistent with the provisions of this
violation of paragraph N of the real estate mortgage is Act.
sufficient to invalidate the extrajudicial foreclosure sale.
Redemption: may redeem the same at any time within the
QUESTIONS: term of one year from and after the date of the sale. And
 What is the effect of the violation of that paragraph? - we are already clear, the jurisprudence is also already
The bank’s violation of paragraph of the real estate clear with this. The one-year redemption period, the right
mortgage is sufficient to invalidate the extrajudicial of redemption begins not from the actual date of the
foreclosure sale. foreclosure sale but from the date of the registration of
 Isn’t it that Act 3135 does not require that the said sale. Although last time we have already emphasized
mortgagor may be personally notified? – That is the different possessions(??????): Homestead Law as well
GR. However the parties stipulated here that there as Tenancy Law, so the right to ___ in favor of tenants.
must be notice.
Now we also have this case of Quezon City Mayor.
DISCUSSION: However I just included this one because you also have
So what do we get here in relation to Sec 3? You can add to take into consideration, in this case, take note this is
requirements. But you cannot waive the requirements that not extrajudicial foreclosure proceeding in relation to a
are already provided under the law. Here, it is clear that mortgage. What I’m saying here is that we have different
when respondent failed to send the notice of extrajudicial laws xxx or period of redemption. We have to differentiate
foreclosure sale to Ramirez, it committed a contractual it from extrajudicial foreclosure under Act 3135 and the
breach of said paragraph N sufficient to render the other laws that we have.
extrajudicial foreclosure sale on September 8, 1994 null
and void. CITY MAYOR, CITY TREASURER, CITY ASSESSOR,
ALL OF QUEZON CITY, and ALVIN EMERSON S. YU
What’s the rule here? Unless the parties stipulate, vs RIZAL COMMERCIAL BANKING CORPORATION
personal notice to the mortgagor in extrajudicial
foreclosure proceedings is not necessary because FACTS: The spouses Roberto and Monette Naval
Section 31 of Act No. 31352 only requires the posting of obtained a loan from respondent Rizal Commercial
the notice of sale in three public places and the Banking Corporation, secured by a real estate mortgage
publication of that notice in a newspaper of general of properties. In 1998, the real estate mortgage was later
circulation. foreclosed and the properties were sold at public auction
with respondent as the highest bidder. The corresponding
In this case, the parties stipulated in paragraph N of the Certificates of Sale were issued in favor of respondent on
real estate mortgage that all correspondence relative to August 4, 1998. However, the certificates of sale were
the mortgage including notifications of extrajudicial allegedly registered only on February 10, 2004.
actions shall be sent to mortgagor Ramirez at his given
address. Therefore, this additional obligation is valid On May 30, 2003, an auction sale of tax delinquent
because it is not really contrary to what is required under properties was conducted by the City Treasurer of
Sec 3. Just comply with posting and publication Quezon City. Included in the properties that were
requirements and the parties can make additional auctioned were two (2) townhouse units and the parcel of
requirements. The parties to the Mortgage Contract are land. For these delinquent properties, Alvin Emerson S.
not precluded from exacting additional requirements. Yu was adjudged as the highest bidder. Upon payment of
the tax delinquencies, he was issued the corresponding
Sec. 6. In all cases in which an extrajudicial sale is Certificate of Sale of Delinquent Property.
made under the special power hereinbefore referred
On February 10, 2004, the Certificate of Sale of tax payable, including penalties or interests, if applicable,
Delinquent Property was registered with the Office of the must be R. A. No. 7160.
Register of Deeds of Quezon City.
As such, it is apparent that in case of sale of tax
On June 10, 2004, respondent tendered payment for all delinquent properties, R.A. No. 7160 is the general law
of the assessed tax delinquencies, interest, and other applicable. Consequently, as regards redemption of tax
costs of the subject properties with the Office of the City delinquent properties sold at public auction, the pertinent
Treasurer, Quezon City. However, the Office of the City provision is Section 261 of R.A. No. 7160, which provides:
Treasurer refused to accept said tender of payment. Section 261. Redemption of Property Sold. Within one (1)
year from the date of sale, the owner of the delinquent
Undeterred, on June 15, 2004, respondent filed before the real property or person having legal interest therein, or his
Office of the City Treasurer a Petition for the acceptance representative, shall have the right to redeem the property
of its tender of payment and for the subsequent issuance upon payment to the local treasurer of the amount of
of the certificate of redemption in its favor. Nevertheless, delinquent tax, including the interest due thereon, and the
respondents subsequent tender of payment was also expenses of sale from the date of delinquency to the date
denied. of sale, plus interest of not more than two percent (2%)
per month on the purchase price from the date of sale to
Petitioners argue: the date of redemption. Such payment shall invalidate the
that the RTC erred when it ruled that P.D. No. 464 was certificate of sale issued to the purchaser and the owner
not repealed by R.A. No. 7160 and when it concluded that of the delinquent real property or person having legal
the phrase from the date of sale as appearing in Section interest therein shall be entitled to a certificate of
261 of R.A. No. 7160 means that the counting of the one redemption which shall be issued by the local treasurer or
(1) year redemption period of tax delinquent properties his deputy.
sold at public action shall commence from the date of
registration of the certificate of sale. From the date of sale until the expiration of the period of
redemption, the delinquent real property shall remain in
Respondent argues: the possession of the owner or person having legal
the RTC did not rule that P.D. No. 464 was not repealed interest therein who shall remain in the possession of the
by R.A. No. 7160, it merely made reference to Section 78 owner or person having legal interest therein who shall be
of P.D. No. 464. entitled to the income and other fruits thereof.
ISSUES: The local treasurer or his deputy, upon receipt from the
 W/N section 78 of p.d. 464 was repealed by republic purchaser of the certificate of sale, shall forthwith return
act no. 7160 known as the local government code of to the latter the entire amount paid by him plus interest of
1991. not more than two percent (2%) per month. Thereafter,
 Whether the period of redemption in a realty tax sale the property shall be free from all lien of such delinquent
in Quezon City [h]as to be reckoned from the date of tax, interest due thereon and expenses of sale.
annotation of the certificate of sale pursuant to
paragraph 7, section 14 of Quezon City tax 2. From the foregoing, the owner of the delinquent real
ordinance no. Sp-91-93 or from the date of sale property or person having legal interest therein, or his
pursuant to section 261 of r.a. 7160. representative, has the right to redeem the property within
 Whether or not the respondent is entitled to the one (1) year from the date of sale upon payment of the
protection of all the provisions of Quezon City tax delinquent tax and other fees. Verily, the period of
ordinance number sp-91-93, otherwise known as redemption of tax delinquent properties should be
Quezon City revenue code of 1993, including counted not from the date of registration of the certificate
section 14 thereof, promulgated pursuant to r.a. of sale, as previously provided by Section 78 of P.D. No.
7160; 464, but rather on the date of sale of the tax delinquent
property, as explicitly provided by Section 261 of R.A. No.
HELD: 7160.
1. The issue of whether or not R.A No. 7160 or the Local
Government Code, repealed P.D. No. 464 or the Real Nonetheless the government of Quezon City, pursuant
Property Tax Code has long been laid to rest by this to the taxing power vested on local government units
Court. Jurisdiction thrives to the effect that R.A. No. 7160 by Section 5, Article X of the 1987 Constitutions and R.A.
repealed P.D. No. 464. From January 1, 1992 onwards, No. 7160, enacted City Ordinance No. SP-91, S-93,
the proper basis for the computation of the real property otherwise known as the Quezon City Revenue Code of
1993, providing, among other things, the procedure in the  Eto nalang, did the sale happen because of an
collection of delinquent taxes on real properties within the extrajudicial foreclosure proceeding? – No, it was
territorial jurisdiction of Quezon City. Section 14 (a), sold for failure to pay real property taxes.
Paragraph 7, the Code provides: o Ma’am: It is true that the property was
Within one (1) year from the date of the annotation of the mortgaged pero ano ba nauna dito
sale of the property at the proper registry, the owner of the naregister? Yung sale due to tax
delinquent real property or person having legal interest delinquencies.
therein, or his representative, shall have the right to  What’s the redemption period here with regard to
redeem the property by paying to the City Treasurer the RCBC? – Within one year counted from the date of
amount of the delinquent tax, including interest due annotation of the certificate of sale in the proper
thereon, and the expenses of sale plus interest of two Register of Deeds.
percent (2) per month on the purchase price from the date  Can RCBC still redeem the property? – Yes
of sale to the date of redemption. Such payment shall  What if the Quezon City does not have this
invalidate the certificate of sale issued to the purchaser ordinance? Can RCBC still redeem the property? –
and the owner of the delinquent real property or person LGU will be applied.
having legal interest therein shall be entitled to a
certificate of redemption which shall be issued by the City DISCUSSION:
Treasurer. What was taken into consideration is not Act 3135
xxxx because there was no extrajudicial foreclosure of the
Verily, the ordinance is explicit that the one-year REM. What we have here was a foreclosure of properties
redemption period should be counted from the date of the that were already delinquent in relation to real property
annotation of the sale of the property at the proper taxes. So what was the law applied? RA 7160. Under RA
registry. At first glance, this provision runs counter to that 7160, dito ang interpretation nya is within 1 year from the
of Section 261 of R.A. No. 7160 which provides that the date of the actual sale of the property. However, for
one year redemption period shall be counted from the Quezon City, meron silang ordinance. Wherein it states
date of sale of the tax delinquent property. There is, “within one year from the date of the annotation of the sale
therefore, a need to reconcile these seemingly conflicting of the property. So with that, when RCBC tendered its
provisions of a general law and a special law. payment, it was still within 1 year from the date the
property was registered. The property was registered on
To harmonize the provisions of the two laws and to Feb 10, 2004, tender of payment was made on June 10,
maintain the policy of the law to aid rather than to defeat 2004.
the owners right to redeem his property, Section 14 (a),
Paragraph 7 of City Ordinance No. SP-91, S-93 should be And as we have mentioned, kung wala itong ordinance,
construed as to define the phrase one (1) year from the then you apply what is provided under RA 7160 or the
date of sale as appearing in Section 261 of R.A. No. 7160, LGC. Sale happened on May 30, 2003. So up to May 30
to mean one (1) year from the date of the annotation of 2004 lang ang redemption period. If RCBC tendered
the sale of the property at the proper registry. payment on June 10, 2004, it cannot redeem anymore.
Ang effect lang nito is because of that ordinance, it will be
3. Consequently, the counting of the one (1) year in favor of RCBC and so the petition of Quezon City was
redemption period of property sold at public auction for its denied.
tax delinquency should be counted from the date of So just take note of Sec 6 and the discussion we had:
annotation of the certificate of sale in the proper Register judicial foreclosure – GR: redemption under Rule 68.
of Deeds. Applying the foregoing to the case at bar, from Right of redemption available to mortgagees who are non-
the date of registration of the Certificate of Sale of financial institutions as provided under the General
Delinquent Property on February 10, 2004, respondent Banking Act.
had until February 10, 2005 to redeem the subject
properties. Hence, its tender of payment of the subject If what you have is an extrajudicial foreclosure
properties tax delinquencies and other fees on June 10, proceeding: GR: 1 year right of redemption as provided in
2004, was well within the redemption period, and it was Act 3135, from the date of registration.
manifest error on the part of petitioners to have refused
such tender of payment. As an exception: you have the 3-month period, which ever
is earlier under General Banking Law. That is when the
QUESTIONS: mortgagor is a juridical person. So take note of those
 First, what was the reason for the sale of the subject instances for redemption in relation to extrajudicial
property? Who sold the property? foreclosure proceedings.
Mamerto died in 1986, leaving behind 3 titled parcels of

Sec. 7. In any sale made under the provisions of this land located in Bulacan, all under the name “Mamerto
Act, the purchaser may petition the Court of First Darcen married to Flora de Guzman.”
Instance of the province or place where the property
or any part thereof is situated, to give him possession According to the petitioners, sometime in 1990, their
thereof during the redemption period, furnishing brother Manuel borrowed money from Veronica Gonzales
bond in an amount equivalent to the use of the (Gonzales), president of V.R. Gonzales Credit
property for a period of twelve months, to indemnify Enterprises. Manuel sought their consent in constituting a
the debtor in case it be shown that the sale was made mortgage over the above properties of their father, but the
without violating the mortgage or without complying petitioners refused. Manuel then caused the execution of
with the requirements of this Act. Such petition shall an Extra-Judicial Settlement of Estate with
be made under oath and filed in form of an ex parte Waiver (ESEW) by forging the signatures of the
motion in the registration or cadastral proceedings if petitioners and their mother Flora.
the property is registered, or in special proceedings
in the case of property registered under the Mortgage In the said instrument, the petitioners were said to have
Law or under section one hundred and ninety-four of waived their shares in their father’s estate in favor of their
the Administrative Code, or of any other real property mother, thus making Flora the sole owner of the 3 lots.
encumbered with a mortgage duly registered in the
office of any register of deeds in accordance with any Meanwhile, fire had razed part of the ROD of Bulacan and
existing law, and in each case the clerk of the court destroyed the titles to the lots. After reconstitution of the
shall, upon the filing of such petition, collect the fees titles, new titles were issued in the name of “Flora de
specified in paragraph eleven of section one hundred Guzman, Filipino, of legal age, widow.”
and fourteen of Act Numbered Four hundred and
ninety-six, as amended by Act Numbered Twenty- Petitioners further claim that on the day that the new titles
eight hundred and sixty-six, and the court shall, upon were issued, they caused the annotation thereon of their
approval of the bond, order that a writ of possession hereditary claim in their father’s estate. In 2000, Flora
issue, addressed to the sheriff of the province in died.
which the property is situated, who shall execute said
order immediately. In 2007, Gonzales demanded payment from the
petitioners of several loans allegedly taken out by Flora,
Sec 7, we have also discussed this, the right to possess claiming that the latter had mortgaged the properties to
the property during the redemption period provided there VR Enterprise.
must be a bond to indemnify the debtor in case it be
shown that the sale was made without violating the Petitioners say that they “immediately noted that the
mortgage or without complying with the requirements of purported signatures of their mother on the 3 mortgage
this Act. contracts were actually forgeries, and that the mortgage
contracts did not state when the supposed loan
If writ of possession is paid(?) for after the lapse of the obligations would become due and demandable.”
redemption period, no need for the bond.
They maintain that their mother did not contract the loans,
Also we have discussed the nature of this petitions or and they point to their brothers Manuel and Arturo, whose
motions for execution of the writ of possession and as well signatures appear as witnesses on the mortgage
as the right to have the title consolidated in the name of documents, as guilty of forging her signatures and of
the highest bidder. These are ex parte in nature, summary receiving the proceeds of the loans. The petitioners also
in nature and also ministerial. disclaim any knowledge of the loans, or of their consent
thereto, either before or after.
DARCEN V. V.R. GONZALES CREDIT ENTERPRISES,
INC. VR Enterprise extrajudicially foreclosed the mortgage
G.R. No. 199747; April 03, 2013 over the lots, but meanwhile, petitioners filed for
“Annulment of Mortgage, Extra-Judicial Foreclosure,
FACTS: Spouses Mamerto Darcen and Flora De Guzman Auction Sale, Certificate of Sale, and Damages,” seeking
begot 7 children, namely: Teodoro, Mamerto, Jr., Nestor, to void the real estate mortgages, the extrajudicial
Benilda, and Elenita (petitioners), and their brothers foreclosure and the auction sale of the lots.
Arturo and Manuel.
The three properties were sold, with the VR Enterprise as to post a bond, and it is the ministerial duty of the courts
the highest bidder. The one-year period to redeem to issue the same upon proper application and proof of
lapsed. VR Enterprise executed an affidavit of title.
consolidation of ownership, and a writ of possession was
issued against petitioners. The nature of an ex parte petition for issuance of the
possessory writ is a non-litigious proceeding and
Contention of Petitioners: summary in nature. As an ex parte proceeding, it is
They are adverse claimants who are third parties and brought for the benefit of one party only, and without
strangers to the real estate mortgages executed by their notice to or consent by any person adversely interested.
mother. The issuance of a writ of possession in favor of
the purchaser in an extrajudicial foreclosure sale ceases Furthermore, it is settled that a pending action for
to be ministerial where the property is in the possession annulment of mortgage or foreclosure sale does not stay
of a third party who holds the property under a claim the issuance of the writ of possession.
adverse to that of the debtor/mortgagor.
Nonetheless, the ministerial duty of the court to issue
The petitioners maintain that they knew nothing about the an ex parte writ of possession ceases once it appears
mortgage contracts, whose validity is now the subject of that there is a third party in possession of the
their appeal. They further claim that their signatures in property, who is a stranger to the mortgage and who
the ESEW were forged. As co-heirs and co-owners with claims a right adverse to that of the debtor/
their mother of the subject lots, they have a claim directly mortgagor.
adverse to hers, and therefore, also directly adverse to
her successor-in-interest, VR Enterprise. Thus they Section 33, Rule 39 of the Rules of Court provides that in
should be entitled to retain possession of the properties an execution sale, the possession of the property shall be
until the claim for ownership is resolved. given to the purchaser or last redemptioner, unless a
third party is actually holding the property adversely
ISSUE: WON the petitioners are adverse claimants to the judgment obligor. The application of the above
entitled to retain possession of the properties. NO Section has been extended to extrajudicial foreclosure
sales pursuant to Section 6 of Act No. 3135.
HELD: The long-settled rule in extrajudicial foreclosure of
real estate mortgage is that after consolidation of The petitioners have persisted in making the point that
ownership of the foreclosed property, it is the ministerial they are strangers to the mortgage contracts executed by
duty of the court to issue, as a matter of right, an ex their mother over their father’s lots, which they claim to
parte writ of possession to the buyer. co-own with her, an interest adverse to that of the VR
Enterprise.
The established rule is that the purchaser in an
extrajudicial foreclosure sale becomes the absolute Thus, as an exception, the possession of the mortgaged
owner of the property if no redemption is made within 1 property may be awarded to a purchaser in the
year from the registration of the certificate of sale. extrajudicial foreclosure unless a third party is actually
Possession, being a recognized essential attribute of holding the property adversely to the judgment debtor.
ownership after consolidation of title, the purchaser may
demand possession as a matter of right. The purchaser’s right of possession is recognized only as
against the judgment debtor and his successor-in-interest
The possession may be granted to the buyer either but not against persons whose right of possession is
(a) within the one-year redemption period, upon the filing adverse to the latter.
by the purchaser of a bond, or
(b) after the lapse of the redemption period, without need However, the SC finds no proof that the petitioners
of a bond. are adverse third-party claimants entitled to be
retained in possession.
It is a time-honored legal precept that after the
consolidation of titles in the buyer’s name, for failure of the The chief consideration for granting to VR Enterprise a
mortgagor to redeem, entitlement to a writ of possession writ of possession was that the assailed mortgages
becomes a matter of right. As the confirmed owner, the executed by Flora in 1995 were constituted on properties
purchaser’s right to possession becomes absolute. The covered by titles issued solely in her name.
basis of this right to possession is the purchaser’s
ownership of the property.There is even no need for him It will be noted that it was only in June 2007, after VR
Enterprise had threatened them with extrajudicial or its foreclosure cannot be a legal ground for the refusal
foreclosure and eviction, or after 12 years had passed, to issue a writ of possession. Regardless of whether or
that the petitioners brought an action to annul the real not there is a pending suit for the annulment of the
estate mortgages, and meanwhile, Flora had obtained mortgage or the foreclosure itself, the purchaser is
several loans totaling P7.5 million fromVR Enterprise. It entitled to a writ of possession without prejudice, of
took petitioners even longer, 15 years, to assail the course, to the eventual outcome of the pending
validity of the ESEW, which gave Flora sole title to the annulment case.
subject lots under the new reconstituted titles issued to QUESTIONS:
her.  What is the issue in this case?
 In the mortgage, lets take into consideration the REM.
Realizing that their claim of forgery of their mother’s Who was the mortgagor therein? – De Guzman; and
signature in the mortgage contracts was tenuous, the Gonzalez as the mortgagee.
petitioners now claim that an earlier instrument,  Who are the petitioners here? – Children of Flora De
the ESEW, was falsified by their brothers Manuel and Guzman.
Arturo who forged their signatures. Yet the petitioners did  What is their ground in questioning the mortgage and
not explain why the said instrument named neither the subsequent foreclosure? – Forgery; and without
Manuel nor Arturo but their mother Flora as the sole their consent
beneficiary of the heirs’ waiver.  Who is in possession of the property here? –
Gonzalez
Considering that the petitioners are now asserting that o Ma’am: And it is Gonzalez or the mortgagee
their signatures in the ESEW had been forged, it is
here who is asserting his possession over the
inexplicable why they failed to attach a copy thereof to property, which is still possessed by the
their Opposition to the ex parte petition for writ of petitioners in this case.
possession. All that they could say about this “oversight”
 So with that, who is entitled to the possession? The
is that they “were never able to insist on the presentation
petitioners or respondent? – Veronica Gonzalez
of the said document because they were never parties in
 Was the writ of possession actually issued already? –
the case for writ of possession. Besides, the case for writ
Yes
of possession is summary and non-adversarial.”
o Ma’am: So it was already issued that is why
the contentions of the petitioners here is
But this is a lie and an obvious subterfuge, for the fact is
already moot and academic.
that they appeared with their lawyer, and had an
DISCUSSION:
opportunity to lay out the complete facts and present
The petitioners here questioned the REM alleging that the
whatever pertinent documents were in their possession.
same was forged. However the procedure for the
They did no such thing.
extrajudicial foreclosure still was followed by the
mortgagee in this case, and applying Sec 6 of Act 3135,
Not only did petitioners not sue to annul the extrajudicial
she is entitled to the possession thereof.
settlement, but on the very day that the new titles were
issued to Flora, an inscription appears in the said titles
It was emphasized that after the consolidation of the
announcing that one-half (½) of the lots would be bound
ownership of the foreclosed property, it is the ministerial
for the next two years to possible claims by other heirs or
duty of the court to issue, as a matter of right, an ex parte
unknown creditors against the estate of Mamerto. All
writ of possession to the buyer.
three titles bear this same inscription, which the
petitioners admit that they themselves had caused to be
The petitioners in this case cited Sec 33 Rule 39 of the
annotated on their mother’s titles.
Rules of Court, wherein the SC also mentioned that this
provision has been extended to foreclosure sales under
All the above leave little doubt that the petitioners had
Sec 6 of Act 3135. Wherein merong exemption yung
always known about, and had consented to, the
ministerial duty. The ministerial duty of the court to issue
extrajudicial settlement of the estate of their father
an ex parte writ of possession ceases once it appears that
Mamerto, as well as waiver by them of their shares therein
there is a third party in possession of the property, who is
in favor of their mother Flora. For this very reason, they
a stranger to the mortgage and who claims a right adverse
cannot now be permitted to interpose an adverse claim in
to that of the debtor/ mortgagor.
the subject mortgaged lots and defeat the writ of
possession issued to VR Enterprise.
So what are the requirements to apply this exception?
1. The one in the possession is the third party – so
Note: Any question regarding the validity of the mortgage
not a party to the mortgage contract; and
2. Has a right adverse to that of the debtor or the na nila yung sale. Pag mag file ka before possession, no
mortgagor. problem.
Section 33, Rule 39 of the Rules of Court provides that in Sec. 9. When the property is redeemed after the
an execution sale, the possession of the property shall be purchaser has been given possession, the redeemer
given to the purchaser or last redemptioner, unless a shall be entitled to deduct from the price of
third party is actually holding the property adversely redemption any rentals that said purchaser may have
to the judgment obligor. collected in case the property or any part thereof was
rented; if the purchaser occupied the property as his
However, in this case, while it is true that petitioners are own dwelling, it being town property, or used it
in possession of the subject property, they cannot apply gainfully, it being rural property, the redeemer may
Rule 29 in relation to Sec 6 of Act 3135. There was no deduct from the price the interest of one per centum
proof that the petitioners are adverse third-party claimants per month provided for in section four hundred and
entitled to be retained in possession. So wala na-comply sixty-five of the Code of Civil Procedure.
yung requirements for the exception to apply.
Now in relation to Act 3135, just take note also of A.M. No.
Further, the petitioners were accorded an opportunity to 99-10-05-0. Again that is in line with the proceeding of the
be heard on the nature of their claimed adverse extrajudicial foreclosure of mortgage. So yan yung
possession, conformably with the time-honored principle provision xxx you file it with the executive judge, it will be
of due process. recorded, receive and docket said application and to
stamp thereon the corresponding file number, date and
Any question regarding the validity of the mortgage its time of filing; pay the fees, the office will examine whether
foreclosure cannot be a legal ground for the refusal to the requirements have been complied with. Thereafter
issue a writ of possession. Issuance of the writ, again, is there will be a sale.
ministerial.
No certificate of sale shall be issued in favor of the highest
The SC also noted that even granting that the petitioners bidder until all fees have been paid.
should be allowed to retain possession, the petition has
been rendered moot and academic by the issuance and After the certificate of sale has been issued to the highest
satisfaction of the writ of possession. bidder, keep the complete records, while awaiting any
redemption within a period of one (1) year from date of
Sec. 8. The debtor may, in the proceedings in which registration of the certificate of sale with the Register of
possession was requested, but not later than thirty Deeds concerned, after which, the records shall be
days after the purchaser was given possession, archived. Notwithstanding the foregoing provision,
petition that the sale be set aside and the writ of juridical persons whose property is sold pursuant to an
possession cancelled, specifying the damages extra-judicial foreclosure, shall have the right to redeem
suffered by him, because the mortgage was not the property until, but not after, the registration of the
violated or the sale was not made in accordance with certificate of foreclosure sale which in no case shall be
the provisions hereof, and the court shall take more than three (3) months after foreclosure, whichever
cognizance of this petition in accordance with the is earlier, as provided in Section 47 of Republic Act No.
summary procedure provided for in section one 8791 (as amended).
hundred and twelve of Act Numbered Four hundred
and ninety-six; and if it finds the complaint of the So if juridical persons are the mortgagors, right of
debtor justified, it shall dispose in his favor of all or redemption is not 1 year but within 3 months or
part of the bond furnished by the person who registration of sale whichever comes earlier.
obtained possession. Either of the parties may appeal
from the order of the judge in accordance with And then the notices of the sale was emphasized, posting
section fourteen of Act Numbered Four hundred and and publication in a newspaper of general circulation. So
ninety-six; but the order of possession shall continue just take note of that.
in effect during the pendency of the appeal.
Also at the back of your book you have a copy of SC
Not later than 30 days after the purchaser was given Circular No. 7-2002: GUIDELINES FOR THE
possession. Usually what would happen here xxx before ENFORCEMENT OF SUPREME COURT RESOLUTION
the writ/date(di ko maintindihan) of possession, i-question OF DECEMBER 14, 1999 IN ADMINISTRATIVE
MATTER NO. 99-10-05-0.
certificate of foreclosure sale which in no case shall be

* A.M. No. 99-10-05-0 and CIRCULAR NO. 7-2002 are more than three (3) months after foreclosure, whichever
provided below. is earlier, as provided in Section 47 of Republic Act No.
8791 (as amended, Res. Of August 7, 2001).
A.M. No. 99-10-05-0 August 7, 2001 Where the application concerns the extrajudicial
(AS FURTHER AMENDED, AUGUST 7, 2001) foreclosure of mortgages of real estates and/or chattels in
PROCEDURE IN EXTRA-JUDICIAL FORECLOSURE different locations covering one indebtedness, only one
OF MORTGAGE filing fee corresponding to such indebtedness shall be
In line with the responsibility of an Executive Judge under collected. The collecting Clerk of Court shall, apart from
Administrative Order No. 6, dated June 30, 1975, for the the official receipt of the fees, issue a certificate of
management of courts within his administrative area, payment indicating the amount of indebtedness, the filing
included in which is the task of supervising directly the fees collected, the mortgages sought to be foreclosed, the
work of the Clerk of Court, who is also the Ex-Office real estates and/or chattels mortgaged and their
Sheriff, and his staff, and the issuance of commissions to respective locations, which certificate shall serve the
notaries public and enforcement of their duties under the purpose of having the application docketed with the
law, the following procedures are hereby prescribed in Clerks of Court of the places where the other properties
extrajudicial foreclosure of mortgages: are located and of allowing the extrajudicial foreclosures
1. All applications for extra-judicial foreclosure of to proceed thereat.
mortgage whether under the direction of the sheriff or a 3. The notices of auction sale in extrajudicial foreclosure
notary public, pursuant to Act 3135, as amended by Act for publication by the sheriff or by a notary public shall be
4118, and Act 1508, as amended, shall be filed with the published in a newspaper of general circulation pursuant
Executive Judge, through the Clerk of court who is also to Section 1, Presidential Decree No. 1079, dated
the Ex-Officio Sheriff. January 2, 1977, and non-compliance therewith shall
2. Upon receipt of an application for extra-judicial constitute a violation of Section 6 thereof.
foreclosure of mortgage, it shall be the duty of the Clerk 4. The Executive Judge shall, with the assistance of the
of Court to: Clerk of Court, raffle applications for extrajudicial
a) receive and docket said application and to stamp foreclosure of mortgage under the direction of the sheriff
thereon the corresponding file number, date and time of among all sheriffs, including those assigned to the Office
filing; of the Clerk of Court and Sheriffs IV assigned in the
b) collect the filing fees therefore pursuant to rule 141, branches.
Section 7(c), as amended by A.M. No. 00-2-01-SC, and 5. The name/s of the bidder/s shall be reported by the
issue the corresponding official receipt; sheriff or the notary public who conducted the sale to the
c) examine, in case of real estate mortgage foreclosure, Clerk of Court before the issuance of the certificate of
whether the applicant has complied with all the sale.
requirements before the public auction is conducted
under the direction of the sheriff or a notary public,
pursuant to Sec. 4 of Act 3135, as amended; CIRCULAR NO. 7-2002
d) sign and issue the certificate of sale, subject to the TO: ALL EXECUTIVE JUDGES, CLERKS OF
approval of the Executive Judge, or in his absence, the COURT, SHERIFFS IN THE OFFICE OF THE CLERK
Vice-Executive Judge. No certificate of sale shall be OF COURT AND BRANCH SHERIFFS IN THE
issued in favor of the highest bidder until all fees provided REGIONAL TRIAL COURTS
for in the aforementioned sections and in Rule 141, SUBJECT: GUIDELINES FOR THE ENFORCEMENT
Section 9(1), as amended by A.M. No. 00-2-01-SC, shall OF SUPREME COURT RESOLUTION OF DECEMBER
have been paid; Provided, that in no case shall the 14, 1999 IN ADMINISTRATIVE MATTER NO. 99-10-05-
amount payable under Rule 141, Section 9(1), as 0 (RE: PROCEDURE IN EXTRA-JUDICIAL
amended, exceed P100,000.00; FORECLOSURE OF MORTGAGE), AS AMENDED BY
e) after the certificate of sale has been issued to the THE RESOLUTIONS DATED JANUARY 30,
highest bidder, keep the complete records, while awaiting 2001 AND AUGUST 7, 2001
any redemption within a period of one (1) year from date These guidelines are issued pursuant to the Supreme
of registration of the certificate of sale with the Register of Court En Banc Resolution of December 14, 1999 in
Deeds concerned, after which, the records shall be Administrative Matter No. 99-10-05-0, as amended by the
archived. Notwithstanding the foregoing provision, resolutions of January 30, 2001 and August 7, 2001,
juridical persons whose property is sold pursuant to an directing the Office of the Court Administrator to prepare
extra-judicial foreclosure, shall have the right to redeem the guidelines for the enforcement of A.M. No. 99-10-05-
the property until, but not after, the registration of the 0 on the extra-judicial foreclosure of mortgages.
Sec. 1. All applications for extra-judicial foreclosure of apart from the official receipt for the fees, a certificate of
mortgage, whether under the direction of the Sheriff or a payment indicating the amount of indebtedness, the filing
notary public pursuant to Art.No. 3135, as amended, fees collected, the mortgages sought to be foreclosed, the
and Act 1508, as amended, shall be filed with the real estates and/or chattels mortgaged and their
Executive Judge, through the Clerk of Court, who is also respective locations, for purposes of having the
the Ex-Officio Sheriff (A.M. No. 99-10-05-0, as application docketed with the Clerks of Court in the places
amended, March 1, 2001). where the other properties are located and of allowing the
Sec. 2. Upon receipt of the application, the Clerk of Court extra-judicial foreclosure to proceed thereat. (A.M. No.
shall: 99-10-05-0, par. 2(e)).
a. Examine the same to ensure that the special power of Sec. 3. The application for extra-judicial foreclosure shall
attorney authorizing the extra-judicial foreclosure of the be raffled under the supervision of the Executive Judge,
real property is either inserted into or attached to the deed with the assistance of the Clerk of Court and Ex-
of real estate mortgage (Act No. 3135, Sec. 1, as Oficio Sheriff, among all Sheriffs including those assigned
amended); to the Office of the Clerk of court and Sheriffs assigned in
b. Give a file number to the application and endorse the the branches of the court. A Sheriff to whom the case has
date and time of its filing and thereafter docket the same, been raffled shall be excluded in the succeeding raffles
keeping, in this connection, separate docket books for and shall participate again only after all other Sheriffs
extra-judicial foreclosure sales conducted by the Sheriff shall have been assigned a case by raffle (Administrative
and those conducted by notaries public; Circular No. 3-98, Feb. 5, 1998).
c. For the conduct of extra-judicial foreclosure of real Sec. 4. The Sheriff to whom the application for extra-
estate or chattel mortgage under the direction of the judicial foreclosure of mortgage was raffled shall do the
sheriff, collect the appropriate filing fees and issues the following:
corresponding official receipt pursuant to the a. Prepare a Notice of Extra-judicial Sale using the
following schedule: following form:
If the amount of the indebtedness or the mortgagee’s “NOTICE OF EXTRA-JUDICIAL SALE”
claim is: “Upon extra-judicial petition for sale under Act 3135 / 1508
(1) Less than P50,000.00 ………………….. P275.00 filed __________________ against (name and address
(2) P50,000.00 or more but less than of Mortgator/s) to satisfy the mortgage indebtedness
P100,000.00 ……………………………..... 400.00 which as of ___________ amounts to P
(3) P100,000.00 or more but less than _________________, excluding penalties, charges,
P150,000.00 ………………………………. 500.00 attorney’s fees and expenses of foreclosure, the
(4) P150,000.00 or more but less than undersigned or his duly authorized deputy will sell at
P200,000.00 ………………………………. 650.00 public auction on (date of sale) _______________ at
(5) P200,000.00 or more but less than 10:00 A.M. or soon thereafter at the main entrance of the
P250,000.00 …………………………….. 1,000.00 ___________ (place of sale) to the highest bidder, for
(6) P250,000.00 or more but less than cash or manager’s check and in Philippine Currency, the
P300,000.00 ………………………….…. 1,250.00 following property with all its improvements, to wit:
(7) P300,000.00 or more but less than ”(Description of Property)”
P400,000.00 …………………………….. 1,500.00 “All sealed bids must be submitted to the undersigned on
(8) P400,000 or more but less than the above stated time and date.”
P500,000.00 …………………………….. 1,750.00 “In the event the public auction should not take place on
(9) P500,000.00 or more but not more than the said date, it shall be held on _______________,
P100,000,000.00 ……………………..…. 2,000.00 _______________ without further notice.”
(10) For each P1,000.00 in excess of ________________ (date)
P1,000,000.00……………………………….. 10.00 “SHERIFF”
(Section 7 (c), Rule 141, Rules of Court, as amended by b. (1) In case of foreclosure of real estate mortgage,
A.M. No. 00-2-01-SC, February 1, 2000). cause the publication of the notice of sale by posting it for
Cooperatives, thrift banks, and rural banks are not exempt not less than twenty (20) days in at least three (3) public
from the payment of filing fees and other fees under these places in the municipality or city where the property is
guidelines (A.M. No. 98-9-280-RTC, September 29, 1998; situated and if such property is worth more than four
A.M. No. 99-3-93-RTC, April 20, 1999; and A.M. No. 92- hundred (P400.00) pesos, by having such notice
9-408-0). published once a week for at least three (3) consecutive
d. In case the application is for the extra-judicial weeks in a newspaper of general circulation in the
foreclosure of mortgages of real estates and/or chattels in municipality or city (Sec. 3, Act No. 3135, as amended).
different locations covering one indebtedness, issue, The Executive Judge shall designate a regular working
day and definite time each week during which said notice redeemed.
shall be distributed personally by him for publication to Sec. 7. In case of foreclosure under Act No. 1508, the
qualified newspapers or periodicals as defined in Sec. 1 Sheriff shall, within thirty (30) days from the sale, prepare
of P.D. No. 1079, which distribution shall be effected by a return and file the same in the Office of the Registry of
raffle (A.M. No. 01-1-07-SC, Oct. 16, 2001). Unless Deeds where the mortgage is recorded.
otherwise stipulated by the parties to the mortgage Sec. 8. The Sheriff or the notary public who conducted the
contract, the debtor-mortgagor need not be personally sale shall report the name/s of the bidder/s to the Clerk of
served a copy of the notice of the extra-judicial Court.
foreclosure. Sec. 9. Upon presentation of the appropriate receipts, the
For real estate mortgages covering loans not Clerk of Court shall issue and sign the Certificate of Sale,
exceeding P100,000.00, exclusive of interests due and subject to the approval of the Executive Judge or, in the
unpaid, granted by rural banks (RA No. 7353, Sec. 6) or latter’s absence, the Vice-Executive Judge. Prior to the
thrift banks (RA No. 7906, Sec. 18),publication in a issuance of the certificate of Sale, the Clerk of court shall,
newspaper shall be dispensed with, it being sufficient that in extra-judicial foreclosure conducted under the direction
the notices of foreclosure are posted for a period of sixty of the sheriff, collect P300.00 as provided in Section
(60) days immediately preceding the public auction in the 20(d), Rule 141, as amended, and in extra-judicial
most conspicuous areas of the municipal building, the foreclosure sales conducted under the direction of a
municipal public market, the rural bank, notary public, collect the appropriate fees pursuant to
the barangay hall, and the barangay public market, if any, Rule 141, §20(e), which amount shall not
where the land mortgaged is situated. Proof of publication exceed P100,000.00 (Minute Res., A.M. No. 99-10-05-0,
shall be accomplished by an affidavit of the Sheriff and August 7, 2001).
shall be attached to the records of the case. Sec. 10. After the Certificate of Sale has been issued, the
(2) In case of foreclosure of a chattel mortgage, post the Clerk of Court shall keep the complete records for a
notice for at least ten (10) days in two (2) or more public period of one (1) year from the date of registration of the
places in the municipality where the mortgagor resides or certificate of sale with the Register of Deeds, after which
where the property is situated (Sec. 14, Act No. 1508, as the records shall be archived. Notwithstanding the
amended). foregoing, juridical persons whose property is sold
Sec. 5. Conduct of the extra-judicial foreclosure sale – pursuant to an extra-judicial foreclosure shall have the
a. The bidding shall be made through sealed bids which right to redeem the property until, but not later than, the
must be submitted to the Sheriff who shall conduct the registration of the certificate of foreclosure sale which in
sale between the hours of 9 a.m. and 4 p.m. of the date no case shall be more than three (3) months after
of the auction (Act 3135, Sec. 4). The property mortgaged foreclosure, whichever is earlier (R.A. 8791, Section 47).
shall be awarded to the party submitting the highest bid In case the property is redeemed, the Clerk of Court shall
and, in case of a tie, an open bidding shall be conducted assess the redemptioner’s fee as provided in Section 7
between the highest bidders. Payments of the winning bid (k), Rule 141, as amended. If the property is not
shall be made either in cash or in manager’s check, in redeemed, the Clerk of Court shall, as a requisite for the
Philippine currency, within five (5) days from notice. issuance of the final Deed of Sale, assess the highest
b. The sale must be made in the province in which the bidder the amount of P300.00 as provided in Section
real property is situated and, in case the place within the 20(d), Rule 141, as amended.
said province in which the sale is to be made is the subject Sec. 11. These guidelines shall take effect on April 22,
of stipulation, such sale shall be made in said place in the 2002.
municipal building of the municipality in which the property Issued this 22nd day of January 2002.
or part thereof is situated (Act No. 3135, as amended,
Sec. 2); February 29, 2016 (Cabangbang)
in case of a chattel mortgage, the sale shall be made at a
place in the municipality where the mortgagor resides or Ok so now we proceed to Antichresis.
where the property is situated (Sec. 14, Act No. 1508, as
amended). PART X: ANTICHRESIS
Sec. 6. After the sale, the Clerk of Courts shall collect the
appropriate fees pursuant to Sec. 9(1), Rule 141, as The definition of Antichresis is provided under Article
amended by A.M No. 00-2-01-SC, computed on the basis 2132.
of the amount actually collected by him, which fee shall
not exceed P100,000.00 (A.M. No. 99-10-05-0, March 1, Art. 2132. By the contract of antichresis the
2001, 2[d]). The amount paid shall not be subject to a creditor acquires the right to receive the fruits of
refund even if the foreclosed property is subsequently an immovable of his debtor, with the obligation
to apply them to the payment of the interest, if In antichresis the creditor is obliged to pay the taxes and
owing, and thereafter to the principal of his credit. charges upon the estate, unless there is a contrary
(1881) stipulation. But there is no such obligation in the REM.
Ok so antichresis is an accessory contract just like pledge Further in antichresis the creditor shall apply the fruits first
and mortgage wherein it secures the performance of a to the interest, thereafter to the principal. But in mortgage
principal obligation. Now for its perfection, the validity of a there is no obligation to apply the fruits.
contract of antichresis, delivery is not required for
perfection, delivery is however required in order that the Now it must be expressly agreed between the creditor and
creditor may receive the goods because as provided the debtor that the creditor having been giving possession
under Article 2132, the creditor acquires the right to of the properties even as a security, will apply the fruits to
receive the fruits of an immovable. So this is different the payment of interest and thereafter to the principal
from REM because here the creditor is given the right to obligation, otherwise there would be no contract of
received the fruits and apply the same to the interest if antichresis.
owing, and thereafter the principal.
Art. 2133. The actual market value of the fruits at
Now when we talk about the contract of antichresis, it the time of the application thereof to the interest
covers all the fruits of the covered property, unless the and principal shall be the measure of such
party stipulate otherwise. Now this kind of contract is also application. (n)
susceptible of guaranteeing all kinds of obligations
whether, pure or conditional. Market value of the fruits at the time of the application, at
the time it is to be applied in the interest and principal.
How is a contract of antichresis different from
pledge? Art. 2134. The amount of the principal and of the
interest shall be specified in writing; otherwise, the
contract of antichresis shall be void. (n)
Both are contracts of security wherein the debtor loses
control over the subject contract. In a pledge we have
So what does it tells us? That the contract of antichresis
already discussed that what is involved therein is a
is a formal or solemn contract. Wherein to be considered
personal property. But in antichresis, the kind of property
as valid, it must be in writing. So the requirement here for
that is involved is a immovable property with regard to its
it to be in writing is not only to bind third persons but
fruits.
actually required for the validity of a contract of
antichresis.
Also take note that, a pledge is a real contract but
antichresis is not perfected by delivery. However if the contract of antichresis is not in writing,
although the antichresis itself is void of course it will not
How about the difference in antichresis and affect the principal obligation.
mortgage?
So we have the case of Alojado vs. Sionco with regard to
They are similar in the sense that they are security the issue of antichresis.
contracts involving REM, but in antichresis the subject
matter must be delivered to the creditor so that the ALOJADO VS SIONCO
creditor can apply the fruits of the property to the
obligation. As to mortgage we have already mentioned FACTS: Juana Mabaquiao sold the land-in-dispute
here, as the delivery of the possession is not required for described in the complaint to Nicolas Alegata . Alegata
its validity, as the debtor usually retains the possession of died. Settlement proceedings of his estate was
the property encumbered. instituted, his property, which included the land-in-
dispute was adjudicated to Lim Kang Sang and Lim
In antichresis the creditor acquires only the right to Eng Teeng, his only heirs. Lim Kang and Lim Eng sold
receive the fruits of the property, but there is no real right the land to Lim Ponso & Co., with the right to
over the property itself. Unlike in mortgage wherein there
repurchase for the period of one year Period expired
is a real right however the creditor has no right to receive
the fruits of the property. without this right having exercised.
Lim Ponso & Co. transferred this land unconditionally HELD: This action was brought in January, 1922,
to Lim Siongco and Lim Kingko. fifteen years after the contract was entered into. The
contract, as been noted, fixes the period for the
Juana Mabaquiao dies. Intestate proceedings took exercise of the right of redemption until Juana
place and Ambrosio T. Alojado was appointed Mabaquiao, or her heirs has the means.
administrator. Ambrosio, as administration, brought
this action against Lim Sionco, Lim Kingko and Lim Whether or not this is considered a period, it is clear
Ponso & Co. prays that he be declared the absolute that the title transmitted to Nicolas Alegata has been
owner of this land with the improvements thereon, and consolidated.
that the defendants be ordered to restore and respect
his right of ownership, possession and usufruct of the According to article 1508 of the Civil Code, when no
property; period of redemption is fixed it shall last four years, and
it is fixed, it shall not exceed ten years. The right of
RTC: in favor of Lim Sionco, Lim Kingko, Lim Ponso redemption not having been exercised the period of ten
&Co. years, the title of Nicolas Alegata, or his heirs, has by
this fact alone been consolidated any events.
Ambrosio contends that the contract executed by
Juana Mabaquiao with Nicolas Alegata was not a DISCUSSION:
contract of sale with the right to repurchase, but a
contract or antichresis Why could it not be considered as an antichresis?
Why would it not be considered as an equitable
ISSUE: WON the contract was a contract of antichresis mortgage?
or contract of sale with right to redemption? Contract of
sale with right to redemption It could not be antichresis with the absence of the
intention, that the right of the creditor has the right to
HELD: The terms of the contract it is clearly a sale with receive the fruits and apply it to the interest and
the right to repurchase. It speaks in unequivocal terms subsequently to the principal.
of a sale and the conveyance of land with the right to
repurchase, and the character of the contract is that of It was stated here that it was a deed of sale with a right
a sale with the right to repurchase. The contract is very to repurchase. Now however, we all know from article
defective in its wording, especially so where it refers to 1602 that there is a possibility that is to be considered
the period within which to exercise the right to as equitable mortgage. Why in this case, it is not
repurchase. But examining it as a whole, it clearly considered as equitable mortgage?
appears that it was the parties' intention that the vendor
Was the property delivered? Or was the contract
could repurchase the land without delay when he had
executed with the intention of having that property
the means to pay the purchase price.
secured the principal obligation? Yes Ma'am.
What characterizes a contract or antichresis is that the
Oh so can it not be considered as an equitable
creditor acquires the right to receive the fruits of the
mortgage?
property of his debtor with the obligation to apply them
to the payment of interests, if any is due, and then to So, no, it was not merely as a security but there was
the principal of his credit. Nowhere in the contract in a transfer of ownership.
question does this character of a contract of antichresis
appear. The only substantial thing agreed upon So here, again to determine whether the parties entered
between the parties was that Juana Mabaquiao could in a contract of antichresis, take a look at the intention of
repurchase the land when she had the means. both parties. In this case it was purely intended that the
vendor would repurchase the land without delay when he
ISSUE: Whether or not the title to the land conveyed by had the means to pay the price. It could not be considered
Juana Mabaquiao has been consolidated.? YES as an antichresis in the absence of that intention that the
creditor acquires the right to receive the fruits of the • Leonardo Barretto, alleging himself to be the
property of his debtor with the obligation to apply them to owner of a certain part of said hacienda, illegally and
the payment of interests, if any is due, and then to the unduly usurped a portion thereof.
principal of his credit.
• Leonardo refused to return that portion of land
Nowhere in the contract does this character of a contract usurped together with the fruits received, or their value,
of antichresis appear. The only substantial thing agreed in spite of the fact that he has been required to do so in
upon was that Juana could repurchase the land when she writing by the Alberto.
had the means.
Leonardo’s case
Again in this case, remember there was a distinction
between this case and the case of Dela Vega vs Ballilos, • The hacienda of Balintagac was owned and
wherein in that instance, there was deemed to be a possessed by Juan Antonio Barretto, Sr., who died in
contract of mortgage and not a deed of sale with a right to 1881 and left 7 children: Juan Antonio, Angelica Maria,
repurchase. Leonardo, Francisca, Bartolome, Jose and Leopoldo.
Also take note here, since it was a Deed of Sale with a • The 7 children of Juan Antonio, Sr. succeeded
Right to Repurchase, the Supreme Court applied the him in all his rights and actions and became owners
perio with regard to the redemption period, when no with the right of possession of hacienda Balintagac.
period of redemption is fixed it shall last four years, and if
• Juan Antonio Jr., then executor of his
it is fixed, it shall not exceed ten years. The right of
deceased father Juan Antonio Sr., declaring himself to
redemption not having been exercised within ten years,
be the absolute owner of all the hacienda of Balintagac,
the title of Nicolas Alegata, or his heirs, has by this fact
borrowed money in the sum of P11,000 from Antonio
alone been consolidated in any event.
Vicente Barretto for the expenses of the hacienda with
Now how about in the case of Barreto? the obligation to pay P1,000 for delinquency, and
interests at 8% per annum, payable quarterly in
BARRETTO VS. BARRETTO advance
G.R. No. L-11933; December 1, 1917
• As guaranty for said loan, he mortgaged the
cultivated half of the hacienda and other properties.
children
• For the failure of the debtor to pay his debt, the
creditor Antonio Vicente brought an action to foreclose
the mortgage in order to recover the money loaned,
against Juan Antonio Jr. in his own behalf and as
executor of his father.
• Half of the mortgaged hacienda was levied

upon and a judgment to sell the property was rendered,
Alberto’s case
but it could not be sold in spite of the fact that it was
• Alberto Barretto alleges that he is the owner of placed at auction three times.
the whole hacienda called Balintagac.
• Antonio Vicente prayed for the adjudication of
• He was in possession of the said hacienda all the property attached to the payment of his credit of
quietly, peacefully, and continuously, as were his P7,648, to which Leonardo voluntarily agreed and
predecessors since the year 1884 until 1912. consented as attorney in fact of Juan Antonio Jr.
• Juan Antonio Jr. and his brothers, not being Vicente and then his successors, one of whom is
able to pay the debt, interests, and costs, delivered and Alberto Barretto, it is logically deduced that such facts
conveyed all the hacienda of Balintagac to the creditor. were accomplished by virtue of a verbal contract, and
not by written one, entered into between the owners of
• From then, the brothers of Juan Antonio Jr. the hacienda and the creditor Antonio Vicente.
administered, by the appointment and exclusive
account of Antonio Vicente, the entire hacienda, Since it is not shown that the debtors have delivered
acknowledging him as the owner of all of it and the whole hacienda to the creditor by assignment of the
delivering to him all its products till April 1896. property, it is to be presumed that the debtors delivered
not only one half, but the whole hacienda with a view
ISSUES: that the creditor might collect by usufruct his credit with
the accrued interests.
1. WON there was a contract of antichresis. YES
In spite of the fact that the agreement between the
2. WON the creditor acquires through possession
creditor and the debtors was not set down in any
the ownership of the real property in antichresis when
document, due to the relationship which exists between
debtor fails to pay debt within the stipulated time. NO
them, it may safely be asserted that the debtors have
HELD: Antonio Vicente Barretto as creditor — not limited themselves to give to the creditor the right to
being able to collect his credit of P11,000 and interest collect his credit from the fruits of the hacienda of
at 8%, nor obtain the adjudication in his favor of half of Balintagac, conferring upon him the possession of the
hacienda of Balintagac which was mortgaged for the property, but not transferring to him the dominion of the
security of the debt, and there having been no bidders same, since such transfer was not proved in the
on the three occasions in which it was offered for public present action.
auction — took possession of all the hacienda, and
The agreement or verbal stipulation is an antichresis as
from that time on received through his administrators
defined by Article 1881 of the Civil Code, which says:
the products of the same for the purpose of collecting
his credit interests. By the antichresis a creditor acquires a right to receive
the fruits of real property of his debtor, with the
It may be established that he took possession of said
obligation to apply them to the payment of the interest,
hacienda by virtue of voluntary assignment with the
if due, and afterwards to the principal of his credit.
express consent of heirs of Juan Antonio Sr., owner of
one-half of the hacienda and of Juan Antonio Jr., owner The perusal of articles 1882-1886 shows that the
of the other half. possession of the hacienda enjoyed by the creditor
Antonio Vicente and his successors up to the present
It does not fully appear which contract has been
time was conferred to them by virtue of the stated
entered into between the creditor and the heirs of Juan
contract or agreement in antichresis.
Antonio, Sr., and his son Juan Antonio Jr; but from the
facts that have been fully established it is inferred that One of the administrators of the hacienda presented
once the foreclosure proceedings were suspended, the sworn declaration of ownership for the purposes of
because the creditor had not been able to obtain the tax assessment and paid the land tax in the name of
adjudication of the hacienda in his favor, the creditor the creditor who possessed and held the hacienda in
took possession of the hacienda of Balintagac, and usufruct.
held it in usufruct with the knowledge and express
consent of its legitimate owners; there has not been Although article 1884 states that the creditor does not
any opposition or protest against the possession, which acquire through possession the ownership of the real
by usufruct the creditor and his successors enjoyed. property delivered by virtue of an antichresis for failure
to pay the debt within the stipulated time, nevertheless,
Considering that from the facts proved, which refer to the debtor cannot recover the use of the real property
the possession and usufruct enjoyed by Antonio given in antichresis to the creditor, without previously
fully paying the creditor. In case of insolvency, the Civil Code (1950). Under the Old Civil "mere consent" or
creditor may ask for the sale of the real property which it was not a requirement that the contract should be in
he possesses in antichresis, unless the pending debt is writing.
paid.
Alright. So take note that this case was decided in 1917.
It appears that defendant Leonardo, without the I want you to take note of this because in the discussions
consent of Alberto, took over and usurped a portion of of De Leon, there is a portion there that mentions that the
land of the hacienda, withholding and refusing to contract of antichresis is consensual in nature when it was
deliver them to the creditor in antichresis on the pretext distinguished from a contract of pledge.
that he is the owner of the whole hacienda. Although it
appears that the debt has been paid, Leonardo still When it was considered as consensual, as in the case of
acted without just reason and in contravention of article Barretto, remember this was prior to the effectivity of the
1883 when he effected the usurpation. New Civil Code. That’s why if you take a look at Article
2134, you see the letter (n) meaning it's a new provision
It is known that the action to recover a thing, where a in the New Civil Code. So there's no such provision prior
legitimate possessor has been deprived of his to NCC. That's why an antichresis during that time was
possession, takes place in accordance with the law sufficient even if it was merely consensual in nature. As
even against the owner himself, who can never be long as, the parties have agreed that creditor is given the
protected by the law even on his right of ownership, right to collect fruits of the immovable property and
without first restoring what he acquired through an applying the same to the principal obligation. So that's
illegal act of dispossession. why again, in the case of Barretto, it was considered as
consensual. But do not confuse that with the new
Though Alberto Barretto has no title of ownership over provision in 2134, that the agreement must be writing,
the hacienda of Balintagac, and therefore, he cannot principal and interest shall be specified in writing
be declared owner of the same, nevertheless, his claim otherwise the contract of antichresis shall be void.
that a judgment be rendered ordering the return to him
of the portion usurped by Leonardo is in conformity with Article 2134 the contract of antichresis is deemed
the law. perfected upon compliance of this formalities, it is a formal
or solemn contract.
Alberto being in the legitimate possession and use of
all the hacienda of Balintagac which was voluntarily Now also take note in relation to Article 2134, we have
delivered to him by Juan Antonio, Jr. and his co-heirs, 2135 as mentioned here referred to the case of Barreto.
with the object that the creditor Antonio Vicente might
collect the capital and interests which they owed and Article 2134 the contract of antichresis is deemed
still owe him — a lawful contractual act called by law a perfected upon compliance of this formalities, it is a formal
covenant in antichresis — the debtors cannot, while the or solemn contract.
debt exists and is not fully paid, recover or reacquire
Now also take note in relation to Article 2134, we have
the possession and use of the real property delivered
2135 which is mentioned here referred to in the case of
to the creditor, without the latter giving his consent;
Barreto. Debtor cannot recover the use of the real
Consequently, Leonardo, without the knowledge or property given in antichresis to the creditor, without
consent Alberto Barretto, who succeeded in the previously fully paying the creditor, who in case of
possession and use of the hacienda, could not have insolvency may ask for the sale of the real property which
recovered, by usurpation, the possession and use of a he possesses by virtue of the covenant in antichresis,
portion of the hacienda. unless the pending debt is paid.
Now with that how it would be reconciled to 2134 that Art. 2136. The debtor cannot reacquire the
it must be writing otherwise it will consider as void? enjoyment of the immovable without first having
This case was decided prior to the enactment of the New totally paid what he owes the creditor.
But the latter, in order to exempt himself from the and of the interest shall be specified in writing;
obligations imposed upon him by the preceding otherwise the contract of antichresis shall be void.” In
article, may always compel the debtor to enter this case, the Heirs of Adolfo were indisputably unable
again upon the enjoyment of the property, except to produce any document in support of their claim that
when there is a stipulation to the contrary. (1883) the contract between Adolfo and Bangis was an
antichresis, hence, the CA properly held that no such
relationship existed between the parties.
ANCIETO BANGIS V HEIRS OF SERAFIN AND The bare testimony of one of the Heirs of Bangis,
SALUD ADOLFO Rodolfo Bangis, that the subject document was only
handed to him by his father, Aniceto, with the
FACTS: Spouses Serafin, Sr. and Saludada Adolfo
information that the original thereof “could not be
were the original registered owners of a lot which was
found” was insufficient to justify its admissibility. The
mortgaged to the DBP. Upon default in the payment of
identification made by Notary Public Atty. Valentin
the loan obligation, it was foreclosed and ownership
Murillo that he notarized such document cannot be
was consolidated in DBP’s name under a TCT. Serafin
given credence as his conclusion was not verified
Adolfo, Sr. repurchased the same and was issued a
against his own notarial records.
TCT a year after his wife died. He allegedly mortgaged
the subject property to Ancieto Bangis who took In sum, the Heirs of Bangis failed to establish the
possession of the land but their transaction was not existence and due execution of the subject deed on
reduced into writing. When Adolfo died, his heirs which their claim of ownership was founded.
executed a deed of extrajudicial partition covering the
subject property and TCT issued to them. The said DISCUSSION:
property was subdivided and separate titles were
issued in names of the heirs of Adolfo. The heirs of Why it could not be consider as a contract of
Adolfo filed a complaint for annulment of the deed of antichresis?
sale and declaration of the purported contract of sale
So the SC here held that for the contract of antichresis to
as antichresis, accounting and redemption of property
be valid, Article 2134 provides that the amount of the
and damages against Bangis. The RTC rendered a
principal and of the interest shall be specified in writing
decision in favor of the heirs of Adolfo declaring that the
otherwise the contract of antichresis shall be void. In the
contract as an antichresis, ordering the defendant to
case the heirs where not able to produce any documents
deliver the possession of the property in question to the
to support their claim that the contract neither was
plaintiffs and the TCT under Bangis as null and
antichresis nor was there any document to prove the
void. Thus, the heirs of Bangis appealed before the
existence of the contract of antichresis. Hence, there was
CA.
no relationship provided that would exist between the
CA affirmed the RTC finding that the contract between parties.
the parties was a mortgage, not a sale. It noted that
Why would it not be considered as a sale?
while Bangis was given possession of the subject
property, the certificate of title remained in the custody What are the intentions of the parties in the contract
of Adolfo and was never cancelled. of sale?
ISSUE: WON the transaction between the parties was

The intention to delivery the property, transfer the
one of sale and not a mortgage or antichresis.
title to Serafin in exchange to the payment of the
NEITHER
purchase price. So in this case such intention does
HELD: There was neither an antichresis nor sale. For not appear. So if it's not a sale, not an antichresis,
the contract of antichresis to be valid, Article 2134 of what contract was entered into? At the very least
the Civil Code requires that “the amount of the principal what would be the contracts entered into?
What was the purpose over the property was Alright, this kind of obligation is not present in mortgage.
delivered? At the possession of Bangis? So we have here the obligations of the antichretic creditor,
he must pay the takes and charges upon the estate
Mortgage, at the very least we can considered it as a unless there is a contrary stipulation. If he does not pay
contract of mortgage. taxes, then he can be required for indemnity or for
damages.
We discussed mortgage in this kind of contract when it is
not registered, it can bind parties. Now if it is the debtor who will pay the taxes, the amount
he paid will be applied as payment of his obligation.
So take note of this one, in the 2012 case of Bangis, this
time it emphasizes 2134, that the contract of antichresis And if it will be applied to extinguish his total obligation
must be in writing in order to be valid. In the absence of then the antichretic creditor should now have the
the contract of antichresis, no such relationship existed obligation to return, possession of the property to the
between the parties. debtor.
Also do take note that there was no contract of sale, as Also take note such creditor is bound to bear the
the property was delivered to Bangis, there was no expenses necessary for its preservation and repair, as
intention to transfer ownership of the thing or property. well some expense for other purposes deducted from the
The very least again, what they could have is a mortgage fruits.
which is binding to the parties. While Bangis indeed took
possession of the land upon its alleged mortgage, the As mentioned we have 2136, cannot be acquired until
certificate of title remained with Adolfo and upon his repaid. Debtor cannot demand its return until debt has
demise, transferred to his heirs, thereby negating any been fully paid, it is emphasize in the case of Macapinlac
contemplated transfer of ownership. vs. Repide.
Heirs of Bangis made no judicial or extrajudicial demand MACAPINLAC VS. REPIDE

on the Heirs of Adolfo to pay the mortgage debt. Instead,
G.R. No. 18574; September 20, 1922
it was the latter who signified their intent to pay their
FACTS: On and prior to August 22, 1916, Jose
father's loan obligation. So the purpose here was to again,
Macapinlac was the owner of the Hacienda Dolores, a
as security to the loan. The mortgage contract therefore
property located in Pampanga. This property had been
continued to subsist despite the lapse of a considerable
registered and a Torrens certificate of title had been
number of years from the time it was constituted in 1975
issued.
because the mortgage debt has not been satisfied. What
On the date above stated, Macapinlac was indebted to
we have here is a mortgage.
Bachrach Motor Company for the price of an
And take note the SC included to pay, since it is mortgage, automobile and its accessories, purchased upon credit;
so the obligation to pay money plus the interest applicable and as evidence of this indebtedness he executed 14
under the law. Now do take note this is a 2012 case promissory notes (PNs) payable to Bachrach
therefore the legal that was applied was still 12%. amounting to the sum of P12,960.
Contemporaneously with the delivery of the PNs,
Art. 2135. The creditor, unless there is a stipulation Macapinlac executed what purports to be a deed of
to the contrary, is obliged to pay the taxes and sale, with privilege of repurchase, to be exercised on or
charges upon the estate. before October 2, 1917 (due date of the debt). This
transfer covered the Hacienda Dolores. In this
He is also bound to bear the expenses necessary conveyance E. M. Bachrach is named as transferee.
for its preservation and repair. On November 8, 1917, Francisco Repide acquired, for
the sum of P5,000, all the rights of E. M. Bachrach in
The sums spent for the purposes stated in this the property which had been conveyed to the latter.
article shall be deducted from the fruits. (1882) Repide was well aware that the transfer of the property
to Bachrach had been made by the Macapinlac for the words, having acquired the interest of Bachrach in the
purpose of securing a debt owing to Bachrach Hacienda Dolores, with knowledge that the contract
Company, and he was furthermore aware that part of has been executed as security for a debt, Francisco
Repide must be understood to stand in exactly the
the debt has been paid and there was only balance of
same position occupied by Bachrach, if the transfer to
less than one-half of the sum of P12,960. After Repide Repide had never been effected.
had acquired the interest in the hacienda in question,
he processed the certificate of title to be transferred to Repide’s contention:
his own name. Repide insisted that his title has become indefeasible
To accomplish this, it was necessary to make it appear and the action of Macapinlac already prescribed, owing
that the contract of sale with pacto de retro noted in the to the fact that the conveyance of the land to him has
been followed by the issuance of a TCT in his name,
original Torrens certificate was really and truly what it
and the original certificate in the name of Macapinlac
appeared to be, that is, a contract of sale, not a mere has been cancelled — all of which had been
mortgage, and that the ownership had consolidated in accomplished more than one year before the present
the purchaser by reason of the failure of the seller to action was begun.
repurchase the property before the expiration of the
time allowed for redemption. Inasmuch as it appeared In the first place, it must be borne in mind that the
that the ownership had then consolidated in the equitable doctrine, to the effect that any conveyance
intended as security for a debt will be held in effect to
purchaser, he directed the ROD of Pampanga to
be a mortgage, whether so actually expressed in the
register the property in the name of Francisco Gutierrez instrument or not, operates regardless of the form of
Repide and to issue to him a new certificate of transfer, the agreement chosen by the contracting parties as
which was accordingly done. the repository of their will.
At the time of the filing of this complaint, Repide was in
actual possession of the property in question, and that Equity looks through the form and considers the
substance; and no kind of engagement can be adopted
he had in effect been enjoying possession since
which will enable the parties to escape from the
August 1917. equitable doctrine to which reference is made. In other
ISSUES: words, a conveyance of land, accompanied by
1. WON the contract executed between Macapinlac registration in the name of the transferee and the
and Bachrach Motor, the sale with pacto de retro, issuance of a new certificate, is no more secured from
was a deed of sale or an equitable mortgage. the operation of this equitable doctrine than the most
Equitable Mortgage(EM) informal conveyance that could be devised.
2. What contract govern between Macapinlac and
Repide (as successor in interest of Bachrach) if the In the second place, the circumstance that the land has
original contract executed by plaintiff with been registered under the Torrens system does not
Bachrach was an EM. Contract of Antichresis. change or affect civil rights and liabilities with respect
thereto. An ordinary transfer of land, effected in any of
HELD: the ways allowed by law, even when followed by
1. In taking up these problems we begin with the registration and that issuance of a new certificate of the
situation created by the execution of the contract of Land Registration Act, has a different character.
sale with pacto de retro between Macapinlac and
Bachrach Company. In this connection the first and Applying said provision to the facts of the present case,
most obvious proposition to be laid down is that since it must follow that the cause of action of the plaintiff to
the conveyance is alleged to have been executed as annul the registration of this property in the name of
security for a debt owing by Macapinlac to Bachrach, it Francisco Repide did not prescribe at one year, and the
follows that in equity, said conveyance must be treated plaintiff's cause of action upon this branch of the case
as a mere security or substantially as a mortgage, as had not in fact been barred at all when the present
creating a mere equitable charge in favor of the creditor action was begun.
or person named as the purchaser therein.
2. Discussion on antichresis:
In this connection the cardinal rule is that a party who The preceding discussion conducts us to the
acquires any interest in property with notice of an conclusion that the estate of Francisco Repide
existing equity takes subject to that equity. In other occupies substantially the position of a mortgagee in
possession. The question then arises as to what are Why is it a contract of antichresis?
the legal rights of the plaintiff as against the Repide
estate. REM or antichresis?
The solution of this problem is to be found in the
application of the doctrine formulated in Barretto vs. So again, why is it considered as an antichresis?
Barretto. In that case the heirs of a mortgagee of an Again look at the intention of the parties.
estate were found in possession of mortgaged property
more than thirty years after the mortgage had been What is the effect now that the antichretic creditor in
executed; and it was shown that the mortgage had the case that it was referred to as a mortgagee? What
never been foreclosed. Upon this state of facts it was
is now his obligation after applying the fruits to the
in effect held that the rights of the parties, heirs of the
mortgagor and mortgagee, were essentially the same obligation?
as under the contract of antichresis.
But what if the antichretic creditor remains in
By reference to the appropriate provisions of the Civil possession of the property and has not been
Code (arts. 1881-1884), in the chapter dealing with returned, possession thereof to the debtor?
antichresis, it will be at once seen that while non-
payment of the debt does not vest the ownership of But if upon applying the fruits the obligation is
the property in the creditor, nevertheless the already paid, nevertheless the antichretic creditor
debtor cannot recover the enjoyment of the remains in the possession of the property, what is
property without first paying in full what he owes to now his obligation to the debtor? He becomes a
his creditor. At the same time, however, the creditor is
trustee for the mortgagor as to the excess of the rents and
under obligation to apply the fruits derived from the
estate in satisfaction, first, of the interest on the debt, profits over such debt; and, lastly, that the mortgagor can
and secondly, to the payment of the principal. From this only enforce his rights to the land by an equitable action
is necessarily deduced the obligation of the creditor to for an account and to redeem.
account to the debtor for said fruits and the
corresponding right of the debtor to have the same So here what we have is really an antichresis. Although
applied in satisfaction of the mortgage debt. the SC loosely referred to an antichretic creditor as a
mortgagee. Here in an antichresis, the debtor cannot
The respective rights and obligations of the parties to a
recover enjoyment to the property without paying in full
contract of antichresis may be taken to be established,
namely: what he owes to the creditor. And the obligation now of
 that if the mortgagee acquires possession in course of the creditor is to apply the fruits, first to the
any lawful manner, he is entitled to retain such interest and secondly to the principal. With that obligation,
possession until the indebtedness is satisfied the creditor has to account to the debtor the fruits and the
and the property redeemed; corresponding right of the debtor to have the same
 that the non-payment of the debt within the term applied in satisfaction of the mortgage debt.
agreed does not vest the ownership of the
property in the creditor; Now if the mortgagee acquires possession in any lawful
 that the general duty of the mortgagee in manner, he is entitled to retain such possession until the
possession towards the premises is that of the
indebtedness is satisfied and the property redeemed; in
ordinary prudent owner;
 that the mortgagee must account for the rents and other words the debtor could not demand the return of the
profits of the land, or its value for purposes of use property to him until fully paid. Nonpayment of the debt
and occupation, any amount thus realized going within the term agreed does not vest ownership of the
towards the discharge of the mortgage debt; property in the creditor.
 that if the mortgagee remains in possession after
the mortgage debt has been satisfied, he The general duty of the mortgagee or the antichretic
becomes a trustee for the mortgagor as to the creditor in possession towards the premises is that of the
excess of the rents and profits over such debt; and ordinary prudent owner. The antichretic creditor must
 that the mortgagor can only enforce his rights to account for the rents and profits of the land, or its value
the land by an equitable action for an account and
to redeem. for purposes of use and occupation, any amount thus
realized going towards the discharge of the mortgage case, the Rules of Court on the foreclosure of
debt. mortgages shall apply. (1884a)
If the mortgagee remains in possession after the If the obligation is not paid, it is clear that the creditor does
mortgage debt has been satisfied, he now becomes a not acquire ownership over the property. Ownership is not
trustee for the mortgagor as to the excess of the rents and transferred although it was delivered but what was
profits over such debt; and, lastly, that the mortgagor can delivered was merely possession, so that the creditor
only enforce his rights to the land by an equitable action should be able to exercise his right to receive the fruits
for an account and to redeem. and apply the same to the obligation.
Now here, plaintiff had made a written offer to the RAMIREZ v. CA

defendant Repide to pay all debts and charges held by
Repide against the property, which offer said defendant FACTS: On September 15, 1959, petitioners-spouses
had refused to accept. However it does not appear that Hilario Ramirez and Valentina Bonifacio filed an
the written offer mentioned a particular sum as the application for registration of a parcel of riceland in
amount to be paid. However the case is not one where a Pamplona, Las Pinas, Rizal. After notice and
tender of payment is necessary, because the amount publication, nobody appeared to oppose the
actually due cannot be known until the mortgagee or the application. An order of general default was issued and
antichretic creditor will do his obligation of accounting. the court allowed the petitioners to present evidence in
support of their claim. Thereafter, the petitioners
Ito yung principal obligation, ito yung fruits, iminus natin presented parole evidence that they acquired the land
yung interest, iminus natin yung principal obligation, eto in question by purchase from Gregoria Pascual during
yung amount due. So you could not question the tender the early part of the American regime but the
of payment here even in the absence of a specific amount corresponding contract of sale was lost and no copy or
because here the creditor who in fact has failed to do his record of the same was available. On January 30,
obligation of accounting. So that the debtor would know 1960, the court ordered the issuance of the decree of
how much is still liable to the debt. registration and consequently, Original Certificate of
Title No. 2273 of the Registry of Deeds of Rizal was
When this had been accomplished, it will become the duty issued in the petitioners’ names. On March 30, 1960,
of the court, upon such amendment of the complaint as private respondents filed a petition to review the decree
may appear desirable, to make the proper decree, of registration on the ground of fraud. The respondents
allowing the plaintiff to redeem and requiring the alleged among others that they obtained a loan of
execution of Francisco Gutierrez Repide to surrender the P400.00 from the petitioners in which they secured with
property in question to the plaintiff. a mortgage on the land in question by way of
antichresis and that there were several attempts to
In relation to 2136 and 2135, 2135, the creditor has the
redeem the land but were refused by the petitioners.
obligation to pay the taxes. If the creditor does not want
to pay taxes and other expenses, the creditor may compel The trial court ordered the cancellation of the original
the debtor to reacquire the enjoyment of the same, except certificate of title. The Court of Appeals affirmed the
if there is a contrary stipulation. decision.
Art. 2137. The creditor does not acquire the ISSUE: Can an antichretic creditor acquire land of
ownership of the real estate for non-payment of the debtor by prescription? NO.
debt within the period agreed upon.
HELD: An antichretic creditor cannot acquire the land
Every stipulation to the contrary shall be void. But of a debtor by prescription. An antichretic creditor is not
the creditor may petition the court for the payment a possessor in the concept of owner but a mere holder
of the debt or the sale of the real property. In this placed in possession of the land by its owners. Thus,
possession of an antichretic creditor cannot serve as a
title for acquiring dominion. The court, from other cases prescription whether 10 years of 30 years must be in the
like Trillana v. Manansala, Valencia v. Acala and concept of an owner. In this case possession was in the
Barretto v. Barretto, held that the antichretic creditor concept of an antichretic creditor, so they were not in
cannot ordinarily acquire by prescription the land possession thereof in the concept of an owner but merely
surrendered to him by the debtor. Holding: The holders placed in possession of the lands by the owners.
decision appealed from is affirmed with a modification Possession therefor cannot serve as a title for acquiring
that the respondents are ordered to pay the petitioners dominion over the property.
the amount of P400.00 as principal for the contract of
antichresis, the fruits obtained from the possession of Now is the obligation here extinguished? Based on the
the land having been applied to the interests on the facts wala pa. Here the debtor despite the fact that the SC
loan. found that there was a contract of antichresis, and that the
petitioners are in possession as antichretic creditors, the
Was there any document evidencing their contract? debtors or the heirs of the debtors cannot demand for the
Because again Article 2134 requires that the contract return of the property until they have fully paid what they
of antichresis must be in writing otherwise the owed to the creditor. So the debtor cannot reacquire the
contract shall be void. Do we apply 2134 here? enjoyment of the immovable without first having totally
paid what he owes the creditor.
Was there a valid contract of antichresis? Even in the
absence of the document? - Yes Also do take note here, that as emphasized in the case of
Ramirez, possession for the purpose of acquisitive
Why? What’s our basis here in saying that there was prescription must be in the concept of an owner.
a valid contract of antichresis even if there was no Antichretic creditor's possession is not in the concept of
written document? an owner unless he repudiates his status as an antichretic
creditor.
The rice mill was for the security of the loan...
Also do take note, that there is not automatic transfer of
And the agreement was most probably perfected prior to
ownership, in case of default on the part of the debtor,
the effectivity of the Civil Code. Why? Possession was
otherwise it will consider as pactum commissorium which
transferred in 1938. So even if this was a case decided in
is considered as void.
1986, the antichresis was perfected prior to the New Civil
Code. So even if it's not in writing it still considered as A stipulation authorizing the antichretic creditor to
valid that's why possession was transferred in 1938. appropriate the property upon the non-payment of the
debt within the period agreed upon is void.
So now what is the ruling of the court with regards to
possession? Now what is the remedy of the creditor if the debtor fails
to pay or kulang yung fruits noh to pay off his obligation?
The possession for the purpose of acquisitive prescription
The creditor can bring an action for specific performance
must be in the concept of an owner.
or file a petition for the sale of the real property involved
So here, petitioners are only antichretic creditors. It was under the judicial foreclosure proceedings (rule 68) or as
duly proven that the intention of the parties when the provided under 3135 of extra-judicial foreclosure, as
property was delivered was to secure the obligation. allowed by the contracts they have executed.
However the mere fact that petitioners as antichretic
Remember in the extrajudicial foreclosure for it to happen
creditors had been in possession of the subject property
there must be an authority to the contract itself that the
for several years that does not mean that ownership is
mortgagee will sell it extra judicially.
already acquired by them.
Art. 2138. The contracting parties may stipulate
Antichretic creditor cannot ordinarily acquire by
that the interest upon the debt be compensated
prescription the land surrendered to him by the debtor,
with the fruits of the property which is the object of
because again for acquisition of the property by
the antichresis, provided that if the value of the
fruits should exceed the amount of interest allowed debt return the pledge or cancel the mortgage, to
by the laws against usury, the excess shall be the prejudice of the other heirs who have not been
applied to the principal. (1885a) paid. From these provisions is excepted the case
So the antichretic creditor is under the obligation to apply in which, there being several things given in
the fruits of the property in satisfaction of, first the interest; mortgage or pledge, each one of them guarantees
the interest here would, based on the stipulations of the only a determinate portion of the credit. The debtor,
parties and must be clearly stipulated and provided in in this case, shall have the right to the
writing as we have discussed and thereafter apply to the extinguishment of the pledge or mortgage as the
principal. portion of the debt for which each thing is
especially answerable is satisfied. (1860)
Art. 2139. The last paragraph of Article 2085, and
Articles 2089 to 2091 are applicable to this contract. So the following provisions are also applicable to
(1886a) Antichresis:
2085 – provision common to pledge and mortgage. Last ART. 2090. The indivisibility of a pledge or
paragraph. mortgage is not affected by the fact that the
debtors are not solidarily liable. (n)
ART. 2085. The following requisites are essential to the
contracts of pledge and mortgage: ART. 2091. The contract of pledge or mortgage may
se-cure all kinds of obligations, be they pure or
(1) That they be constituted to secure the fulfillment of subject to a suspensive or resolutory condition.
a principal obligation; (1861)
(2) That the pledgor or mortgagor be the absolute Now in practice wala na masyado yung strict application
owner of the thing pledged or mortgaged; ng antichresis contract, so the fruits will be applied to the
obligation. But a variety thereof may be entered into by
(3) That the persons constituting the pledge or mort-
the parties, mortgage in one sense or antichresis in one
gage have the free disposal of their property, and in the
sense, wherein possession is delivered to the creditor and
absence thereof, that they be legally authorized for the
then the creditor will continue to possess the property and
purpose.
then siya ang magplant. Any fruits or income sa creditor
Third persons who are not parties to the principal lang hindi inaaply sa obligation. So it's more of mortgage
obligation may secure the latter by pledging or but the parties agreed that possession will be delivered to
mortgaging their own property. (1857) the mortgagee and the mortgagee have the obligations to
till the land so sa iya gihapon ang income.
So yung rules would be applied not to the obligation of the
owner of the property but to the other debtor. Also Sometimes it will allow the mortgagor to stay in
applicable is 2089 with regard to indivisibility of a pledge possession over the property pero yung fruits ay doon sa
or mortgage. So since applicable sa antichresis, an mortgagee ibayad but it was actually the mortgagor who
antichresis is therefore, also, indivisible. is cultivating the land. In which the mortgagor can apply
the fruits to the obligations.
ART. 2089. A pledge or mortgage is indivisible, So it can be really a variety of mortgage or mortgage and
even though the debt may be divided among the antichresis. There is nothing in the law which prohibits
successors in interest of the debtor or of the that. There is no provisions in the Obligation of Contracts
creditor. Therefore, the debtor’s heir who has paid providing for the definition of the breach of contract under
a part of the debt cannot ask for the proportionate the law of antichresis, so we apply what is the nearest or
extinguishment of the pledge or mortgage as long similar contract, either mortgage or pledge.
as the debt is not completely satisfied. Neither can
the creditor’s heir who received his share of the
March 1, 2016 (Tongo) fulfilment obligation or by the destruction of the property

pledged or mortgaged.
PART XI: CHATTEL MORTGAGE & THE CHATTEL
MORTGAGE LAW CHATTEL MORTGAGE PLEDGE
It is clear that Registration is not
Under the civil code there are two articles which relates to registration is required required. Pledge is real
chattel mortgage for a chattel mortgage contract and delivery is
essential for its validity
Articles 2140 and 2141 unlike chattel mortgage.
Act 1508 which provides Article 2112 governs the
Actually the chattel mortgage is already covered by for the procedure and procedure for the sale of
Chattel Mortgage Law or Act 1508. But the definition is rules for the sale of the the property pledge
already provided in the civil code subject of a chattel
mortgaged.
Article 2140. By a chattel mortgage, personal property In Act no 1508 the Creditor cannot sue for
is recorded in the Chattel Mortgage Register as a creditor can still sue for the balance as a rule
security for the performance of an obligation. If the the balance. Except if under a contract of
movable, instead of being recorded, is delivered to the sale is considered a pledge and the debtor
the creditor or a third person, the contract is a pledge sale on installment. does not get the excess
and not a chattel mortgage. (because we have to unless there is a
Here it is clear that this kind of contract by virtue in which apply recto law. If the stipulation to the contrary.
property is subject of
personal property is recorded in a chattel mortgage
mortgage and the
register for the same purpose of the other contracts that creditor wants to
we have discussed, security for the performance of the foreclose it he cannot
obligation. anymore seek the
deficiency as against the
With that we can say that it is accessory in nature and debtor)
formal in a sense that 2140 provides that it must be
registered. Registration in the chattel mortgage register is
indispensable. 2141. The provisions of this Code on pledge, insofar
as they are not in conflict with the Chattel Mortgage
Being a mortgage contract it is also considered as Law, shall be applicable to chattel mortgages.
unilateral. It produces only obligation on the part of the The provisions of the pledge under the civil code are
creditor to free the thing from the encumbrance on applicable in chattel mortgage insofar as they are not
fulfilment of the obligation. inconsistent with the provisions of the chattel mortgage
under the civil code.
2140 makes a clear distinction of a chattel mortgage and
a pledge. Other laws aside from act 1508, we can also take into
consideration the Revised Administrative Code, the
Both contracts are accessory contracts; they secure the Revised Penal code as well as the Ship Mortgage decree.
performance of the principal obligation. Both are
constituted only on personal properties also similar in the For example under the Ship mortgage decree, if the
sense that they are indivisible and constitute a lien on the property is subject of a mortage is a ship or a vessel, the
property. There other similiarities: creditor cannot mortgage must be registered in the Philippine
appropriate the property covered in the pledge or chattel Coastguard. With the Motor Vehicles Law we get to see
mortgage xx itself the payment of a debt otherwise it that the chattel mortgage involving a motor vehicle must
would be in violation of 2088, pactum commissorium. be recorded in the Land Transportation office otherwise it
will not be effective as against third person.
When the debtor defaults in these two contracts the
property can be sold for the payment of the creditor. And As to Revised Penal Code this is already mentioned in
in these two types of contract they are extinguished by the Article 319.
Art. 319 Knowingly removing any personal property recorded in the office of the Philippine Coastguard as
mortgaged under the Chattel mortgage law to any provided under the Ship Mortgage Decree not for validity
province or city other than the one in which it was but as to be effective against third persons. Mortgage on
located at the time of the execution of the mortgage the vessels is not necessary to be recorded in the office
without the written consent of the mortgagee.
of the register of deeds.
So there is a criminal liability for the mortgagor if it
transfers the location of the property subject of the As mentioned earlier motor vehicles must also be
mortgage without the written consent of the mortgagee. registered with the Land Transportation Office. If the
Likewise criminal liability arise if there is sellling or Motor Vehicle is for public transportation or services—
pledging personal property already mortgaged or any part public utility vehicle, the registration must also be done in
thereof under the terms of the Chattel Mortage law without LTFRB to make it effective as against the public and as
the consent of the mortgagee written on the back of the against the commission.
mortgage and duly recorded at the back of the chattel
mortgage register.
With regarding to the liability, recall in your Revised Penal Borlough vs Fortune enterprises
Code every person criminally liable is civilly liable but
these are two separate liabilities. The mortgagor is not OLAF N. BORLOUGH vs. FORTUNE ENTERPRISES,
necessarily relieved of criminal liability even iIf he has INC.
already paid his indebtedness in full because this criminal
FACTS: Fortune Enterprises, Inc. sold to Salvador
liability is separate from a civil liability.
Aguinaldo a Chevrolet sedan, which it from United Car
Can a mortgagor sell his property to another person? Exchange, and for not having paid it in full, the latter
YES. That sale is considered as valid even if walang executed on the same date a promissory note in the
written consent ni mortgagee. But again Applying 319 the amount of P2,400 payable in 20 installments.
mortgagor who sold the property makes himself open to
To secure the payment of this note, Aguinaldo executed
criminal prosecution in violation of Article 319 under the
a deed of chattel mortgage over said car. The deed was
Revised Penal Code.
duly registered in the office of the Register of Deeds of
What is the valid subject matter of a chattel mortgage? Manila.
Looking at 2140, it is personal or movable property. As the buyer-mortgagor defaulted in the payment of the
Deviations may be allowed in the form of; for example installments due, counsel for Fortune Enterprises Inc.
shares of stock. Shares of stock may be a subject of a addressed a letter on May 16, 1952, requesting him to
chattel mortgage wherein you do not really deliver the make the necessary payment and to keep his account up
stock themselves otherwise it may be considered as a to date, so that no court action would be resorted to.
pledge. However, you have to register it. Registration
The above-described car found its way again into the
here would be in both provinces of the domicile of the
United Car Exchange which sold the same in cash for
owner and the corporation, the one who issued the shares
P4,000 to one O. N. Borlough. Accordingly, he registered
of stock.
it on the following day with the Motor Vehicles Office.
Interest in a business can also be a subject matter of a
0. N. Borlough took possession of the vehicle from the
chattel mortgage.
time he purchased it, On July 10, 1952, Fortune
Machineries that are treated by parties as a personal Enterprises, Inc. brought action against Salvador
property, I think this is a Davao Sawmill case, puwede din Aguinaldo to recover the balance of the purchase price.
yan.
Borlough filed a third-party complaint, claiming the
Vessels as I’ve mentioned before are personal properties vehicle. Thereupon, Fortune Enterprises, Inc. amended
although it is essential that the mortgage must be its complaint, including Borlough as a defendant and
alleging that he was in connivance with Salvador

Aguinaldo and was unlawfully hiding and concealing the The recording provisions of the Revised Motor Vehicles
vehicle in order to evade seizure by judicial process. Law, therefore, are merely complementary to those of the
Chattel Mortgage Law. A mortgage in order to affect third
Borlough answered alleging that he was in legal
persons should not only be registered in the Chattel
possession thereof, having purchased it in good faith and Mortgage Registry, but the same should also be recorded
for the full price of P4,000, and that he had a certificate of in the motor Vehicles Office as required by section 5 (e)
registration of the vehicle issued by the Motor Vehicles of the Revised Motor Vehicles Law [Whenever any owner
Office, and he prayed for the dismissal of the complaint, hypothecates or mortgage any motor vehicle as surety for
the return of the vehicle and for damages against the a debt or other obligation, the creditor or person in whose
plaintiff. favor the mortgage is made shall, within seven days,
notify the Chief of the Motor Vehicles Office in writing].
ISSUE: Whether or not the mortgage binds Borlough who And the failure of the respondent mortgage to report the
mortgage executed in its favor had the effect of making
is a purchaser in good faith. NO.
said mortgage ineffective against Borlough, who had his
purchase registered in the said Motor Vehicles Office.
HELD: Two recording laws are here being invoked, one
by each contending party — the Chattel Mortgage Law
One holding a lien on a motor vehicle, in so far as he can
(Act No. 1508), by the mortgagor and the Revised Motor
Vehicles Law (Act No. 3992), by a purchaser in reasonably do so, must protect himself and others
possession. thereafter dealing in good faith by complying and requiring
The Revised Motor Vehicles Law is a special legislation compliance with the provisions of the laws concerning
enacted to "amend and compile the laws relative to motor certificates of title to motor vehicles, such as statutes
vehicles," whereas the Chattel Mortgage Law is a general providing for the notation of liens or claims against the
law covering mortgages of all kinds of personal property. motor vehicle certificate of title or manufacturer's
The former is the latest attempt to assemble and compile
certificate, or for the issuance to the mortgagee of a new
the motor vehicle laws of the Philippines, all the earlier
laws on the subject having been found to be very deficient certificate of ownership.
in form as well as in substance; it had been designed
primarily to control the registration and operation of motor The holder of a lien who is derelict in his duty to comply
vehicles. and require compliance with the statutory provisions acts
at his own peril, and must suffer the consequence of his
Counsel for petitioner contends that the passage of the own negligence; and accordingly, he is not entitled to the
Revised Motor Vehicles Law had the effect of repealing lien as against a subsequent innocent purchaser filed as
the Chattel Mortgage Law, as regards registration of
provided by other chattel mortgage statutes.
motor vehicles and of the recording of transaction
affecting the same. We do not believe that it could have
The above authorities leave no room for doubt that
been the intention of the legislature to bring about such a
repeal. In the first place, the provisions of the Revised purchaser O. N. Borlough's right to the vehicle should be
Motor Vehicles Law on registration are not inconsistent upheld as against the previous and prior mortgage
with does of the Chattel Mortgage Law. In the second Fortune Enterprises, Inc., which failed to record its lien in
place, implied repeals are not favored; implied repeals are accordance with the Revised Motor Vehicles Law.
permitted only in cases of clear and positive
inconsistency. The first paragraph of section 5 indicates Why is there a need to discuss whether the motor
that the provisions of the Revised Motor Vehicles Law vehicles law repealed the chattel mortgage law?
regarding registration and recording of mortgage are not
incompatible with a mortgage under the Chattel Mortgage To determine who has the better right between the
Law. The section merely requires report to the Motor
mortgagee who registered the mortgage under the chattel
Vehicles Office of a mortgage; it does not state that the
registration of the mortgage under the Chattel Mortgage mortgage law (ROD) or the transfer of the sale duly
Law is to be dispensed with. We have, therefore, an recorded under the motor vehicles law with no knowledge
additional requirements in the Revised Motor Vehicles of the previous mortgage.
Law, aside from the registration of a chattel mortgage,
which is to report a mortgage to the Motor Vehicles Office, Here who has the better right?
if the subject of the mortgage is a motor vehicle; the report
merely supplements or complements the registration.
Olaf. Because the failure of Aguinaldo to record the be dispensed with. It rather emphasizes an additional
mortgage as required by the Chattel Mortage Law makes requirement. Aside from the registration of the chattel
the mortgage ineffective against xx mortgage, report the mortgage to the Motor vehicles
office.
So the chattel mortgage is valid? YES
Again, these provisions under these laws are merely
What is the effect of not having registered that complementary to each other. A mortgage, in this case a
mortgage at the Motor Vehicles office? chattel mortgage involving motor vehicles to affect third
persons should not only be registered with the Chattel
It does not bind third person.
Mortgage Registry but should also be recorded with the
So or more or less it is similar with our laws in the real Motor Vehicles Office as provided by Section 5 thereof.
estate mortgage but you have to consider here the Failure of the mortgagee to report the mortgage executed
rewuirement that It must be registered with the Motor in its favour had the effect of making the mortgage
Vehicles Office for it to be binding against third persons. ineffective against Borlough who in this case was
considered as purchaser in good faith. Failure to comply
Can we say the Revised Motor Vehicles law repealed with the statute the transferees title is rendered invalid as
that provision on the chattel mortgage law? against subsequent purchaser from the transferor who is
unable by such failure of compliance to obtain an indicia
No. it is only complementary. of ownership such as subsequent purchaser in good faith
or a purchaser xx. And a lien on the chattel mortgage
How do you harmonize?
given by the buyer to secure a purchase or money loan
Revised Motor Vehicles Law is a special law wherein never becomes effective in such case as against the
chattel mortgage law is considered as a general law. innocent purchaser.
There is necessarily no repeal. It is suppletory in nature in
One xx a lien on a motor vehicle insofar as he can
the sense that they do not contradict each other because
reasonably do so must protect himself from others after
you have to consider that Revised Motor vehicles law is a
dealing in good faith by complying and requiring the
special law.
compliance by the provisions of the law concerning
Here the Motor Vehicles Law clearly requires to enter or certificates of title of motor vehicles.
record the transfer of motor vehicles and ensure
Borlough’s right to the vehicle as against the previous and
reasonable regulation governing the search and
prior mortgagee, the fortune motors would therefore be
examination of the documents and reports.
upheld. Ofcourse here the right of the mortgagee to
Two recording laws are here being invoked: The Chattel foreclose or to go after the motor vehicle itself cannot
Mortgage Law and the revised Motor Vehicle law. proceed anymore. But the obligation is still there. So what
remains is the collection of sum of money. He cannot
The Revised Motor Vehicles law is a special legislation to foreclose in relation to that mortgage anymore.
amend and compile the laws relative to Motor vehicles
whereas the chattel mortgage law is a general law Now other deviation, a house of mixed materials or a
covering mortgages of all kinds of property. Take note house itself is considered as a real property. If it is
there was no repeal of Chattel Mortgage law or any of its composed of a mixed materials jurisprudence provides
provision just because of the Revised Motor Vehicle law that it can be a valid subject of a chattel mortgage.
requirements. Likewise a house that is intended to be demolished may
also be a valid subject of a chattel mortgage as well as a
The provisions of the Revised Motor Vehicles law on house built on a rented land.
registration is not inconsistent with the Chattel Mortgage
law. There was no statement that registration of the What is the effect if the parties executed a chattel
mortgage under the Motor Vehicles law, it does not state mortgage but the property involves a real estate property
that the registration under the Chattel Mortgage law is to such as a building?
Can the mortgage be considered valid? Yes. As against mortgage consists in the fact that it operates as
third person it would be ineffectual constructive notice of the existence of the contract, and
the legal effects of the contract must be discovered in the
Standard oil vs Jaramilio instrument itself in relation with the fact of notice.
Registration adds nothing to the instrument, considered
STANDARD OIL COMPANY vs. JARAMILLO as a source of title, and affects nobody's rights except as
a specifies of notice.
Articles 334 and 335 of the Civil Code supply no absolute

FACTS: Gervasia de la Rosa, Vda. de Vera, was the criterion for discriminating between real property and
lessee of a parcel of land situated in the City of Manila personal property for purpose of the application of the
and owner of the house of strong materials built thereon, Chattel Mortgage Law. Those articles state rules which,
upon which date she executed a document in the form of considered as a general doctrine, are law in this
a chattel mortgage, purporting to convey to the petitioner jurisdiction; but it must not be forgotten that under given
by way of mortgage both the leasehold interest in said lot conditions property may have character different from that
and the building which stands thereon. imputed to it in said articles. It is undeniable that the
parties to a contract may by agreement treat as personal
The clauses in said document describing the property property that which by nature would be real property; and
intended to be thus mortgage are expressed in the it is a familiar phenomenon to see things classed as real
following words: property for purposes of taxation which on general
Now, therefore, the mortgagor hereby conveys and principle might be considered personal property. Other
transfer to the mortgage, by way of mortgage, the situations are constantly arising, and from time to time are
following described personal property, situated in the City presented to this court, in which the proper classification
of Manila, and now in possession of the mortgagor, to wit: of one thing or another as real or personal property may
be said to be doubtful.
(1) All of the right, title, and interest of the mortgagor in If you take a look at this case, a chattel mortgage is
and to the contract of lease hereinabove referred to, and executed but the subject matters are leasehold rights,
in and to the premises the subject of the said lease; leasehold interest and the building—property of the
(2) The building, property of the mortgagor, situated on mortgagor. Now the case actually here is regarding the
the aforesaid leased premises. refusal of the Jaranillo as Register of Deeds to have the
said mortgage registered for the reason that the
After said document had been duly acknowledge and
delivered, the petitioner caused the same to be presented properties indicated therein are not personal properties.
to the respondent, Joaquin Jaramillo, as register of deeds However it is emphasized that the duty of the Register of
of the City of Manila, for the purpose of having the same Deeds with respect to the registration of the Chattel
recorded in the book of record of chattel mortgages. Upon Mortgage is purely ministerial in character. No discretion
examination of the instrument, the respondent was of the is required with respect to the registration. As long as the
opinion that it was not a chattel mortgage, for the reason properties are xx and the documents are duly presented
that the interest therein mortgaged did not appear to be
personal property, within the meaning of the Chattel in the Register of deeds the ROD must register the said
Mortgage Law, and registration was refused on this chattel mortagge even if it in truth and in fact it is a real
ground only. property. Again no discretion on the part of the Register
of Deeds.
ISSUE: Whether or not the RoD may refuse registration
of the mortgage. NO In this case it was also emphasized that parties may by
agreement treat as personal property and subject it in
HELD: The duties of a register of deeds in respect to the chattel mortgage even if by nature it is considered as a
registration of chattel mortgage are of a purely ministerial
real property. Although as mentioned it is binding between
character; and no provision of law can be cited which
confers upon him any judicial or quasi-judicial power to the parties themselves and not as against third persons.
determine the nature of any document of which
registration is sought as a chattel mortgage. Again the Register of Deeds has no authority to pass
upon the capacity of the parties to a chattel mortgage
His duties in respect to such instruments are ministerial which is presented for them to record. If the mortgage
only. The efficacy of the act of recording a chattel property is a real property instead of personal property,
would no doubt be ineffective as against third persons but executors or administrators, unless the possession
this is a question to be determined by the courts but not of the property is delivered* to and retained by the
the register of deeds. mortgagee or unless the mortgage is recorded in the
office of the register of deeds of the province in which
As long as it is deemed to be agreement of the third party the mortgagor resides at the time of making the same,
or, if he resides without the Philippine Islands, in the
and no party is prejudiced--okay lang.
province in which the property is situated: Provided,
however, That if the property is situated in a different
The parties cannot later on after they executed the chattel
province from that in which the mortgagor resides,
mortgage go to court and seek for the annulment just the mortgage shall be recorded in the office of the
because the property involve is actually real property. The register of deeds of both the province in which the
parties themselves designated that these properties will mortgagor resides and that in which the property is
be subjected to a chattel mortgage. They cannot later on situated, and for the purposes of this Act the city of
impugn the validity of the contract as void as it did not Manila shall be deemed to be a province.
comply with the requirements to constitute a chattel * wala na yang delivered because there is a distinction
mortgage. Again, apply the doctrine of the principle of between a pledge and a personal property.
estoppel.
Sec. 5. Form. – A chattel mortgage shall be deemed
The parties cannot say that the contract is void because to be sufficient when made substantially in
accordance with the following form, and shall be
what is involved is a real property because they are
signed by the person or persons executing the same,
already estopped but the validity of the contract in that in the presence of two witnesses, who shall sign the
instance cannot be held against third persons who would mortgage as witnesses to the execution thereof, and
be prejudiced by such arrangements.. each mortgagor and mortgagee, or, in the absence of
the mortgagee, his agent or attorney, shall make and
Going back to the case of Borlough vs Fortune, even if subscribe an affidavit in substance as hereinafter set
you have there a real property—chattel mortgage duly forth, which affidavit, signed by the parties to the
registered it will bind them but not necessarily thethird mortgage as above stated, and the certificate of the
persons who will be prejudiced. oath signed by the authority administering the same,
shall be appended to such mortgage and recorded
therewith.
Act 1508
Sec. 2. All personal property shall be subject to FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.
mortgage, agreeably to the provisions of this Act, and
a mortgage executed in pursuance thereof shall be “This mortgage made this ____ day of ______19____
termed chattel mortgage. by _______________, a resident of the municipality of
*Sec. 3. Chattel mortgage defined. – A chattel
______________, Province of ____________,
mortgage is a conditional sale of personal property
as security for the payment of a debt, or the Philippine Islands mortgagor, to ____________, a
performance of some other obligation specified resident of the municipality of ___________, Province
therein, the condition being that the sale shall be void of ______________, Philippine Islands, mortgagee,
upon the seller paying to the purchaser a sum of witnesseth:
money or doing some other act named. If the
condition is performed according to its terms the “That the said mortgagor hereby conveys and
mortgage and sale immediately become void, and the mortgages to the said mortgagee all of the following-
mortgagee is thereby divested of his title. described personal property situated in the
*take note of section 3 because this is no longer accurate municipality of ______________, Province of
in the light of Article 2140, so be very careful kasi ang ____________ and now in the possession of said
nakalagay sa section 3 definition ng chattel mortgage—a
mortgagor, to wit:
conditional sale of personal property. not anymore, the
definition is provided by article 2140. (Here insert specific description of the property
mortgaged.)
Sec. 4. Validity. – A chattel mortgage shall not be valid
against any person except the mortgagor, his
“This mortgage is given as security for the payment So here in section 5 you have also here a form of what we
to the said ______, mortgagee, of promissory notes call as an affidavit of good faith.
for the sum of ____________ pesos, with (or without,
With regard to subject matter of a chattel mortgage law
as the case may be) interest thereon at the rate of
nakalagay diyan personal property and we’ve mentioned
___________ per centum per annum, according to the
some deviations. How about incorporeal property? They
terms of __________, certain promissory notes, dated
can be subject of chattel mortgage such as shares of
_________, and in the words and figures following
stocks. In the shares of stock your right as a stock holder
(here insert copy of the note or notes secured). is incorporeal in nature. The certificate is merely written
“(If the mortgage is given for the performance of acknowledgment or written evidence of your right for a
some other obligation aside from the payment of share holder. Pero kahit mawala yung certificiate mo
promissory notes, describe correctly but concisely andyan parin yung incorporeal right mo as a stockholder.
the obligation to be performed.) So it can be subject of a chattel mortgage. With regard to
the registration requirement under the law, it will be
“The conditions of this obligation are such that if the registered in the place or domicile ng owner/stockholder
mortgagor, his heirs, executors, or administrators and the principal place of the business of the corporation.
shall well and truly perform the full obligation (or So registration must be made in the place where the
obligations) above stated according to the terms corporation and the natural persons reside. So there must
thereof, then this obligation shall be null and void. be two registration.
“Executed at the municipality of _________, in the Improvements of land, it can also be subject of chattel
Province of ________, this _____ day of 19_____ mortgage. Growing crops, large cattles are considered
personal properties capable of being mortgage although
____________________
in some instances growing crops may be considered as
(Signature of mortgagor.)
immovable under article 415.
“In the presence of
With regard to real estate mortgage in general insofar as
“_________________ the public is concerned any improvements on the land is
“_________________ considered as immovable properties.
(Two witnesses sign here.)
Under section 5 you have therein the affidavit of good
FORM OF OATH. faith, so you have the form for deed of chattel mortgage
“We severally swear that the foregoing mortgage is and the other one is actually affidavit in good faith.
made for the purpose of securing the obligation
specified in the conditions thereof, and for no other “We severally swear that the foregoing mortgage is
purpose, and that the same is a just and valid made for the purpose of securing the obligation
obligation, and one not entered into for the purpose specified in the conditions thereof, and for no other
of fraud.” purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose
FORM OF CERTIFICATE OF OATH. of fraud.”
“At ___________, in the Province of _________,
personally appeared ____________, the parties who LILIUS VS MANILA RAILROAD COMPANY
signed the foregoing affidavit and made oath to the
truth thereof before me. ALEKO E. LILIUS vs. MANILA RAILROAD COMPANY
“_____________________________” (G.R. No. 42551, September 4, 1935)

(Notary public, justice of the peace, 1 or other officer,
as the case may be.) FACTS: In G.R. No. L-39587, Aleko E. Lilius, and his wife
Sonja Maria Lilius, and Brita Marianne Lilius, met an
accident, wherein their Studebaker car, collided with
locomotive No. 713, Manila Railroad Company’s train. 41159 of the Court of First Instance of Manila, together
They sustained lifethreatening wounds, fractures and with a certified copy of the writ of execution and the
other injuries, which left them permanently disfigured. The garnishment issued by virtue of said judgment. The
Supreme Court ruled in favor of Aleko Lilius, et al, alleged public document evidencing its claim was not
awarding them in the amount of P33,525.03 as damages, offered in evidence but, in their brief in this court, counsel
including interest and costs. for the Motor Co., Inc., merely assume that its credit is
evidenced by a public document dated may 10, 1931,
In G.R. No. 42551, herein case, Laura Lindley Shuman, because the court, in its judgment in said civil case No.
the Manila Wine Merchants, Ltd., the Bank of the 41159, refers to a mortgage appearing in the evidence as
Philippine Islands and the Manila Motor Co., Inc(creditors Exhibit A, as the basis of its judgment, without mentioning
of the spouses Lilius)., have appealed from an order of the date of the execution of the exhibit.
the Court of First Instance of Manila fixing the degree of
preference of the claimants and distributing the proceeds ISSUE: WON the reference to a mortgage appearing in a
of the judgment of this court in the case of Lilius vs. Manila public document in a judgment, entitled to preference
Railroad Co. under article 1924 of the Civil Code. NO
APPEAL OF LAURA LINDLEY SHUMAN :The lower court HELD: This reference in said judgment to a mortgage is
erred in holding that Dr. W.H. Waterous and Dr. M. Marfori not competent or satisfactory evidence as against third
had a claim against the plaintiff, Aleko E. Lilius superior to persons upon which to base a finding that the Manila
the claim of the appellant, Laura Lindley Shuman, against Motor Company's credit evidenced by a public document
him." within the meaning of article 1924 of the Civil Code. If the
Manila motor Co., Inc., desired to rely upon a public
One of the contentions of this appellant under this document in the form of a mortgage as establishing its
assignment of error is that her claim, having been made preference in this case, it should have offered that
the basis of the plaintiffs' action and of the award for document in evidence, so that the court might satisfy itself
damages, as shown in the original decision herein, should as to its nature and unquestionably fix the date of its
constitute, and does constitute a superior lien against the execution.
funds awarded said plaintiffs, to those of any other
claimants, except the two doctors, the hospital and the Under section 5 of Act No. 1507 as amended by Act No.
other nurse, and that as to the claims of the two doctors, 2496, a chattel does not have to be acknowledged
the hospital and the other nurse the claim of this appellant before a notary public. As against creditors and
has equal preference with their claims. subsequent encumbrances, the law does require an
affidavit of good faith appended to the mortgage and
APPEAL OF THE MANILA WINE MERCHANTS, LTD., recorded with it. A chattel mortgage may, however, be
AND THE BANK OF THE PHILIPPINE ISLANDS. :The valid as between the parties without such an affidavit of
appellants, the Manila Wine Merchants. Ltd., and the good faith. In 11 Corpus Juris, 482, the rule is expressly
Bank of the Philippine islands also contend that the sum stated that as between the parties and as to third persons
separately awarded Sonja Maria Lilius is conjugal who have no rights against the mortgagor, no affidavit of
property and therefore liable for the payment of the private good faith is necessary. It will thus be seen that under the
debts of her husband, Aleko E. Lilius, contracted during law, a valid mortgage may exist between the parties
her marriage. without its being evidenced by a public document.
APPEAL OF THE THE MANILA MOTOR CO., INC.: For This court would not be justified, merely from the
its part, Manila Motor Co., Inc. claims that the lower court reference by the lower court in that case to a mortgage, in
erred in not holding their claims, evidenced by public assuming that its date appears in a public document. if the
instruments and final judgment, as preferred over all other Manila motor Co., Inc., desired to rely upon a public
claims against Aleko E. Lilius. In support of its claim of document in the form of a mortgagor as establishing its
preference against the fund of Aleko E. Lilius was a preference in this case, it should have offered that
certified copy of its judgment against him in civil case No. document in evidence, so that the court might satisfy itself
as to its nature and unquestionably fix the date of its So the essence here is that the mortgage is constituted to
execution. There is nothing either in the judgment relied secure the fulfilment of the obligation and not to defraud
upon or in the evidence to show the date of said third persons.
mortgage. The burden was upon the claimant to prove
that it actually had a public Code. CEBU INTERNATIONAL FINANCE vs CA
It is essential that the nature and the date of the document CEBU INTERNATIONAL FINANCE CORPORATION,
be established by competent evidence before the court petitioner,vs. COURT OF APPEALS, ROBERTO ONG
can allow a preference as against the other parties to this AND ANGTAY, respondents
proceeding. Inasmuch as the claimant failed to establish
(268 SCRA 178, G.R. No. 107554, February 13, 1997)
its preference, based on a public document, the lower
court properly held that its claim against the said Aleko E. FACTS: On 4 March 1987, Jacinto Dy executed a Special
Lilius was based on the final judgment in civil case No.
Power of Attorney in favor of private respondent Ang Tay,
41159 of the Court of First Instance of Manila of May 3,
authorizing the latter to sell the cargo vessel Owned by
1932. The court, therefore, committed no error in holding
Dy and christened LCT “Asiatic.”
that the claim of the Manila Motor Co., Inc., was inferior in
preference to those of the appellees in this case. On 28 April 1987, through a Deed of Absolute Sale, Ang
Tay sold the subject vessel to private respondent Robert
What is the effect of the absence of affidavit of good Ong (Ong) for P900,000.00. Ong paid the purchase price
faith? by issuing three (3) checks in the following amounts:
P150,000.000, P600,000.00 and P150,000.00. However,
Mortgage is still valid in the absence of affidavit of good
since the payment was not made in cash, it was
faith, no preference as to the credit in relation to the
specifically stipulated in the deed of sale that the “LCT
chattel mortgage, it will not bind parties.
Asiatic shall not be registered or transferred to Robert
In the case of Lilius it emphasizes what is provided under Ong until complete payment.”
section 5 of act 1508. In a chattel mortgage it is not
Thereafter, Ong obtained possession of the subject
required for its validity to be acknowledged before a
vessel so he could begin deriving economic benefits
notary public. However in practice you could not have it
therefrom. He, likewise, obtained copies of the
registered (mortgage) if it is not notarized. As against
unnotarized deed of sale allegedly to be shown to the
creditors and subsequent encumbrancers the law does
banks to enable him to acquire a loan to replenish his
not require an affidavit of good faith appended to the
(Ong’s) capital. The aforequoted condition, however,
mortgage and recorded with it. What does that mean? It
which was handwritten on the original deed of sale, does
does not bind, although the law require this good faith to
not appear on Ong’s copies.
bind third parties. However the chattel mortgage may be
valid between the parties even in the absence of this Contrary to the aforementioned agreements and without
affidavit of good faith. As between parties and as to third the knowledge of Ang Tay, Ong had his copies of the deed
persons they have no rights xx the mortgagors, no of sale (on which the aforementioned prohibition does not
affidavit of good faith is necessary. A valid mortgage exist appear) notarized on 18 May 1987. Ong presented the
between the parties without it being evidenced in a public notarized deed to the Philippine Coast Guard which
document. subsequently issued him a Certificate of Ownership and
a Certificate of Philippine Register over the subject vessel
Take a look here in section 5, this affidavit of good faith is
on 27 May 1987. Ong also succeeded in having the name
an oath in this contract of chattel mortgage wherein the
of the vessel changed to LCT “Orient Hope.”
parties severally swear that the mortgage is made for the
purpose of securing the obligation specified in the On 29 October 1987, Ong acquired a loan from petitioner
conditions thereof and for no other purposes and the in the amount of P496,008.00 to be paid in instalments as
same is just and valid obligation and not entered into for evidenced by a promissory note of even date.
the purpose of fraud.
As security for the loan, Ong executed a chattel 2. WON petitioner is a mortgagee in good faith whose lien
mortgage over the subject vessel, which mortgage was over the mortgaged vessel should be respected.
registered with the Philippine Coast Guard and annotated
on the Certificate of Ownership. HELD:
In paragraph 3 of the Deed of Chattel Mortgage, it was 1. As to validity of the mortgage contract between
stated that: Cebu International and Ong:
3. The said sum of 496,008.00 represents the balance The key lies in the certificate of ownership issued in Ong's
due on of MORTGAGOR(S) from the MORTGAGEE and name (which, along with the deed of sale, he submitted to
is payable in the office of the MORTGAGEE at Cebu City petitioner as proof that he is the owner of the ship he gave
or in the office of the latter’s assignee, in case the rights as security for his loan). It was plainly stated therein that
and interests of the MORTGAGEE in the foregoing the ship LCT "Orient Hope" ex "Asiatic," by means of a
mortgage are assigned to a third person, under the terms Deed of Absolute Sale dated 28 April 1987, was "sold and
of said promissory note, as follows: (a)(P20,667.00 on or transferred by Jacinto Dy to Robert Ong."
before…...and (b) the balance in Twenty Four (24) equal
There can be no dispute then that it was Dy who was the
successive monthly instalments on the . . . . . . day of each
seller and Ong the buyer of the subject vessel. Coupled
and every succeeding month thereafter until the amount
with the fact that there is no evidence euphony transaction
is fully paid. The interest on the foregoing instalments
between Jacinto Dy or Ang Tay and petitioner, it follows,
shall be paid on the same date that the instalments
therefore, that petitioner's role in the picture is properly
become payable and additional interest at the rate of
and logically that of a creditor-mortgagee and not owner-
fourteen (14%) per cent per annum will be charged on all
seller.
amounts, principal and interest, not paid on due date.
It is paragraph 2 of the mortgage contract which
Ong defaulted in the payment of the monthly instalments.
accurately expresses the true nature of the transaction
Consequently, on 11 May 1988, petitioner sent him a
between petitioner and Ong--that it is a simple loan with
letter demanding delivery of the mortgaged vessel for
chattel mortgage. The amount petitioner loaned to Ong
foreclosure or in the alternative to pay the balance of
does not represent the balance of any purchase price
P437,802.00 pursuant to paragraph 11 of the deed of
since the aforementioned documents state that Ong is
chattel mortgage.
already the absolute owner of the subject vessel.
Meanwhile, the two checks (worth P600,000.00 and
Obviously, therefore, paragraph 3 of the said contract was
P150,000.00) paid by Ong to Ang Tay for the purchase of
filled up by mistake. Considering that petitioner used a
the subject vessel bounced. Ang Tay’s search for the
form contract, it is not improbable that such an oversight
elusive Ong and all attempts to confer with him proved to
may have been committed--negligently but unintentionally
be futile.
and without malice.
A subsequent investigation and inquiry with the Office of
Accordingly, the chattel mortgage contract between
the Coast Guard revealed that the subject vessel was
already in the name of Ong, in violation of the express petitioner and Ong is valid and subsisting.
undertaking contained in the original deed of sale.
2. As to the good faith of Cebu International as
As a result thereof, on 13 January 1988, Ang Tay and mortgagee whose lien over the mortgaged vessel
Jacinto Dy filed a civil case for rescission and replevin should be respected:
with damages against Ong and his wife.
The prevailing jurisprudence is that “a mortgagee has a
ISSUES: right to rely in good faith on the certificate of title of the
mortgagor to the property given as security and in the
1. WON the chattel mortgage contract between petitioner
absence of any sign that might arouse suspicion, has no
and Ong is valid.
obligation to undertake further investigation. Hence, even
if the mortgagor is not the rightful owner of or does not It had no participation in and was not privy to the sale
have a valid title to the mortgaged property, the transaction between Jacinto Dy (through Ang Tay) and
mortgagee or transferee in good faith is nonetheless Ong. Petitioner, thus, had no obligation to undertake
entitled to protection.” Although this rule generally further investigation since it had the necessary
pertains to real property, particularly registered land, documents to prove Ong's ownership. In addition
it may also be applied by analogy to personal petitioner even took pains to inspect the subject vessel
property, in this case specifically, since ship owners which was in Ong's possession.
are, likewise, required by law to register their vessels
with the Philippine Coast Guard. Although Ang Tay may also be an innocent person, a
similar victim of Ong's fraudulent machinations, it was his
ANG TAY’S CONTENTIONS: act of confidence which led to the present fiasco. Ang Tay
readily agreed to execute a deed of absolute sale in Ong's
That the above rule is not applicable in the case at bar in favor even though Ong had yet to make a complete
the face of the numerous "badges of bad faith" on the part payment of the purchase price. It is true that in the copy
of petitioner. of the said deed submitted by Ang Tay there was an
undertaking that ownership will not vest in Ong until full
Ang Tay's contentions are unmeritorious. As previously
payment.
discussed, paragraph 3 of the chattel mortgage contract
was erroneously but unintentionally filled up. The failure However, Ong was able to obtain several copies of the
of petitioner to exercise due care in filling up the deed with Ang Tay's signature and had these notarized
necessary provisions in the chattel mortgage contract without the aforementioned undertaking as evidenced by
does not, however, amount to bad faith. It was a mere the copy of the deed of sale presented by petitioner. The
oversight and not a deliberate and malicious act. Deed of Absolute Sale consisted of two (2) pages. The
signatures of Ang Tay and Ong appeared only on the first
ISSUE ON AFFIDAVIT OF GOOD FAITH
page of the deed. The Second page contained the
That petitioner's bad faith is further demonstrated by its continuation of the acknowledgment and the undertaking.
failure to comply with the special affidavit of good faith as Ong could have easily reproduced the second page
required in Sec. 4 of P.D. No. 1521. without the undertaking since this page was not signed by
the contracting parties. To complete the deception, Ang
The special affidavit of good faith, on the other hand, Tay unwittingly allowed Ong to have possession of the
is required only for the purpose of transforming an ship. Hence, in consonance with our ruling that:
already valid mortgage into a "preferred mortgage."
Thus, the abovementioned affidavit is not necessary ... as between two innocent persons, the mortgagee and
for the validity of the chattel mortgage itself but only the owner of the mortgaged property, one of whom must
to give it a preferred status. suffer the consequence of a breach of trust, the one who
made it possible by his act of confidence must bear the
*** loss, it is Ang Tay and his principal Jacinto Dy who must,
unfortunately, suffer the consequences thereof. They are
Petitioner had every right to rely on the Certificate of considered bound by the chattel mortgage on the subject
Ownership and Certificate of Philippine Register duly vessel.
issued by the Philippine Coast Guard in Ong's name.
There was a valid sale but the circumstances in the
Petitioner had no reason to doubt Ong's ownership over transfer of ownership is questionable. However it appears
the subject vessel. The documents presented by Ong, Cebu International Finance Corporation is a mortgagee in
upon petitioner's insistence before accepting the said good faith. Why? The vessel was duly registered in the
vessel as loan security, were all in order and properly name of Ong and in fact it was also registered in the
issued by the duly constituted authorities. There was no Philippine Coast guard under his name. The mortgage
circumstance that might have aroused petitioner's was also registered therein.
suspicion or alerted it to any infirmity committed by Ong.
So here there was no dispute that there was a sale as Now the essence of this affidavit of good faith aside from
between ong and xx.. CIC here was considered as a preference of credit, this would hold the parties liable for
mortgagee in good faith and his right should be respected. perjury. Because puwede nila palabasin na ‘i-mortgage ko
A ortgagee has a right to rely on good faith in the kunwari ang property ko sayo para hindi habulin ng ibang
certificate of title of the mortagagor of the property given creditors’, so they would execute an a chattel mortgage
as security in the absence of any sign that might arouse so by executing an affidavit of good faith they attest that
suspicion. There is no obligation to undertake further there is a just and valid obligation. In other words if it can
investigation. Ship owners here are required by law to be proven that there was no mortgage or loan, the parties
register under Philippine coastguard and the Supreme executed a chattel mortgage so that hindi mahabol ng
Court apply the similarity doon sa registration involving third persons then the effect is that they can be held liable
real estate properties. for fraud/perjury because they will have to execute
affidavit of good faith to bind third persons.
Now the affidavit of good faith is required only for the
purpose of transforming to an already a valid mortgage to Take note of the effect of the presence or absence of
a preferred mortgage. So affidavit is not necessary for the affidavit of good faith.
validity of the chattel mortgage but only to give it a
preferred status. Sec. 7. Descriptions of property. – The description of
the mortgaged property shall be such as to enable the
In this case the Supreme Court also applied the ruling as parties to the mortgage, or any other person, after
between two innocent persons, in this case the reasonable inquiry and investigation, to identify the
same.
mortgagee and the owner of the mortgaged property, the
If the property mortgaged be large cattle,” as defined
one who must suffer the consequence is the one who by section one of Act Numbered Eleven and forty-
make it possible by his act of confidence bears the loss. seven, 2 and the amendments thereof, the description
of said property in the mortgage shall contain the
So what’s the relevance of affidavit of good faith? It brands, class, sex, age, knots of radiated hair
secures the fulfilment of the mortgage and it is an commonly known as remolinos, or cowlicks, and
attestation on the part of the parties that this mortgage is other marks of ownership as described and set forth
true and not executed to defraud third persons. The in the certificate of ownership of said animal or
absence thereof will not affect the validity of the mortgage animals, together with the number and place of issue
of such certificates of ownership.
between the parties. In addition the credits secured by the
If growing crops be mortgaged the mortgage may
mortgage in the absence of affidavit of good faith will not contain an agreement stipulating that the mortgagor
assume the position of a preferred credit. If the binds himself properly to tend, care for and protect
debtor/mortgagor becomes insolvent the the crop while growing, and faithfully and without
mortgagee/creditor will have to participate in the general delay to harvest the same, and that in default of the
distribution of the assets of the debtor. They have the performance of such duties the mortgage may enter
upon the premises, take all the necessary measures
same footing with the other creditors unlike preferred
for the protection of said crop, and retain possession
creditors. This will be more clear when we go to thereof and sell the same, and from the proceeds of
concurrence and preference of credits because generally such sale pay all expenses incurred in caring for,
with regard to that vehicle if you have a mortgaged and harvesting, and selling the crop and the amount of the
then you have special affidavit of good faith, if that vessel indebtedness or obligation secured by the mortgage,
will be sold to pay the obligation of the debtor i-apply ang and the surplus thereof, if any shall be paid to the
proceeds una doon sa mortgage na merong affidavit of mortgagor or those entitled to the same.
A chattel mortgage shall be deemed to cover only the
good faith. In the absence of affidavit of good faith hindi
property described therein and not like or substituted
ka preferred. Tingnan mo muna sino ibang mortgages na property thereafter acquired by the mortgagor and
preferred doon or anything considered as preferred credit placed in the same depository as the property
with regard to ship or vessel. Now if wala ng preferred originally mortgaged, anything in the mortgage to the
credits, the proceeds of that ship will be distributed contrary notwithstanding
proportionally to all the creditors. So wala ng preference
even if the property was actually mortgaged.
SALDANA VS PHILIPPINE GUARANTY. equipment found in the said premises", validly and
sufficiently covered within its terms the personal
SALDANA vs. PHILIPPINE GUARANTY properties disposed of in the auction sale,
FACTS: in order to secure an indebtedness of ISSUE: Whether or not the properties levied are covered
P15,000.00, Josefina Vda. de Aleazar executed in favor by the mortgage. YES.
of the plaintiff-appellant Buenaventura Saldana a chattel
mortgage covering properties described as follows: HELD: Section 7 of Act No. 1508, commonly and better
A building of strong materials, used for restaurant known as the Chattel Mortgage Law, does not demand a
business, located in front of the San Juan de Dios
minute and specific description of every chattel
Hospital at Dewey Boulevard, Pasay City, and the
following personal properties therein contained: mortgaged in the deal of mortgage but only requires that
1 Radio, Zenith, cabinet type. the description of the properties be such "as to enable the
1 Cooler. parties in the mortgage, or any other person, after
1 Electric range, stateside, 4 burners. reasonable inquiry and investigation to identify the same".
1 Frigidaire, 8 cubic feet. Gauged by this standard, general description have been
1 G.E. Deepfreezer. held by this Court.
8 Tables, stateside.
32 Chromium chairs, stateside. The description in the mortgage must point out its subject
1 Sala set upholstered, 6 pieces.
matter so that such person may identify the chattels
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment found in the observed, but it is not essential that the description be so
said premises. specific that the property may be identified by it alone, if
such description or means of identification which, if
Subsequent to the execution of the mortgage, a writ of pursued will disclose the property conveyed.
execution was duly issued as a result of a civil case
instituted by Hospital de San Juan de Dios against The specifications in the chattel mortgage contract in the
Josefina Eleazar; whereupon the following properties of instant case, we believe, in substantial compliance with
Josefina Eleazar were levied upon:
the "reasonable description rule" fixed by the chattel
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs. Mortgage Act. We may notice in the agreement,
1 Table (large) with 5 chairs. moreover, that the phrase in question is found after an
1 Radio-phono (Zenith, 8 tubes). enumeration of other specific articles. It can thus be
2 Showcases (big, with mirrors). reasonably inferred therefrom that the "furnitures, fixture
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . and equipment" referred to are properties of like nature,
1 Wooden drawer. similarly situated or similarly used in the restaurant of the
1 Tocador (brown with mirror).
mortgagor located in front of the San Juan de Dos
1 Aparador .
2 Beds (single type). Hospital at Dewey Boulevard, Pasay City, which articles
1 Freezer (deep freeze). can be definitely pointed out or ascertain by simple inquiry
1 Gas range (magic chef, with 4 burners). at or about the premises. A contrary view would unduly
1 Freezer (G.E.). impose a more rigid condition than what the law
prescribes, which is that the description be only such as
On January 31, 1957, the plaintiff-appellant Saldana filed to enable identification after a reasonable inquiry and
a third-party claim asserting that the above-described
properties levied are subject to his chattel mortgage of investigation.
May 8, 1953. In virtue thereof, the sheriff released only
some of the property originally included in the levy of Is it required to have a specific description of the
January 28, 1957, to wit: properties to have a valid chattel mortgage to bind
1 Radio, Zenith, cabinet type. third parties?
8 Tables, stateside.
32 Chromiun chairs, stateside. No.
1 G.E. Deep freezer.
Appellants claims that the phrase in the chattel mortgage
contract — "and all other furnitures, fixtures and
What is the requirement under the law regarding the Sec. 7.

description of the property covered by a chattel Descriptions of property. — The description of the
mortgage? mortgaged property shall be such as to enable the
parties to the mortgage, or any other person, after
No specific description but merely a reasonable reasonable inquiry and investigation, to identify the
description that would enable the mortagee to identify same.
xxx
thee properties mortgaged—the Reasonable
A chattel mortgage shall be deemed to cover only the
Description Rule. property described therein and not like or substituted
property thereafter acquired by the mortgagor and
The Chattel Mortgage Law does not demand the specific placed in the same depository as the property
description of every chattel mortgage in the deed of originally mortgaged, anything in the mortgage to the
mortgage but only requires that the description of the contrary notwithstanding.
properties is such as to enable the parties in the
mortgage or any other person at a reasonable inquiry and In the case of Saldaña, we had pointed out that
investigation to identify the same. General description has substantial compliance with the Reasonable Description
Rule is sufficient. It is not required that the mortgage
already been held by the court.
would exactly describe the property mortgaged, as long
as it can be identified by the parties, then that is sufficient.
As against third persons the description must be
sufficient to point out the subject matter so that such Also, under the last paragraph of Sec. 7 (please refer
person can identify the chattels concern but not essential above). In this light, we also take into consideration after-
that the description must be so specific that the property incurred obligations and after-acquired properties, in
may be identified in it alone. Such description are means relation to a chattel mortgage.
of identification if pursued will disclose the property
conveyed. Substantial compliance in line with the As we have discussed in Pledge and REM, it can incur
AFTER-INCURRED OBLIGATIONS. For example in
reasonable description rule is sufficient.
REM, we have the concept of a Dragnet Clause, wherein
you can cover future obligations. So long as this is clearly
So yung phase ‘furniture, fixture, equipment’ referred to
provided in the REM, that future debts are included and
properties of like nature, similarly situated-used in the described.
restaurant of the mortgagor in this case which can be
definitely pointed out for a certain and simple inquiry on How about in a Chattel Mortgage? Can it also cover
the premises. ‘like or subsituated properties’ that phrase obligations that will exist in the future? NO.
make references to those the properties after acquired by
A Chattel Mortgage can only cover obligations existing at
the mortgagor and based on the same repository as to the
the time the mortgage is constituted. Although a promise
property mortgaged. So that is provided also in the last expressed in a chattel mortgage including debts that are
paragraph of section 7. yet to be contracted can be a binding commitment, the
security itself, the chattel mortgage, does not come into
How is it different sa pledge? If you recall pledge the existence or arise until after a Chattel Mortgage
description of the property must be made in a public Agreement covering the newly-contracted debt is
instrument together with the thing. If you recall pledge not executed either: by having a fresh or new chattel
exactly as specific in that sense but of course here in mortgage, or by amending the old contract of chattel
pledge it is easier kasi you deliver the property to the mortgage.
pledgee so alam mo na yung na deliver mo, that should
A Deed of Chattel Mortgage shall be considered as NOT
be already enough as long as it can be pointed out. valid where it provides that the security stated therein is
for the payment of “any and all obligations, hereinbefore
March 4, 2016 (Damalerio) contracted, and which may hereafter be contracted by the
mortgagor in favor of the mortgagee.” That phrase will
Under Sec. 7 of Act 1508, we already mentioned that it is constitute as a DRAGNET CLAUSE. And it is valid in a
required that the mortgage must have the description of REM as long as it is very clear between the parties and
the property. such is stipulated.
But that is NOT APPLICABLE with regard to a Chattel So, to distinguish:

Mortgage. What’s the difference? In a chattel mortgage, - After-incurred obligations, as a general rule,
you have a personal property. It can easily be moved from are not allowed. It is allowed only in case you
one place to another. Unlike Pledge, you do not deliver RENEW or AMEND the chattel mortgage.
the personal property. The property remains in the - After-acquired properties, as a general rule, are
possession of the debtor-mortgagor. not allowed because the personal property
mortgaged must be the very same property that
Further, what we have is the requirement (in relation to will be subsequently foreclosed. But if in the
chattel mortgage) of an Affidavit of Good Faith to bind 3rd ordinary course of business, you have to
persons. What’s the relevance of that? That the obligation replenish your goods or inventories, the after-
is a just and valid obligation, and was not contracted to acquired properties may be covered by the
defraud 3rd persons. So how do you execute an Affidavit mortgage.
of Good Faith, ascertaining that the mortgage is based on
a just and valid obligation, when the obligation does not How about ASSIGNMENT? Can a creditor-mortgagee
yet exist at the time of the execution of the mortgage? assign his rights as such? Yes, the creditor can assign his
rights. What will happen to the assignee (or 3rd person)?
So those were the reasons behind this rule that a Chattel Such 3rd person can now hold the mortgage against the
Mortgage can only cover obligations EXISTING at the debtor, and if the debtor cannot pay, the 3rd person can
time the mortgage was instituted. now foreclose the property mortgaged.
What would happen is that, if you want the same property What are the requirements if the chattel mortgage is
to cover after-incurred obligation, meaning obligations assigned to a 3rd person?
incurred after the chattel mortgage was executed, then
you execute a NEW chattel mortgage or you AMEND the 1) The registration of the assignment.
old one. But this registration is not required for validity.
What will be the relevance of this? Registration or
How about AFTER-ACQUIRED PROPERTIES, can they notice will only be relevant in relation to payment
be included in a chattel mortgage? Again take a look at made by the debtor. So recall your obligations
the last paragraph of Section 7. It will cover only the and contracts, what is the effect if there is
property described therein and not like or substituted subrogation (when a creditor assigns his rights to
property. a 3rd person)? If the debtor has been notified
thereof, and nevertheless he pays to the original
So as a general rule, it CANNOT cover after-acquired creditor, the obligation is NOT extinguished. So
properties, unless the nature of the property mortgaged pwede pa syang habulin nung assignee. He
allows it. What do you mean by that? If the coverage of a cannot raise the defense that he has paid to the
chattel mortgage is the inventory in a store, so whether original creditor. Why? Because he has been
you sell rice or appliances, etc. Usually what would you notified of the assignment.
do? You will incur an obligation, you borrow money,
execute a chattel mortgage and the property mortgaged But if there was an assignment and the debtor
are your inventory, stocks, goods to be sold. Now at the had NO knowledge thereof, and then he pays to
time you executed that mortgage, you have these TV sets the original creditor, then his obligation is
with serial numbers in your store. At the time the extinguished. The assignee in that instance
obligation becomes due and demandable, nabenta na cannot anymore go after the principal debtor. His
yung mga lumang appliances, yung mga inventory mo, remedy is to go after the creditor-assignor. Bakit
pero meron pa namang ibang naiwan. In that instance, niya tinanggap yung payment, considering that
the mortgage can still be valid. It can be executed against his right as a creditor has already been assigned.
the properties in store considered as inventory.
2) Actual knowledge by the debtor of the
So if we’re talking of goods, in which in the ordinary assignment.
course of business it can be replenished (like sari-sari Here, mere registration is NOT sufficient notice.
store, appliance store, etc.), these can still be covered by Even if the assignment is registered, the debtor
a chattel mortgage even if they are considered as after- must have actual knowledge of the assignment
acquired properties. Even if some of the properties were for him to be bound by it. The debtor cannot be
not present at the time of the execution of the mortgage. prejudiced by the assignment by the mere fact
that it has been registered, if he had no actual
knowledge thereof. If the debtor did not know that What happens if the debtor refuses to deliver the
the creditor had assigned the mortgage to a 3rd property? Again, follow proper action in court. If there is a
person, payment made by him to the creditor judicial foreclosure, the highest bidder in the foreclosure
would result to the extinguishment of the sale can ask for the possession of the subject property.
obligation.
Can there be an automatic appropriation of the property
Who may redeem? mortgaged? Again, NO. Pactum commissorium is
1) Mortgagor or person holding a subsequent prohibited as well in a chattel mortgage.
mortgage
2) Subsequent attaching creditor With regard to possession, if the debtor refuses to turn
Who is this subsequent attaching creditor? over the property, the creditor can file the proper
A creditor who redeems the property from the original proceeding in court to acquire the possession. But what if
creditor, to which he will be subrogated to the rights of the the person in possession of the property is not the debtor,
mortgagee, and entitled to foreclose the mortgage in the but a 3rd person? So the creditor-mortgagee must
same manner that the mortgagee could foreclose. impede other persons in possession of the property, or
those who are claiming ownership over the same. So the
REDEMPTION is made by paying or delivering to the action here for possession will not only be against the
mortgagee the amount due on such mortgage, and the debtor, but also against those in possession or those
costs and expenses incurred by such breach of condition claiming ownership.
before the sale.
FORECLOSURE
Can you subject the property mortgaged to a subsequent The mortgagee must discharge the mortgage in the
or 2nd mortgage? YES, there can be a 2nd mortgage. It is manner provided by law, otherwise he may be held liable
allowed. for damages by any person entitled to the mortgage. As
in REM, what we have here is also a public sale, and the
What is the right of the 2nd mortgagee? He cannot creditor-mortgagee has no right to appropriate for himself
foreclose the mortgage as long as there is still the 1 st the personal property. Actually, the manner here is almost
mortgage not yet extinguished. What he can do is to the same as that in a REM, under Act 3135 (?).
redeem the property from the 1st mortgagee, and in effect
pay the obligation of the debtor, so that the 1 st mortgage What happened in the case of:
will be extinguished. The 2nd mortgagee now becomes PAMECA WOOD vs. CA and DBP
entitled to the mortgage. (310 SCRA 281, G.R. No. 106435, July 14, 1999)
RIGHT OF MORTGAGEE TO POSSESSION FACTS:

We already know that the mortgagee is NOT entitled to On April 17, 1980, petitioner PAMECA obtained 2M worth
possession if what is involved is a chattel mortgage. But loan from respondent Bank. By virtue of this loan,
what if there is already default, when the debtor failed to petitioner PAMECA, through its President, petitioner
pay his obligation? Can the creditor-mortgagee be entitled Teves, executed a promissory note for the said amount,
to possession of the property? promising to pay the loan by installment. As security for
the said loan, a chattel mortgage was also executed over
If the creditor desires to foreclose the property, his right to PAMECA's properties in Dumaguete City, consisting of
take possession of such is IMPLIED from the provision inventories, furniture and equipment, to cover the whole
which gives him the right to sell the property (in a value of the loan.
foreclosure proceeding). But before default, the
mortgagee is not entitled to the possession of the On January 18, 1984, and upon petitioner PAMECA's
property, otherwise you would have a Contract of Pledge, failure to pay, respondent bank extrajudicially foreclosed
not a Chattel Mortgage anymore. the chattel mortgage, and, as sole bidder in the public
auction, purchased the foreclosed properties.
What if the mortgagor refuses to surrender possession,
and he’s already in default? Then you file an Action for On June 29, 1984, respondent bank filed a complaint for
Judicial Foreclosure or an action to secure possession. the collection of the balance against petitioner PAMECA
But the creditor cannot take the law into his own hands. and private petitioners herein, as solidary debtors with
So he must go to the procedure. PAMECA under the promissory note.
Petitioners now claim that respondent appellate court inferred from the lone circumstance that it was only
gravely erred in not holding that the public auction sale of respondent bank that bid in the sale of the foreclosed
petitioner PAMECA's chattels were tainted with fraud, properties.
as the chattels of the said petitioner were bought by
private respondent as sole bidder in only 1/6 of the market NOTE: The mere fact that the mortgagee was the sole
value of the property, hence unconscionable and bidder for the mortgaged property in the public sale does
inequitable (P322,350.00 from 2M), and therefore null and not warrant the conclusion that the transaction was
void. attended with fraud.
Petitioners contend that the amount of P322,350.00 at Here, there was a contention in relation to deficiency.
which respondent bank bid for and purchased the
mortgaged properties was unconscionable and So what’s the rule? Since the Chattel Mortgage Law bars
inequitable considering that, at the time of the public sale, the creditor-mortgagee from retaining the excess of the
the mortgaged properties had a total value of more than sale proceeds, there is a corollary obligation on the part
P2,000,000.00. of the debtor-mortgagor to pay the deficiency in case of a
reduction of the price in the public auction.
According to petitioners, this is evident from an inventory
which valued the properties at P2,518,621.00, in This must be distinguished from Pledge. In Pledge, the
accordance with the terms of the chattel mortgage deficiency cannot be collected anymore.
contract between the parties that required that the
inventories "be maintained at a level no less than P2 It must also be distinguished from the Recto Law, Art.
million". 1484 of the Civil Code applicable to sale of personal
property in installments, wherein if the mortgagee
Petitioners argue that respondent bank's act of bidding chooses the remedy of foreclosure, he cannot anymore
and purchasing the mortgaged properties for seek for the deficiency.
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, In this case, it was not a sale of personal property in
unconscionable and inequitable, and constitutes sufficient installment.
ground for the annulment of the auction sale.
Also, with regard to the discrepancy in the price, they
ISSUE: were not able to prove the Fair Market Value at the time
WON the auction sale is null and void on grounds of fraud of the sale. They were not able to prove that there was
and inadequacy of price. – NO fraud during the sale. Furthermore, the mere fact that the
bank was the sole bidder for the mortgaged properties
HELD: does not warrant the conclusion that the transaction was
There is no merit in petitioners' submission that the public attended with fraud. Fraud is a serious allegation that
auction sale is void on grounds of fraud and inadequacy requires full and convincing evidence.
of price.
Now Section 14 – period to foreclose property.
Having nonetheless examined the inventory and chattel
mortgage document as part of the records, We are not Sec. 14.
convinced that they effectively prove that the mortgaged Sale of property at public auction; Officer's return;
properties had a market value of at least P2,000,000.00 Fees; Disposition of proceeds. — The mortgagee, his
on January 18, 1984, the date of the foreclosure sale. executor, administrator, or assign, may, after thirty
days from the time of condition broken, cause the
At best, the chattel mortgage contract only indicates the mortgaged property, or any part thereof, to be sold at
obligation of the mortgagor to maintain the inventory at a public auction by a public officer at a public place in
value of at least P2,000,000.00, but does not evidence the municipality where the mortgagor resides, or
compliance therewith. where the property is situated, provided at least ten
days' notice of the time, place, and purpose of such
Furthermore, the mere fact that respondent bank was the sale has been posted at two or more public places in
sole bidder for the mortgaged properties in the public sale such municipality, and the mortgagee, his executor,
does not warrant the conclusion that the transaction was administrator, or assign, shall notify the mortgagor or
attended with fraud. Fraud is a serious allegation that person holding under him and the persons holding
requires full and convincing evidence, and may not be subsequent mortgages of the time and place of sale,
either by notice in writing directed to him or left at his (1) This thirty-day period is the minimum period after
abode, if within the municipality, or sent by mail if he violation of the mortgage condition for the mortgage
does not reside in such municipality, at least ten days creditor to cause the sale at public auction of the
previous to the sale. mortgaged chattels, with at least ten days’ notice to
xxx the mortgagor and posting of public notice of the time,
place and purpose of such sale, and is a period of
We have here the case of: grace for the mortgagor, who has no right of
CABRAL vs. EVANGELISTA redemption after the sale is held, to discharge the
mortgage obligation. 5
FACTS:
On 12 Dec 1959, George had executed in favor of Cabral The prescription period for recovery of movables for
Spouses a chattel mortgage covering a Morrison English foreclosure purposes such as in the present case is eight
piano and a Frigidaire GM Electric Stove as security for years as provided in Article 1140 of the Civil Code, and
payment to the latter of a promissory note in the sum of here plaintiffs had timely filed their action within 8 months
P1k executed on the same date in the Chattel Mortgage from the mortgage debtor's default.
Register of Rizal on 14 Dec 1959. Meanwhile, the
Evangelista spouses obtained a final money judgment By the same token, neither could laches properly be
against Tunaya in a Civil Case. They caused the levy in imputed against plaintiffs, who filed their action promptly
execution on Tunaya’s personal properties, including the after they had been advised by Tunaya of the public
piano and the stove mortgaged to Cabral spouses. auction sale on June 24, 1960 of the chattels, at the
instance of Evangelista as his judgment creditor.
The said mortgage chattels, together with other personal
properties of the judgment debtor, were sold at public (2) Evangelista spouses’ purchase of the mortgaged
auction to Evangelista spouses as the highest bidders. chattels at the public sheriff's sale and the delivery of
The judgment credit of Evangelista spouses, as creditors the chattels to them with a certificate of sale did not
in the said Civil Case, was considered paid up and the give them a superior right to the chattels as against
Sheriff issued the corresponding certificate of sale in their the Cabral spouses.
favor.
It has long been settled by this Court that "The right of
Subsequently, 8 months after the maturity of Tunaya’s those who so acquire said properties should not and
promissory note and his having defaulted in the payment cannot be superior to that of the creditor who has in his
thereof, Cabral spouses filed their complaint against favor an instrument of mortgage executed with the
Tunaya and the Evangelista spouses, alleging that the formalities of the law, in good faith, and without the least
Evangelista spouses had refused their demands to pay indication of fraud.
the amount due to Tunaya’s promissory note or to
exercises their right of redemption. In another case between two mortgagees, we held that
"As between the first and second mortgagees, therefore,
Evangelista spouses now claim that their right over the the second mortgagee has at most only he right to
mortgaged chattels as purchasers at the public sale in redeem, and even when the second mortgagee goes
execution of their judgment against their debtor, Tunaya, through the formality of an extrajudicial foreclosure, the
should not be held subordinate to the mortgage lien of purchaser acquires no more than the right of redemption
Cabral spouses as mortgagees, by virtue of prescription from the first mortgagee." 9
and laches on the part of said mortgagees as well as of
their having purchased the chattels at a public sheriffs The superiority of the mortgagee's lien over that of a
sale. subsequent judgment creditor is now expressly provided
in Rule 39, section 16 of the Revised Rules of Court,
ISSUES: which states with regard to the effect of levy on execution
(1) Has the right of the Cabral spouses to recover the as to third persons that "The levy on execution shall
properties prescribed? NO. create a lien in favor of the judgment creditor over the
(2) Did the certificate of sale give the Evangelista right, title and interest of the judgment debtor in such
spouses superior right against the Cabral spouses? property at the time of the levy, subject to liens or
NO. encumbrances then existing."
HELD: Take note of this Section 14. The 30-day period indicated
therein and the 10-day notice required.
foreclose the property, he can file for an ordinary action

This 30-day period is NOT the prescriptive period, but for Collection of the obligation, in which he has deemed
rather the minimum period. Within 30 days after the time to have abandoned the mortgage. But as we have
the “condition is broken,” that’s the time when the discussed, these remedies of filing an Action for
mortgagee can institute the foreclosure sale. That is after Collection of Sum of Money and Foreclosure Proceeding
the violation of the condition, for the mortgage creditor to are ALTERNATIVE remedies, not cumulative.
cause the sale in a public auction.
If he files an action for collection and he has a favorable
Also, at least 10 days notice. So 10 days before the sale, judgment, if he wants he can tell the sheriff that the debtor
dapat ma-notify is mortgagor. Plus the requirement of has this property and the property may be sold, NOT
posting of the notice of the time, place and purpose of under a foreclosure sale proceeding but an execution
such sale. The 10-day period is actually a grace period sale. However, the properties of the debtre which are
for the mortgagor, who has no right of redemption after exempt from execution cannot be sold at a public auction.
the sale is held. But those which are not exempt can be sold and the
proceeds applied as payment of the obligation. In Rule 39
The prescriptive period, in this instance, is 8 years as of your Civil Procedure, andun nakalagay kung ano ang
provided in Art. 1140 of the Civil Code. Under the facts of mga exempted from execution.
this case, the action was filed within 8 months, so the
action has not yet prescribed. We also have the case of:
NORTHERN MOTORS vs. COQUIA
The spouses Evangelista’s purchase of the mortgaged
chattels at the public sheriff’s sale, and the delivery of the FACTS:
chattels to them with the certificate of sale, DID NOT give Manila Yellow Taxicab, executed a chattel mortgage over
them a superior right to the said chattels as against the several taxicabs in favor of Northern Motors. TROPICAL
spouses Cabral (mortgagees). Why? Because yung is a judgment creditor of Yellow Taxicab which assigned
Sheriff’s sale, EXECUTION SALE man yun, it was after the credit to ONG.
the obligation was incurred and the mortgage was
annotated in the title. MYT failed to pay its loan so On December 12 1974,
Sheriff then levied upon 20 taxicabs in favor of Tropical, 8
The sale conveys to the purchaser all the rights which the of which are security for the chattel mortgage. Northern
debtor has to the property. The rights of those who so Motors filed an intervention on December 18, 1974;
acquires the properties should not and cannot be superior however, the levied taxicabs were sold the same day at
to that of the creditor, who has in his favor an instrument 2pm although agreement shows that it should have
of mortgage executed with the formalities of law, in good happened at 4pm. Indemnity bond was posted by
faith, and without the least indication of fraud. TROPICAL, but the bond was cancelled after the sale
without notice to Northern Motors.
How about with regard to redemption of the chattel
mortgage? In REM, we have emphasized that as a A second levy was made upon 35 taxicabs, 7 of which
general rule, in extrajudicial foreclosure there is right of are mortgaged to Northern Motors. The taxies were levied
redemption; exception – juridical persons. If Judicial and sold at an auction sale. The auction sale proceeded
foreclosure, there is also right of redemption; exception – and the purchasers were of unknown addresses, hence
the mortgagee is a bank. the 8 taxicabs cannot be recovered. The proceeds of the
auction were contested by Northern Motors. Moreover,
How about in chattel mortgage? No right of redemption. the sheriff deducted the expenses of the execution sale
After the sale, the mortgagor has no more right to redeem. from the proceeds.
This is the basis why notice is required to be given to the
mortgagor, because after the property has been sold, Honesto Ong and City Sheriff of Manila filed a motion for
wala ng right of redemption. Well, the mortgagee can the reconsideration contending that the lien of Northern
voluntarily sell it back to the debtor-mortgagor, but he Motors, as chattel mortgagee, over certain taxicabs is not
cannot be compelled under the law. Essentially, the superior to the levy made on the said cabs by Honesto
debtor has 10 days from the notice of the order of Ong, the assignee of the unsecured judgment creditor of
foreclosure, to discharge of his obligation. MYT.
Aside from foreclosure, what are the other remedies On the other hand, Northern Motors prayed that the sheriff
available to the chattel mortgagee? If he does not want to should be required to deliver to it the proceeds of the
execution sale of the mortgaged taxicabs without or equity of redemption. The sale did not extinguish the
deducting the expenses of execution. pre-existing mortgage lien.
ISSUES: We already held that the execution was not justified

1. WON the expenses for the execution sale should be and that Northern Motors, as mortgagee, was entitled
deducted from the proceeds thereof. NO to the possession of the eight taxicabs. Those cabs
2. WON the purchaser has a better right than the should not have been levied upon and sold at public
creditor/mortgagee. NO auction to satisfy the judgment credit which was
inferior to the chattel mortgage. Since the cabs could
HELD: no longer be recovered because they had been
Those cabs cannot be sold at an execution sale because transferred to persons whose addresses are
the levy thereon was wrongful. unknown, the proceeds of the execution sale may be
regarded as a partial substitute for the unrecoverable
Ong had no right to levy upon the mortgaged taxicabs and cabs. Northern Motors is entitled to the entire
that he could have levied only upon the mortgagor's equity proceeds without deduction of the expenses of
of redemption. The essence of the chattel mortgage is execution.
that the mortgaged chattels should answer for the
mortgage credit and not for the judgment credit of the POLICY: The mortgagee has a better right over the thing
mortgagor's unsecured creditor. The mortgagee is not mortgaged than the judgment creditors of the mortgagor.
obligated to file an "independent action" for the It is improper to deduct the expenses of an illegal auction
enforcement of his credit. To require him to do so would from the proceeds of thereof. Proceeds of the must be
be a nullification of his lien and would defeat the purpose delivered to the mortgagee in full.
of the chattel mortgage which is to give him preference
over the mortgaged chattels for the satisfaction of his The essence of a Chattel mortgage is for it to answer for
credit. (See art. 2087, Civil Code). the mortgage credit, NOT for the judgment credit of the
mortgagor’s unsecured creditor.
Ong's theory that Manila Yellow Taxicab's breach of the
chattel mortgage should not affect him because he is not The mortgagee is not obligated to file independent action
privy of such contract is untenable. The registration of the for the enforcement of his credit, otherwise it would now
chattel mortgage is an effective and binding notice to him defeat the purpose of a chattel mortgage. Because if there
of its existence or a lien which, being recorded, follows the is a chattel mortgage, you can choose, as a mortgagee,
chattel wherever it goes. not to file for a collection of sum of money, but rather
proceed for the foreclosure of the mortgage.
His contention that Northern Motors was negligent
because it did not sue the sheriff within the 120-day period Ong’s theory that Manila Taxicab’s breach should not
provided for in section 17, Rule 39 of the Rules of Court affect him because he is not privy to such contract, is not
is not correct. Such action was filed on April 14, 1975. tenable. Take note, the registration here is an effective
However, instead of Honesto Ong, his assignor Tropical and binding notice to him of its existence, or to any 3rd
Commercial Corporation, was impleaded as a defendant person for that matter. As the mortgage creates a REAL
therein. That might explain his unawareness of the RIGHT, it follows the chattel wherever it goes.
pendency of such action.
The mortgagee’s right to the mortgaged property is
Ong admits "that the mortgagee's right to the mortgaged UPERIOR to that of the judgment creditor. In fact, in this
property is superior to that of the judgment creditor". But case, Northern Motors filed a 3rd-party claim, and that
he contends that the rights of the purchasers of the cars should have alerted the purchasers of the risks which they
at the execution sale should be respected. He reasons out were taking when they took part in the auction sale.
they were not parties to the mortgage and that they
acquired the cars prior to the mortgagee's assertion of its At an Execution Sale, the buyers acquire only the right of
rights thereto. a judgment debtor, which in this case is a mere right or
equity of redemption. It did not extinguish the pre-
The third-party claim filed by Northern Motors, Inc. should existing mortgage lien, which was duly registered.
have alerted the purchasers to the risk which they were
taking when they took part in the auction sale. Moreover, However, since the 8 taxi cabs could not be located
at an execution sale the buyers acquire only the right of anymore, even though they should not have been levied
the judgment debtor which in this case was a mere right upon and sold to satisfy the judgment credit, Northern
Motors would now be entitled to the proceeds of the Preference of credit on the other hand, is the right held by
execution sale in lieu of the taxis which could not be a creditor to be preferred, to be given priority, in the
recovered anymore. payment of his claim above others out of the debtor’s
assets.
DEFICIENCY and EXCESSS
We have discussed that under the Chattel Mortgage Law, Now take note that for the rule on concurrence and
the mortgagee is entitled to the deficiency; and with preference of credit to apply, the assets of the debtor must
regard to the excess, the debtor-mortgagor is entitled be insufficient to pay his debts in full. So if his assets are
thereto. sufficient, so there is no need to apply these rules on
concurrence and preference of credit.
Exceptions:
1) Pledge (Art. 2115) Now what is the nature and effect of this preference of
2) If it is covered under Art. 1484, and he avails of credit?
the foreclosure remedy
1. Do remember that preference is an exception to
How do you apply the proceeds of the foreclosure sale? the general rule. Therefore, any preference will
Order of application: be strictly construed;
1) Costs and expenses of keeping and sale 2. Preference does not create an interest in the
2) Payment of the obligation secured by the property. It is not a lien, not an encumbrance in
mortgage the property. It is simply a right of the creditor to
3) Claims of persons holding subsequent
be paid first. No lien or encumbrance, but
mortgages in their order
preference in the application of the payment of
4) Any balance shall pertain to the mortgagor or
person holding under him the debt of the principal debtor;
3. The law does not give the creditor who has a
preference, a right to take the property. He also
That’s also under Section 14 of the Chattel Mortgage Law. does not have a right to sell it as against another
Just go over the remaining provisions of that law, yung iba creditor. Again, when we talk about preference of
are procedural naman. credit, it is one of application of the proceeds of
the sale of the subject property t which the
Sec. 14. preferred credit can avail of;
xxx 4. The right of preference must be asserted and
The proceeds of such sale shall be applied to the maintained. Otherwise it is lost;
payment, first, of the costs and expenses of keeping 5. And the preferential right of credit attains
and sale, and then to the payment of the demand or significance only after the properties of the debtor
obligation secured by such mortgage, and the have been inventoried and liquidated, and the
residue shall be paid to persons holding subsequent
claims held by these various creditors have been
mortgages in their order, and the balance, after
paying the mortgages, shall be paid to the mortgagor established.
or person holding under him on demand. x x x Do not confuse preference from lien. A preference applies
only to claims which do not attach to specific properties.
March 7, 2016 (Calatrava) When we talk about a lien, it creates a charge on a
particular property. Now, to apply this rule on concurrence
So second to the last topic is concurrence and preference and preference of credits, again, the assets or properties
of credits. of the debtor must not be sufficient to pay his obligation.
And of course, the credits or the obligations of the debtor
PART XII: CONCURRENCE AND PREFERENCE OF must be due and demandable.
CREDITS
So we have here Art. 2236:
What do we mean by concurrence and how is it different
from preference of credit? When we say concurrence of Art. 2236. The debtor is liable with all his property,
credit, this implies the possession by two or more present and future, for the fulfillment of his
creditors of equal rights or privilege over the same obligations, subject to the exemptions provided by
property or all of the property of a debtor. law. (1911a)
Do recall Article 1177: (a) The judgment obligor's family home as provided
by law, or the homestead in which he resides, and
Art. 1177. The creditors, after having pursued the land necessarily used in connection therewith;
property in possession of the debtor to satisfy their
claims, may exercise all the rights and bring all the (b) Ordinary tools and implements personally used by
actions of the latter for the same purpose, save those him in his trade, employment, or livelihood;
which are inherent in his person; they may also
(c) Three horses, or three cows, or three carabaos, or
impugn the acts which the debtor may have done to
other beasts of burden such as the judgment obligor
defraud them. (1111)
may select necessarily used by him in his ordinary
So what does it mean? Creditor can go after the debtor occupation;
against his properties for payment of his obligation. Now (d) His necessary clothing and articles for ordinary
with this, take note of the following principles: personal use, excluding jewelry;
1. The assets of the debtor can be used to satisfy his (e) Household furniture and utensils necessary for
obligation to his creditors; housekeeping, and used for that purpose by the
2. However, there are certain properties which are judgment obligor and his family, such as the
exempted from satisfying the liabilities of the debtor; judgment obligor may select, of a value not exceeding
3. And even if these properties are deemed exempted, one hundred thousand pesos;
these assets shall not exempt from execution issued
upon a judgment, recovered for its price, or upon (f) Provisions for individual or family use sufficient for
judgment on the foreclosure of the mortgage four months;
thereon.
(g) The professional libraries and equipment of
So what are these properties that should not be included judges, lawyers, physicians, pharmacists, dentists,
for the payment of the obligation of the debtor to the engineers, surveyors, clergymen, teachers, and other
creditor? professionals, not exceeding three hundred
thousand pesos in value;
1. Under the Family Code, you have the Family
Home, Arts. 152-155. A family home is generally (h) One fishing boat and accessories not exceeding
exempted from execution, unless the family home the total value of one hundred thousand pesos owned
will be sold for nonpayment of taxes; for debts by a fisherman and by the lawful use of which he
incurred prior to the institution of the family home; earns his livelihood;
for debts secured by mortgages on the premises
before or after the constitution of the family home; (i) So much of the salaries, wages, or earnings of the
and for debts due to laborers, mechanics, judgment obligor of his personal services within the
architects, builders, materialmen and others who four months preceding the levy as are necessary for
have rendered service or furnished material for the support of his family;
the construction of the building. (j) Lettered gravestones;
2. Also exempted under the Family Code, we also
have Support under Art. 205: right to receive (k) Monies, benefits, privileges, or annuities accruing
support as well as any money or property or in any manner growing out of any life insurance;
obtained, as such support shall not be levied
upon attachment or execution. (l) The right to receive legal support, or money or
3. And then we have that long list under the Rules property obtained as such support, or any pension or
of Court. Rule 39, Section 13 enumerates the gratuity from the Government;
exempted properties: (m) Properties specially exempt by law.
Sec. 13. Property exempt from execution. But no article or species of property mentioned in this
section shall be exempt from execution issued upon
Except as otherwise expressly provided by law, the
a judgment recovered for its price or upon a judgment
following property, and no other, shall be exempt
of foreclosure of a mortgage thereon.
from execution:
So even if for example it is a family home, if you executed Article 2239:

a REM wherein the family home is the property that is
mortgaged, if you fail to pay your obligation, it will still be Art. 2239. If there is property, other than that
foreclosed. mentioned in the preceding article, owned by two or
more persons, one of whom is the insolvent debtor,
4. Property in custodia legis and public dominion his undivided share or interest therein shall be among
exempt from attachment or execution. the assets to be taken possession of by the assignee
for the payment of the insolvent debtor's obligations.
The provisions on concurrence and preference of credits
(n)
will only apply again to the liabilities of the debtor more
than his assets. Do not apply this rule on concurrence and So you have a co-ownership and one of the co-owners is
preference of credits if assets are sufficient to pay deemed insolvent. In that instance, only the undivided
liabilities. share or interest of the insolvent co-debtor shall be
possessed by the assignee in insolvency proceedings.
Essentially, when you go to FRIA, what you have there is
Now, Article 2237: merely an enumeration of the procedure or the steps in
relation to the action of a debtor or creditors for
Art. 2237. Insolvency shall be governed by special rehabilitation, suspension of payments or elimination (?).
laws insofar as they are not inconsistent with this But with regard to sino yung unang bayaran, ano yung
Code. (n) unag bayaran pag itong property ang nabenta, that is the
time we apply the rule on concurrence and preference of
Right now we have the FRIA, Financial Rehabilitation and
credits.
Insolvency Act which covers both natural and juridical
persons. This is Republic Act 10142. Article 2240:
Article 2238: Art. 2240. Property held by the insolvent debtor as a
trustee of an express or implied trust, shall be
Art. 2238. So long as the conjugal partnership or
excluded from the insolvency proceedings. (n)
absolute community subsists, its property shall not
be among the assets to be taken possession of by the You will have Trust (BIG WORD!) in Bus. Org. 1. So a
assignee for the payment of the insolvent debtor's trustee is strictly speaking not the owner of the trust
obligations, except insofar as the latter have although he has a legal title. Who really owns it? The
redounded to the benefit of the family. If it is the beneficial owner thereof, the beneficiary of the trust
husband who is insolvent, the administration of the agreement. So therefore, if the trustee is insolvent, the
conjugal partnership of absolute community may, by property held in trust by him, should not be included in his
order of the court, be transferred to the wife or to a insolvency proceedings. Kasi hindi yun sa kaniya. Doon
third person other than the assignee. (n) sa beneficiary.
So this is what I mentioned earlier. Assets of conjugal Now, let us go over the specific provisions regarding
partnership or absolute community do not pass to the classification of credit. There are three categories of credit
assignee in insolvency elected by creditors or appointed here:
by the court as these properties do not belong to the
individual spouses. Exception applies provided the 1. Specially preferred credits- movables under 2241
partnership or community subsists, so this exemption in and immovable under 2242
other words will not be subject to execution or sold to pay 2. Ordinary preferred credits- under 2244; and
the obligation of the debtor. Again, this exception will 3. Common credits- under 2245.
apply as long as the absolute community or conjugal What do we mean here by specially preferred credits? It’s
partnership of gains subsists and the obligations did not a situation wherein a particular property, a house or a car,
redound to the benefit of the family. Do remember, which is either movable or immovable and subject to
insolvency of the husband do not have the effect of certain obligations. The special preferred credits or
dissolving the conjugal partnership and absolute obligations have to be satisfied first from the proceeds of
community regime of the spouses. the sale of said property.
Now, Article 2241 refers to movable properties, but 2242 (8) Credits between the landlord and the tenant,
refers to immovable properties. arising from the contract of tenancy on shares, on the
share of each in the fruits or harvest;
Like for example, you own a vehicle. The price of the
vehicle may not have been fully paid yet. The vehicle may (9) Credits for transportation, upon the goods carried,
have been imported so merong duties and taxes due. If for the price of the contract and incidental expenses,
you use that vehicle to be subject with a chattel mortgage, until their delivery and for thirty days thereafter;
another obligation in relation to that movable property.
Other credits like unpaid repair expenses therein. So what (10) Credits for lodging and supplies usually
is the effect with that special preferred credit in relation to furnished to travellers by hotel keepers, on the
that scenario? One specific property, but you have movables belonging to the guest as long as such
different obligations in relation thereto. Such as the movables are in the hotel, but not for money loaned
unpaid price, unpaid taxes and duties, chattel mortgage to the guests;
and unpaid repair expenses. 2241 will serve as your (11) Credits for seeds and expenses for cultivation
guide. and harvest advanced to the debtor, upon the fruits
harvested;
Art. 2241. With reference to specific movable property
of the debtor, the following claims or liens shall be (12) Credits for rent for one year, upon the personal
preferred: property of the lessee existing on the immovable
leased and on the fruits of the same, but not on
(1) Duties, taxes and fees due thereon to the State or
money or instruments of credit;
any subdivision thereof;
(13) Claims in favor of the depositor if the depositary
(2) Claims arising from misappropriation, breach of
has wrongfully sold the thing deposited, upon the
trust, or malfeasance by public officials committed in
price of the sale.
the performance of their duties, on the movables,
money or securities obtained by them; In the foregoing cases, if the movables to which the
lien or preference attaches have been wrongfully
(3) Claims for the unpaid price of movables sold, on
taken, the creditor may demand them from any
said movables, so long as they are in the possession
possessor, within thirty days from the unlawful
of the debtor, up to the value of the same; and if the
seizure. (1922a)
movable has been resold by the debtor and the price
is still unpaid, the lien may be enforced on the price; 1. Duties, taxes and fees due thereon to the State
this right is not lost by the immobilization of the thing or any subdivision thereof. Mauna talaga ito siya.
by destination, provided it has not lost its form,
substance and identity; neither is the right lost by the Take a look at 2243:
sale of the thing together with other property for a
lump sum, when the price thereof can be determined Art. 2243. The claims or credits enumerated in the two
proportionally; preceding articles shall be considered as mortgages
or pledges of real or personal property, or liens within
(4) Credits guaranteed with a pledge so long as the the purview of legal provisions governing insolvency.
things pledged are in the hands of the creditor, or Taxes mentioned in No. 1, Article 2241, and No. 1,
those guaranteed by a chattel mortgage, upon the Article 2242, shall first be satisfied. (n)
things pledged or mortgaged, up to the value thereof;
With regard to that part, if the property will be sold, then
(5) Credits for the making, repair, safekeeping or the proceeds will first be applied to the duties, taxes and
preservation of personal property, on the movable fees on the movable. So essentially ano ito? Obligation to
thus made, repaired, kept or possessed; the government. That is the reason why it is preferred.
(6) Claims for laborers' wages, on the goods Now how about these other obligations in relation to that
manufactured or the work done; vehicle or movable? Those are also enumerated in 2241.
*Last sentence of 2241* however this is not applicable
(7) For expenses of salvage, upon the goods
when the debtor has parted with its ownership over the
salvaged;
movable subject as when he has already sold it.
What is the effect of this preference of credit? So let us Cordova bought from Philfinance certificates of stock of
say you have a: Celebrity Sports Plaza Inc (CSPI) and shares of stock of
other corporations. He was issued a confirmation of sale.
Motor vehicle- P2,000,000 CSPI shares were delivered to former Filmanbank and
Philtrust Banks (as custodian banks to hold the shares in
Then you have the following obligations in relation to that behalf of Cordova).
vehicle:
In 1981, Philfinance was placed under receivership by
Taxes- P500,000
SEC. Thereafter, private respondents Reyes and Atty
Unpaid price- P500,000 Wendell Coronel were appointed as liquidators. In 1991,
without the knowledge and consent of Cordova and
Chattel mortgage (pwede ba ito ma-mortgage? Pwede. without authority from SEC, private respondents withdrew
Kasi diba ownership is different from failure to pay the the CSPI shares from the custodian banks. They
price. As long as there is delivery, you could already be subsequently sold the shares to Northeast Corporation
the owner.)- P500,000 and included the proceeds thereof in the funds of
Philfinance. Cordova learned about the sale only in 1996.
Repair expenses- P500,000 He filed a complaint against private respondents in the
receivership proceedings with the SEC for the return of
So let us also say, unpaid obligation for safekeeping (that the shares.
is also among the enumerated)- P500,000
In 1998, SEC dismissed the petition, but granted it upon
Total obligation- P2.5M reconsideration. It held that Cordova was the owner of the
CSPI shares by virtue of a confirmation sale (which was
So here, the motor vehicle is not sufficient to pay off his
considered as a deed of assignment) issued to him by
obligations. So how do we apply here the rule on
Philfinance. But since the shares had already been sold
preference of credits? and proceeds commingled with other assets of
First, bayaran muna itong taxes. So what does that Philfinance, Cordova’s status was converted into that of
an ordinary creditor for the value of such shares.
mean? You only have the value of the car at P1.5M to pay
the P2Million obligation. Now under 2241, all the rest
Therefore, it ordered private respondents to pay Cordova
aside from the duties and taxes would share pro-rata as the amount of P5,062,500, representing the 15% of
to the share of the remaining proceeds. So this P2M will monetary value of his CSPI shares plus interest at the
be pro-rated among these remaining 4 obligations. So: legal rate from the time of their unauthorized sale.
500,000/2,000,000 x 1,500,000= P375,000
ISSUES:
So ano ibig sabihin nito? Dito sa unpaid price na 500,000, 1. WON petitioner should be considered as preferred
ang 375,000 mabayaran from the value of the vehicle. So (and secured) creditor of Philfinance NO
2. WON petitioner can recover the full value of his CSPI
preferred siya with regard to that. But what happens to the
shares or merely 15% thereof like all other ordinary
remaining value of 125,000? Nandiyan pa rin siya. If creditors of Philfinance only 15%
meron pang ibang properties ang debtor, that 125,000 3. WON petitioner is entitled to legal interest NO
remaining amount would be included among the ordinary
credits pro-rated together with the rest. HELD: To resolve the issues, we have to determine if
petitioner was indeed a creditor of Philfinance. – SC held
Now again take note here, under 2241, it does not give that petitioner had become an ORDINARY creditor of
the order or priority of payment. Except number 1- taxes, Philfinance. Certainly, petitioner had the right to demand
duties, in favor of the State. All the rest, hindi yan in order the return of the shares. He filed a complaint in the
or priority. All the rest is just enumeration of credits which liquidation proceedings. He sought instead to recover
enjoy preference. In other words, they merely concur. their monetary value.
Now let’s take a look to what happened in the case of The CSPI shares were specific or determinate movable
Cordova: properties. But after they were sold, the money raised
from the sale became generic and were commingled with
CORDOVA vs REYES other assets of Philfinance. Unlike shares of stock, money
is generic. This means that once a certain amount is
FACTS: Sometime in 1977 and 1978, petitioner Jose
added to the cash balance, one can no longer pinpoint the since it applies only when there is a delay in the payment
specific amount included which then becomes part of a of a sum of money.
whole mass of money.
Q: In other words, is Art. 2241 applicable to Cordova?
It thus became impossible to identify the exact proceeds Why not?
of the sale of the CSPI shares. Petitioner’s only remedy A: No.
was to file a claim on the whole mass of these assets, to Q: Isn’t what you have here are shares of stocks
which unfortunately all other creditors of Philfinance also considered personal property?
had a claim. A: Yes. However upon the withdrawal and sale of said
shares of stock to Northeastern, it is converted, the
Petitioner’s right of action against Philfinance was a payment was through money. So money in this case is
“claim” properly to be litigated in the liquidation generic. So before, the shares of stock were specially
proceedings. He had a right to the payment of the value preferred credit. But when it was subsequently sold, it
of his shares. His demand was of a pecuniary nature became money and money has the character if being
since he was claiming the monetary value of his shares. generic in nature so it cannot be ascertained as to what
It was in this sense that he was a creditor of Philfinance. part specifically pertains to the share.
Q: What happens now to the credit of Cordova if it is
Petitioner argues that he was a preferred creditor not a specially preferred credit?
because private respondents illegally withdrew his CSPI A: It is now already an ordinary credit so he is now an
shares from the custodian banks and sold them without ordinary creditor for value of said share. He is entitled to
his knowledge and consent and without authority from the 15% of the monetary value of said share plus interest as
SEC. He quotes Article 2241 (2) of the Civil Code: held by the SEC.
With reference to specific movable property of the
debtor, the following claims or liens shall be preferred: CORDOVA vs REYES: So here, the shares of stock were
(2) Claims arising from misappropriation, breach of trust, sold to private respondents and therefore, with regard to
or malfeasance by public officials committed in the Cordova, he is now considered as an ordinary creditor of
performance of their duties, on the movables, money or Philfinance. So in other words, you cannot apply 2241
securities obtained by them;
because there is no more movable property involved.
He asserts that, as a preferred creditor, he was entitled to After they were sold, the money raised from the sale
the entire monetary value of his shares. Petitioner’s became generic and were comingled with the other cash
argument is incorrect. Article 2241 refers only to specific and assets of Philfinance. Article 2241 only refers to
movable property. His claim was for the payment of specific movable property. Cordova’s claim was for the
money, which, as already discussed, is generic property payment of money, which as mentioned is generic, not
and not specific or determinate. Considering that specific, or determinate. With that, since he is not a
petitioner did not fall under any of the provisions specially preferred creditor, he was deemed as an
applicable to preferred creditors, he was deemed an ordinary creditor under 2245 to which he will be paid pro-
ordinary creditor under Article 2245: rata together with the common credits.
Credits of any other kind or class, or by any other right or Now, 2242, again this is also special preferred credits but
title not comprised in the four preceding articles, shall in relation to immovables.
enjoy no preference. This being so, Article 2251 (2) states
that:
Common credits referred to in Article 2245 shall be Art. 2242. With reference to specific immovable
paid pro rata regardless of dates. property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and
Like all the other ordinary creditors or claimants against shall constitute an encumbrance on the immovable or
Philfinance, he was entitled to a rate of recovery of only real right:
15% of his money claim.
Was petitioner entitled to interest? (1) Taxes due upon the land or building;
Petitioner is not entitled to legal interest of 12% per (2) For the unpaid price of real property sold, upon the
annum because the amount owing to him was not a loan immovable sold;
or forbearance of money. Neither was he entitled to legal
interest of 6% per annum under Art 2209 of the Civil Code
(3) Claims of laborers, masons, mechanics and other Essentially what would happen there? Kung wala nang
workmen, as well as of architects, engineers and matira from the assets of debtor, di na mabayaran yung
contractors, engaged in the construction, remaining. So that is the significance of preferred credit.
reconstruction or repair of buildings, canals or other If it is with regard to an immovable, to some extent, you
works, upon said buildings, canals or other works; will receive payment. But if it is not considered as a
special preferred credit, and wala ng ibang properties ang
(4) Claims of furnishers of materials used in the debtor, anong end nito? Di ka mabayaran.
construction, reconstruction, or repair of buildings,
We have here the case of Barretto vs Villanueva.
canals or other works, upon said buildings, canals or
other works; DE BARRETO vs VILLANUEVA
(5) Mortgage credits recorded in the Registry of FACTS: Rosario Cruzado sold all her right, title, and
Property, upon the real estate mortgaged; interest and that of her children in the house and lot herein
involved to Villanueva for P19K. The purchaser paid
(6) Expenses for the preservation or improvement of P1,500 in advance, and executed a promissory note for
real property when the law authorizes the balance. However, the buyer could only pay P5,500
reimbursement, upon the immovable preserved or On account of the note, for which reason the vendor
improved; obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a
(7) Credits annotated in the Registry of Property, in clean certificate of title and mortgaged the property to
virtue of a judicial order, by attachments or appellant Barretto to secure a loan of P30K, said
mortgage having been duly recorded.
executions, upon the property affected, and only as
to later credits; Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her favor,
(8) Claims of co-heirs for warranty in the partition of obtained judgment, and upon its becoming final asked for
an immovable among them, upon the real property execution. Cruzado filed a motion for recognition for her
thus divided; "vendor's lien" invoking Articles 2242, 2243, and 2249 of
the new Civil Code. After hearing, the court below ordered
(9) Claims of donors or real property for pecuniary the "lien" annotated on the back of the title, with the
charges or other conditions imposed upon the donee, proviso that in case of sale under the foreclosure decree
upon the immovable donated; the vendor's lien and the mortgage credit of appellant
Barretto should be paid pro rata from the proceeds.
(10) Credits of insurers, upon the property insured,
for the insurance premium for two years. (1923a) Appellants insist that:
1. The vendor's lien, under Articles 2242 and 2243 of
So similar to 2241, 2242 is merely an enumeration of the the new, Civil Code of the Philippines, can only become
preferred of claims of a specific immovable. It is not an effective in the event of insolvency of the vendee, which
order of preference except number 1- taxes or duties due has not been proved to exist in the instant case; and .
upon the immovable. 2. That the Cruzado is not a true vendor of the
foreclosed property.
So similar to the earlier example, but instead of a car, this
time it is let us say a house and lot or a parcel of land. Article 2242 of the new Civil Code enumerates the
Then you have here taxes, unpaid mortgage, unpaid claims, mortgage and liens that constitute an
price, REM, then you also have claims of laborers, encumbrance on specific immovable property, and
expenses for preservation. So ganun din siya. Unahin among them are: .
yung taxes due to the State and all the rest would share (2) For the unpaid price of real property sold, upon the
pro-rata as to the remaining proceeds of the value of the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
real estate property. So similar ito sa computation kanina,
yung 375,000 would be from the proceeds of the sale of
Article 2249 of the same Code provides that "if there are
the immovable property. The remaining 125,000 would be two or more credits with respect to the same specific real
included among the common credit. property or real rights, they shall be satisfied pro-
rata after the payment of the taxes and assessment upon
the immovable property or real rights. If there are two or more credits with respect to the same
specific real property or real rights, they, shall be
HELD: Application of the above-quoted provisions to the satisfied pro-rata after the payment of the taxes and
case at bar would mean that the herein appellee Rosario assessments upon the immovable property or real rights."
Cruzado as an unpaid vendor of the property in question
has the right to share pro-rata with the appellants the The full application of Articles 2249 and 2242 demands
proceeds of the foreclosure sale. that there must be first some proceedings where the
claims of all the preferred creditors may be bindingly
ISSUE: Appellant’s argument: inasmuch as the unpaid adjudicated, such as:
vendor's lien in this case was not registered, it should not 1. insolvency,
prejudice the said appellants' registered rights over the 2. the settlement of decedents estate under Rule 87 of the
property. Rules of Court, or
3. other liquidation proceedings of similar import.
HELD: There is nothing to this argument. Note must be
taken of the fact that article 2242 of the new Civil Code This explains the rule of Article 2243 of the new Civil
enumerating the preferred claims, mortgages and liens on Code that —
immovables, specifically requires that. Unlike the unpaid The claims or credits enumerated in the two preceding
price of real property sold. mortgage credits, in order to articles" shall be considered as mortgages or pledges of
be given preference, should be recorded in the Registry real or personal property, or liens within the purview of
of Property. If the legislative intent was to impose the legal provisions governing insolvency.
same requirement in the case of the vendor's lien, or the
unpaid price of real property sold, the lawmakers could And the rule is further clarified in the Report of the Code
have easily inserted the same qualification which now Commission, as follows:
modifies the mortgage credits. The law, however, does The question as to whether the Civil Code and the
not make any distinction between registered and insolvency Law can be harmonized is settled by Article
unregistered vendor's lien, which only goes to show that 2243. The preferences named in Articles 2261 and 2262
any lien of that kind enjoys the preferred credit status. (now 2241 and 2242) are to be enforced in accordance
with the Insolvency Law."
As to the point made that the articles of the Civil Code on
concurrence and preference of credits are applicable only RULE:
to the insolvent debtor, suffice it to say that nothing in the Thus, it becomes evident that one preferred creditor's
law shows any such limitation. If we are to interpret this third-party claim to the proceeds of a foreclosure sale (as
portion of the Code as intended only for insolvency cases, in the case now before us) is not the proceeding
then other creditor-debtor relationships where there are contemplated by law for the enforcement of preferences
concurrence of credits would be left without any rules to under Article 2242, unless the claimant were enforcing a
govern them, and it would render purposeless the special credit for taxes that enjoy absolute priority. If none of the
laws on insolvency. claims is for taxes, a dispute between two creditors will
not enable the Court to ascertain the pro-rata dividend
Resolution on Motion to Consider (1962) corresponding to each, because the rights of the other
Appellants, spouses Barretto, have filed a motion creditors likewise" enjoying preference under Article 2242
vigorously urging that our decision be reconsidered and can not be ascertained.
set aside, and a new one entered declaring that their right
as mortgagees remain superior to the unrecorded claim HELD: There being no insolvency or liquidation, the claim
of herein appellee for the balance of the purchase price of of the appellee, as unpaid vendor, did not require the
her rights, title, and interests in the mortgaged property. character and rank of a statutory lien co-equal to the
mortgagee's recorded encumbrance, and must remain
We have reached the conclusion that our original decision subordinate to the latter.
must be reconsidered and set aside:
Q: What was the requirement here that was
Under the system of the Civil Code of the Philippines, only emphasized by the Supreme Court in order to apply
taxes enjoy a similar absolute preference. All the this Article 2242?
remaining thirteen classes of preferred creditors under A: In order to apply 2242, there must be a proceeding
Article 2242 enjoy no priority among themselves, but must wherein a claim of all the creditors of the insolvent debtor
be paid pro-rata i.e., in proportion to the amount of the shall be adjudicated. Such proceeding insolvency
respective credits. Thus, Article 2249 provides:
proceedings, settlement of the estate of the decedent and spouses Filomeno and Socorro Tabligan.
other liquidation proceedings.
Q: What is the other reason mentioned by the The duplex-apartment house was built for the spouses by
Supreme Court that this Art. 2242 cannot be applied private respondent Candido Ramos, a duly licensed
in the absence of any insolvency or liquidation architect and building contractor, at a total cost of
proceedings? P32,927.00. The spouses paid private respondent the
A: Another reason is that Cruzado here, at the time she sum of P7,139.00 only. Hence, the latter used his own
sold the house and lot to Villanueva, was not technically money, P25,788.50 in all, to finish the construction of the
the owner anymore of the house and lot. duplex-apartment.
Q: Remember here, Villanueva was already the
registered owner when she mortgaged the property. Meanwhile, on December 16, 1966, February 1, 1967,
So in this instance, which is preferred, the mortgagee and February 28, 1967, the spouses Tabligan obtained
whose mortgage is duly registered in the title and from petitioner Philippine Savings Bank three (3) loans in
having a valid mortgage or the vendor whose price in the total amount of P35,000.00, the purpose of which was
his favor is not yet paid? to complete the construction of the duplex-apartment. To
A: The SC held, that it is the mortgage that is duly secure payment of the l2oans, the spouses executed in
registered should be favored than the unpaid purchase favor of the petitioner three (3) promissory notes and
price of the prior sale of the house and lot. three (3) deeds of real estate mortgages over the property
subject matter of this litigation.
BARRETTO vs VILLANUEVA: So again there must be
first, some proceeding where the claims of all the On December 19, 1966, the petitioner registered the
preferred creditors may be bindingly adjudicated. Now the December 16, 1966 deed of real estate mortgage with the
conflict between the parties here must be decided Register of Deeds of Manila. The subsequent mortgages
pursuant to the principle concerning registered lands. of February 1, 1967, and February 28, 1967, were
Purchaser in good faith and for value takes registered registered with the Register of Deeds of Manila on
property free from liens and encumbrances other than February 2, 1967 and March 1, 1967, respectively. At the
statutory lien and those recorded under the certificate of time of the registration of these mortgages, Transfer
title. There being no insolvency or litigation, the claim of Certificate of Title No. 86195 was free from all liens and
the appellee, as unpaid vendor, did not require the encumbrances.
character and rank of a statutory lien co-equal to the
The spouses failed to pay their monthly amortizations. As
mortgagee's recorded encumbrance, and must remain a result thereof, the petitioner bank foreclosed the
subordinate to the latter. mortgages, and at the public auction held on July 23,
Now this was the ruling of the Supreme Court, also in 1969, was the highest bidder.
consideration of the confidence with regard to certificates
On August 5, 1969, the petitioner bank registered the
of title. All confidence with the title would be destroyed certificate of sale issued in its favor. On August 9, 1970,
and credit transactions on the faith of such titles would be the bank consolidated its ownership over the property in
hampered, if not prevented, with incalculable results, if question, and Transfer Certificate of Title No. 101864 was
2242 would be applied in this instance. Loans on real issued by the Register of Deeds of Manila in the name of
estate security would become aleatory and risky the petitioner bank.
transactions, for no, prospective lender could accurately
estimate the hidden liens on the property offered as Upon the other hand, the private respondent filed an
security, unless he indulged in complicated, tedious action against the spouses to collect the unpaid cost of
investigations. The logical result might well be a the construction of the duplex-apartment before the Court
contraction of credit unforeseeable proportions that could of First Instance of Manila, Branch I, which case was
lead to economic disaster. docketed therein as Civil Case No. 69228. During its
pendency, the private respondent succeeded in obtaining
We also have this case of Philippine Savings. the issuance of a writ of preliminary attachment, and
pursuant thereto, had the property in question attached.
PHILIPPINE SAVINGS vs LANTIN Consequently, a notice of adverse claim was annotated
at the back of Transfer Certificate of Title No. 86195.
FACTS: Involved in this case is a duplex-apartment
house on a lot covered by TCT No. 86195 situated at San On August 26, 1968, a decision was rendered in Civil
Diego Street, Sampaloc, Manila, and owned by the Case No. 69228 in favor of the private respondent and
against the spouses. A writ of execution was accordingly involved. Consequently, Transfer Certificate of Title No.
issued but was returned unsatisfied. 101864 issued in favor of the bank which is supposed to
be indefeasible would remain constantly unstable and
As the spouses did not have any properties to satisfy the questionable. Such could not have been the intention of
judgment in Civil Case No. 69228, the private respondent Article 2243 of the Civil Code although it considers claims
addressed a letter to the petitioner for the delivery to him and credits under Article 2242 as statutory liens. Neither
(private respondent) of his pro-rata share in the value of does the De Barretto case sanction such instability.
the duplex-apartment in accordance with Article 2242 of
the Civil Code. The petitioner refused to pay the pro-rata Q: Now can we not apply 2242 considering that there
value prompting the private respondent to file the instant were no other known creditors in relation to the
action. A decision was rendered in favor of the private debtors in this case?
Respondent. A: This cannot be conclusive. It will not bar other creditors
in the event they show up and present their claims against
ISSUE: whether or not the private respondent is entitled the petitioner bank, claiming that they also have preferred
to claim a pro-rata share in the value of the property in liens against the property involved.
question.
PHILIPPINE SAVINGS BANK vs LANTIN: So
RULING: NO. The conclusions of the lower court are not concurrence of credits occurs when the same specific
supported by the law and the facts. property of the debtor or all of his property is subjected to
the claims of several creditors. The concurrence of credits
Concurrence of credits occurs when the same specific raises no questions of consequence were the value of the
property of the debtor or all of his property is subjected to property or the value of all assets of the debtor is sufficient
the claims of several creditors. The concurrence of credits to pay in fall all the creditors. It becomes material when
raises no questions of consequence were the value of the said assets are insufficient for then some creditors of
property or the value of all assets of the debtor is sufficient necessity will not be paid or some creditors will not obtain
to pay in fall all the creditors. However, it becomes the full satisfaction of their claims.
material when said assets are insufficient for then some
creditors of necessity will not be paid or some creditors However this rule as to concurrence of credit would not
will not obtain the full satisfaction of their claims. In this be applied because as mentioned in the Barretto case,
situation, the question of preference will then arise, that is there must be first some proceeding, liquidation or
to say who of the creditors will be paid the all of the others. insolvency proceeding where the claims of all preferred
creditors may be bindingly adjudicated. While there was
The proceedings in the court below do not partake of the an action filed here, collection for the unpaid cost of
nature of the insolvency proceedings or settlement of a
construction, this was not the proceeding contemplated to
decedent’s estate. The action filed by Ramos was only to
be able to apply the rule on concurrence and preference
collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the of credit.
estate of the Tabligan spouses. Although the lower court found that "there were no known
creditors other than the plaintiff and the defendant
Insolvency proceedings and settlement of a decedent’s
estate are both proceedings in rem which are binding herein", this cannot be conclusive. It will not bar other
against the whole world. All persons having interest in the creditors in the event they show up and present their
subject matter involved, whether they were notified or not, claims against the petitioner bank, claiming that they also
are equally bound. Consequently, a liquidation of similar have preferred liens against the property involved. The
import or "other equivalent general liquidation’ must also title issued in favor of the bank which is supposed to be
necessarily be a proceeding in rem so that all interested indefeasible would remain constantly unstable and
persons whether known to the parties or not may be questionable if that would be the case. So again here, the
bound by such proceeding. SC upheld the well-established principle, it must be
applied that the purchaser in good faith and for value
In the case at bar, although the lower court found that takes registered land free from liens and encumbrances
"there were no known creditors other than the plaintiff and other than statutory liens and those recorded in the
the defendant herein", this can not be conclusive. It will
certificate of title.
not bar other creditors in the event they show up and
present their claims against the petitioner bank, claiming What we are saying is that, these creditors could not be
that they also have preferred liens against the property considered preferred, 2241 or 2242 could not be applied
to them. In the end saan man yan sila mapunta? Ordinary mortgages or pledges of real or personal property, or
credits. We are not saying that their obligations are liens within the purview of legal provisions governing
extinguished or that they have no other remedies in the insolvency. Taxes mentioned in No. 1, article 2241, and
law. But they could not be considered a preferred creditor No. 1, article 2242, shall first be satisfied.
with regard to that specific movable or immovable
property. This is the basis when we said that the taxes, No. 1, article
2241, and No. 1, article 2242,are preferred than the rest
Now, kung merong insolvency proceeding, ordinary provided therein. 2243 emphasizes that claims and credit
creditor, pro-rata with all the other creditors. In the mentioned in the preceding articles are considered
meantime na walang insolvency proceeding, you have an mortgages of pledges. In other words, these are liens in
action for collection of sum of money. You cannot have a the property involved.
preference with regard to specific property, but you can
J.L. BERNARDO VS CA
institute on the other properties that may be available. So
kung naka-mortgage na yan, most probably hindi na yan
FACTS: Sometime in 1990, the municipal government
pwede i-execute. So hanap ka ng ibang properties not of San Antonio, Nueva Ecija approved the construction
exempted from execution na pwede mong habulin, since of the San Antonio Public Market. The construction of
you already have, as in this case for example, Arch. the market was to be funded by the Economic Support
Ramos has already filed an action for the collection of Fund Secretariat (ESFS), a government agency
unpaid cost. Again, if the judgment in his favor, what he working with the USAID. Under ESFS "grant-loan-
can do is to look for available property of the debtor para equity" financing program, the funding for the market
mabayaran siya. But with regard to specific immovable would be composed of a (a) grant from ESFS, (b) loan
property, he has no preference considering he has extended by ESFS to the Municipality of San Antonio,
already been mortgaged. and (c) equity or counterpart funds from the
Municipality.
But let us say that there is no encumbrance or there is no It is claimed by petitioners Santiago R. Sugay, Edwin
lien? Anong pwede niyang gawin? If you take into A. Sugay, Fernando S.A. Erana and J.L. Bernardo
consideration the Rules of Court, if hindi ______ yung Construction, a single proprietorship owned by Juanito
personal property, then this free property free from L. Bernardo, that they entered into a business venture
encumbrances can be levied and can be sold in an for the purpose of participating in the bidding for the
execution sale and the proceeds will be applied. Yun ang public market. It was agreed by petitioners that
Santiago Sugay would take the lead role and be
mangyari. Hindi natin i-apply ang rules on concurrence
responsible for the preparation and submission of the
and preference of credits in the absence of insolvency
bid documents, financing the entire project, providing
proceedings. and utilizing his own equipment, providing the
Do take note what do we mean here about refectionary necessary labor, supplies and materials and making
the necessary representations and doing the liaison
credit. Refectionary credit is primarily an indebtedness
work with the concerned government agencies.
incurred in the repair or the reconstruction of something
previously made. Again this can be considered as a On April 20, 1990, J.L. Bernardo Construction, thru
special preferred credit in relation to an immovable. As petitioner Santiago Sugay, submitted its bid together
such repair or construction be made necessary by the with other qualified bidders. After evaluating the bids,
deterioration or destruction of the thing as it formerly the municipal pre-qualification bids and awards
existed. It includes new construction. This kind of credit is committee, headed by respondent Jose L. Salonga
among those considered as specially preferred credit. (then incumbent municipal mayor of San Antonio) as
Chairman, awarded the contract to petitioners. On
March 11, 2016 (Jala) June 8, 1990, a Construction Agreement was entered
into by the Municipality of San Antonio thru respondent
Take note of the classifications. Special preferred under Salonga and petitioner J.L. Bernardo Construction.
2241 and 2242. In both of these provisions, 2241 sa
movables and 2242 sa immovables, first priority or the It is claimed by petitioners that under this Construction
duties, taxes in favor of the State. All the rest will concur. Agreement, the Municipality agreed to assume the
expenses for the demolition, clearing and site filling of
Article 2243. The claims or credits enumerated in the the construction site in the amount of P1,150,000 and,
two preceding articles shall be considered as in addition, to provide cash equity of P767,305.99 to be
remitted directly to petitioners. property of the debtor is subjected to the claims of

several creditors and the value of such property of the
Petitioners allege that, although the whole amount of debtor is insufficient to pay in full all the creditors. In
the cash equity became due, the Municipality refused such a situation, the question of preference will arise,
to pay the same, despite repeated demands and that is, there will be a need to determine which of the
notwithstanding that the public market was more than creditors will be paid ahead of the others. Fundamental
ninety-eight percent (98%) complete as of July 20, tenets of due process will dictate that this statutory lien
1991. should then only be enforced in the context of some
kind of a proceeding where the claims of all the
Furthermore, petitioners maintain that Salonga induced preferred creditors may be bindingly adjudicated, such
them to advance the expenses for the demolition, as insolvency proceedings.
clearing and site filling work by making representations
that the Municipality had the financial capability to This is made explicit by Article 2243 which states that
reimburse them later on. However, petitioners claim the claims and liens enumerated in articles 2241 and
that they have not been reimbursed for their expenses. 2242 shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of
On July 31, 1991, J.L. Bernardo Construction, Santiago legal provisions governing insolvency.
Sugay, Edwin Sugay and Fernando Erana, with the
latter three bringing the case in their own personal The action filed by petitioners in the trial court does not
capacities and also in representation of J.L. Bernardo partake of the nature of an insolvency proceeding. It is
Construction, filed a complaint for breach of contract, basically for specific performance and damages. Thus,
specific performance, and collection of a sum of money, even if it is finally adjudicated that petitioners herein
with prayer for preliminary attachment and actually stand in the position of unpaid contractors and
enforcement of contractors lien against the Municipality are entitled to invoke the contractor’s lien granted
of San Antonio, Nueva Ecija and Salonga, in his under Article 2242, such lien cannot be enforced in the
personal and official capacity as municipal mayor. After present action for there is no way of determining
defendants filed their answer, the Regional Trial Court whether or not there exist other preferred creditors with
held hearings on the ancillary remedies prayed for by claims over the San Antonio Public Market. The records
plaintiffs. do not contain any allegation that petitioners are the
only creditors with respect to such property. The fact
On September 5, 1991, the Regional Trial Court issued that no third party claims have been filed in the trial
the writ of preliminary attachment prayed for by court will not bar other creditors from subsequently
plaintiffs. It also granted J.L. Bernardo Construction the bringing actions and claiming that they also have
right to maintain possession of the public market and to preferred liens against the property involved.
operate the same.
If there are other creditors, would the decision of the SC
ISSUE: Whether or not the grant of writ of attachment be different?
and the contractor’s lien proper?
What we have here is a contractor’s lien. It is actually
HELD: There is no contractor’s lien in favor of enumerated as one of those special preferred credit in
petitioners. relation to an immovable property. This contractor’s lien
refers to construction, reconstruction or repair of buildings
Articles 2241 and 2242 of the Civil Code enumerates or other works in relation to an immovable property.
certain credits which enjoy preference with respect to However, this provisions in 2241 and 2242 will only be
specific personal or real property of the debtor. applied when there is concurrence of credits. The same
Specifically, the contractor’s lien claimed by petitioners property subjected to claims of several creditors and the
is granted under the third paragraph of Article 2242 debtor is insolvent or does not have sufficient assets to
which provides that the claims of contractors engaged pay all his creditors. That is the time when the question of
in the construction, reconstruction or repair of buildings preference will arise and there will be a need to determine
or other works shall be preferred with respect to the which of the creditors will be paid ahead of the others.
specific building or other immovable property
constructed. For this provision to be applied, it can only be enforced in
a proceeding where the claims of all the preferred
However, Article 2242 only finds application when there creditors are bindingly adjudicated, such as an insolvency
is a concurrence of credits, i.e. when the same specific proceeding.
As mentioned in this case, there was no insolvency On January 30, 1998, respondent and a certain Ernest
proceeding, but merely an action for collection for sum of L. Escaler, filed a Motion to Dismiss petitioner's
money. Therefore, 2242 is not applicable. Such lien could Complaint for lack of jurisdiction and for failure to state
not be enforced in the present action for there is no way a cause of action. They claimed that the Makati RTC
of determining whether or not there is this other preferred has no jurisdiction over the subject matter of the case
creditors with claims over the public market. The records because the parties' Construction Contract contained a
do not contain any allegation that petitioners are the only clause requiring them to submit their dispute to
creditors with respect to such property. The fact that no arbitration. The case against respondent was
third party claims have been filed in the trial court will not dismissed because of failure to comply with the
bar other creditors from subsequently bringing actions arbitration clause. Under the law, a prior resort to
and claiming that they also have preferred liens against arbitration is a condition precedent for filing a court
the property involved. action. Thus, in effect, the court admitted it had no
jurisdiction to hear and decide the case.
We are not saying that the obligation of the debtor is
extinguished. We are just saying that we cannot apply On April 24, 1998, respondent filed a Motion to Cancel
2242. So there is no preference in relation to that Notice of Lis Pendens. It argued that the notices of lis
immovable property. The action for collection of sum of pendens are without basis because petitioner's action
money can still proceed and if there is a judgment where is a purely personal action to collect a sum of money
the debtor is held liable, maghanap ng property na and recover damages and does not directly affect title
pwedeng maexecute. Then have it sold in a public to, use or possession of real property. This motion was
auction. But in the absence of any insolvency proceeding, granted.
you cannot apply the provisions under the concurrence
and preference of credits. However, the notices of lis pendens were subsequently
reinstated after judge Ranada claimed that a notice of
ATLANTIC ERECTORS, INC. vs. HERBAL COVE lis pendens serves only as a precautionary measure or
REALTY CORPORATION warning to prospective buyers of a property that there
G.R. No. 148568 (March 20, 2003) is a pending litigation involving the case. Respondent
then made an appeal to the CA which rendered a
FACTS: On June 20, 1996, Herbal Cove Realty decision in favor of the former.
Corporation and Atlantic Erectors, Inc. entered into a
Construction Contract whereby the former agreed to Claims of each party:
construct four (4) units of townhouses designated and petitioner- the money claim constitutes a lien that can
one (1) single detached unit for an original contract be enforced to secure payment for the said obligations.
price of P15,726,745.19 which was later adjusted to The lien on respondent's property was necessary to
P16,726,745.19 as a result of additional works. preserve the alleged improvement it had made on the
Respondent was not able to finish the construction in subject land.
time and as a consequence petitioner filed a complaint
for sum of money with damages. Petitioner won the suit respondent- the annotation is bereft of any factual or
and the RTC ordered respondent to pay around 24 legal basis because the action does not directly affect
million in damages and fees. (The cause of action in the title to the property, or the use or possession
this case is a money claim by one creditor) thereof. The annotation is baseless and cannot be
made through the enforcement of a contractor's lien
On November 21, 1997, petitioner filed a notice of lis under Art. 2242 as said provision applies only to cases
pendens for annotation of the pendency of Civil Case in which there are several creditors carrying on a legal
No. 97-707 on titles TCTs nos. T-30228, 30229, 30230, action against an insolvent debtor.
30231 and 30232. When the lots covered by said titles
were subsequently subdivided into 50 lots, the notices ISSUE:
of lis pendens were carried over to the titles of the 1. Whether or not money claims representing cost of
subdivided lots, i.e., Transfer Certificate of Title Nos. T- materials and labor on the houses constructed on a
36179 to T-36226 and T-36245 to T-36246 of the property are a proper lien for annotation of lis
Register of Deeds of Tagaytay City. (The case does not pendens on the property title
explain the existence of these TCT's. It was not 2. Whether or not the trial court, after having declared
mentioned if these were securities or properties under itself without jurisdiction to try the case, may still decide
execution.) on thesubstantial issue of the case\
interest or lien in connection with the subject property.

Even if a party initially avails itself of a notice of lis
HELD: pendens upon the filing of a case in court, such notice
1.NO, the lis pendens annotations were improper. is rendered nugatory if the case turns out to be a purely
personal action.
As a general rule, the only instances in which a notice
of lis pendens may be availed of are as follows: (a) an As it is, petitioner's money claim cannot be
action to recover possession of real estate; (b) an characterized as an action that involves the
action for partition; and (c) any other court proceedings enforcement of a lien or an encumbrance, one that
that directly affect the title to the land or the building would thus warrant the annotation of the Notice of Lis
thereon or the use or the occupation thereof. Pendens. Indeed, the nature of an action is determined
Additionally, this Court has held that resorting to lis by the allegations of the complaint.
pendens is not necessarily confined to cases that
involve title to or possession of real property. This Even assuming that petitioner had sufficiently alleged
annotation also applies to suits seeking to establish a such lien or encumbrance in its Complaint, the
right to, or an equitable estate or interest in, a specific annotation of the Notice of Lis Pendens would still be
real property; or to enforce a lien, a charge or an unjustified, because a complaint for collection and
encumbrance against it. damages is not the proper mode for the enforcement of
a contractor's lien.
Petitioner's money claim is not a contractor's lien
Contractor's lien and the proper methods of
Apparently, petitioner proceeds on the premise that its enforcing it
money claim involves the enforcement of a lien. Since In J.L. Bernardo Construction v. Court of Appeals, the
the money claim is for the nonpayment of materials and Court explained the concept of a contractor's lien under
labor used in the construction of townhouses, the lien Article 2242 of the Civil Code and the proper mode
referred to would have to be that provided under for its enforcement as follows:
Article 2242 of the Civil Code. This provision Articles 2241 and 2242 of the Civil Code
describes a contractor's lien over an immovable enumerates certain credits which enjoy
property as follows: preference with respect to specific personal or real
Art. 2242. With reference to specific immovable property of the debtor. Specifically, the
property and real rights of the debtor, the following contractor's lien claimed by the petitioners is
claims, mortgages and liens shall be preferred, granted under the third paragraph of Article 2242
and shall constitute an encumbrance on the which provides that the claims of contractors
immovable or real right: engaged in the construction, reconstruction or
xxx xxx xxx repair of buildings or other works shall be
(3) Claims of laborers, masons, mechanics preferred with respect to the specific building or
and other workmen, as well as of architects, other immovable property constructed.
engineers and contractors, engaged in the However, Article 2242 finds application when
construction, reconstruction or repair of there is a concurrence of credits, i.e., when the
buildings, canals or other works, upon said same specific property of the debtor is subjected
buildings, canals or other works; to the claims of several creditors and the value of
(4) Claims of furnishers of materials used in the such property of the debtor is insufficient to pay in
construction, reconstruction, or repair of full all the creditors. In such a situation, the
buildings, canals or other works, upon said question of preference will arise, that is, there will
buildings, canals or other works. be a need to determine which of the creditors will
be paid ahead of the others. Fundamental tenets
However, a careful examination of petitioner's of due process will dictate that this statutory lien
Complaint, as well as the reliefs it seeks, reveals that should then only be enforced in the context of
no such lien or interest over the property was ever some kind of a proceeding where the claims of all
alleged. The Complaint merely asked for the payment the preferred creditors may be bindingly
of construction services and materials plus damages, adjudicated, such as insolvency proceedings.
without mentioning -- much less asserting -- a lien or an
encumbrance over the property. Verily, it was a purely Clearly then, neither Article 2242 of the Civil Code nor
personal action and a simple collection case. It did not the enforcement of the lien thereunder is applicable
contain any material averment of any enforceable right, here, because petitioner's Complaint failed to satisfy
the foregoing requirements. Nowhere does it show that regarding the immovable property.
respondent's property was subject to the claims of As emphasized in this case of JL Bernardo that first, there
other creditors or was insufficient to pay for all must be concurrence of credit in order to apply 2242. In
concurring debts. Moreover, the Complaint did not this case, wala. Second, there must be a proceeding
pertain to insolvency proceedings or to any other action where the claims of all the preferred creditors may be
in which the adjudication of claims of preferred adjudicated, such as an insolvency proceeding.
creditors could be ascertained.
2242, or the enforcement of a lien is not applicable here
2.The trial court still had jurisdiction to decide on the because the complaint failed to satisfy the requirements.
substantial issue of the case Nowhere does it show that respondent's property was
subject to the claims of other creditors or was insufficient
The trial court lost jurisdiction over the case only to pay for all concurring debts. Moreover, the Complaint
on August 31, 1998, when petitioner filed its Notice of did not pertain to insolvency proceedings or to any other
Appeal. Thus, any order issued by the RTC prior to that action in which the adjudication of claims of preferred
date should be considered valid, because the court still creditors could be ascertained.
had jurisdiction over the case. Accordingly, it still had
the authority or jurisdiction to issue the July 30, DBP vs. COURT OF APPEALS
1998 Order canceling the Notice of Lis Pendens. On G.R. No. 126200 (August 16, 2001)
the other hand, the November 4, 1998Order that set
aside the July 30, 1998 Order and reinstated that FACTS: Marinduque Mining-Industrial Corporation
Notice should be considered without force and effect, (MMIC) obtained from the Philippine National Bank
because it was issued by the trial court after it had (PNB) various loan accommodations. To secure the
already lost jurisdiction. loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel
Finally, petitioner vehemently insists that the trial court Mortgage in favor of PNB. The mortgage covered all of
had no jurisdiction to cancel the Notice. Yet, the former Marinduque Mining's real properties, located at Surigao
filed before the CA an appeal, docketed as CA-GR CV del Norte, Sipalay, Negros Occidental, and at Antipolo,
No. 65647, questioning the RTC's dismissal of the Rizal, including the improvements thereon. As of
Complaint for lack of jurisdiction. Moreover, it must be November 20, 1980, the loans extended by PNB
remembered that it was petitioner which had initially amounted to P4 Billion, exclusive of interest and
invoked the jurisdiction of the trial court when the charges.
former sought a judgment for the recovery of money
and damages against respondent. Yet again, it was On July 13, 1981, Marinduque Mining executed in favor
also petitioner which assailed that same jurisdiction for of PNB and the Development Bank of the Philippines
issuing an order unfavorable to the former's cause. (DBP) a second Mortgage Trust Agreement. In said
Indeed, parties cannot invoke the jurisdiction of a court agreement, Marinduque Mining mortgaged to PNB and
to secure affirmative relief, then repudiate or question DBP all its real properties located at Surigao del Norte,
that same jurisdiction after obtaining or failing to obtain Sipalay, Negros Occidental, and Antipolo, Rizal,
such relief. including the improvements thereon. The mortgage
also covered all of Marinduque Mining's chattels, as
Here, there was an enumeration as to when notice of lis well as assets of whatever kind, nature and description
pendens may be availed: which Marinduque Mining may subsequently acquire in
-action to recover possession of areal estate; substitution or replenishment or in addition to the
-action for partition; properties covered by the previous Deed of Real and
-any proceeding that directly affects the land or building, Chattel Mortgage dated October 7, 1978. Apparently,
or the use or occupation thereof. Marinduque Mining had also obtained loans totaling P2
Billion from DBP, exclusive of interest and charges.
Looking at the complaint and allegations in this case,
notice of lis pendens is not available because any of those On April 27, 1984, Marinduque Mining executed in
3 are not present. The Complaint merely asked for the favor of PNB and DBP an Amendment to Mortgage
payment of construction services and materials plus Trust Agreement by virtue of which Marinduque Mining
damages, without mentioning a lien or an encumbrance mortgaged in favor of PNB and DBP all other real and
over the property. Verily, it was a purely personal action personal properties and other real rights subsequently
and a simple collection case. It did not contain any acquired by Marinduque Mining.
material averment of any enforceable right, interest or lien
For failure of Marinduque Mining to settle its loan claim for unpaid purchases made by MMIC against
obligations, PNB and DBP instituted sometime on July DBP
and August 1984 extrajudicial foreclosure proceedings
over the mortgaged properties. HELD: No, in the absence of liquidation
proceedings, Remington's claim cannot be
In the ensuing public auction sale conducted on August enforced against DBP.
31, 1984, PNB and DBP emerged and were declared
the highest bidders over the foreclosed real properties, ARTICLE 2241. With reference to specific movable
buildings, mining claims, leasehold rights together with property of the debtor, the following claims or liens shall
the improvements thereon as well as machineries and be preferred:
equipments of MMIC. xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on
PNB and DBP thereafter thru a Deed of Transfer dated said movables, so long as they are in the possession
August 31, 1984 and June 6 1994, purposely, in order of the debtor, up to the value of the same; and if the
to ensure the continued operation of the Nickel refinery movable has been resold by the debtor and the price is
plant and to prevent the deterioration of the assets still unpaid, the lien may be enforced on the price; this
foreclosed, assigned and transferred to Nonoc Mining right is not lost by the immobilization of the thing by
and Industrial Corporation amd Maricalum Mining destination, provided it has not lost its form, substance
Corp. respectively, all their rights, interest and and identity, neither is the right lost by the sale of the
participation over the foreclosed properties of MMIC. thing together with other property for a lump sum, when
the price thereof can be determined proportionally;
On February 27, 1987, PNB and DBP, pursuant to
Proclamation No. 50 as amended, again assigned, (4) Credits guaranteed with a pledge so long as the
transferred and conveyed to the National Government things pledged are in the hands of the creditor, or those
thru the Asset Privatization Trust (APT) all its existing guaranteed by a chattel mortgage, upon the things
rights and interest over the assets of MMIC, earlier pledged or mortgaged, up to the value thereof;
assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement In Barretto vs. Villanueva, the Court had occasion to
Corporation. construe Article 2242, governing claims or liens over
specific immovable property.
In the meantime, between July 16, 1982 to October 4,
1983, Marinduque Mining purchased and caused to be In its decision upholding the order of the lower court,
delivered construction materials and other the Court ratiocinated thus:
merchandise from Remington Industrial Sales Article 2242 of the new Civil Code enumerates the
Corporation (Remington) worth P921,755.95. The claims, mortgages and liens that constitute an
purchases remained unpaid as of August 1, 1984 when encumbrance on specific immovable property, and
Remington filed a complaint for a sum of money and among them are:
damages against Marinduque Mining for the value of "(2) For the unpaid price of real property sold, upon the
the unpaid construction materials and other immovable sold"; and
merchandise purchased by Marinduque Mining, as well "(5) Mortgage credits recorded in the Registry of
as interest, attorney's fees and the costs of suit. Property."
Remington's original complaint was later amended to Article 2249 of the same Code provides that "if there
implead additional defendants and in the end, the co- are two or more credits with respect to the same
defendants were MMIC, PNB, DBP, Nonoc Mining, specific real property or real rights, they shall be
Maricalum Mining, Island Cement and Asset satisfied pro-rata, after the payment of the taxes and
Privatization Trust. assessments upon the immovable property or real
rights."
The RTC ruled in favor of Remington, whose decision
was later affirmed by the CA. The CA held that there Application of the above-quoted provisions to the case
exists in Remington's favor a lien on the unpaid at bar would mean that the herein appellee Rosario
purchases of MMIC and as transferee, DBP must be Cruzado as an unpaid vendor of the property in
held liable for the value thereof. question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
ISSUE: Whether or not Remington can enforce its xxx xxx xxx
As to the point made that the articles of the Civil Code similar import.
on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say This explains the rule of Article 2243 of the new Civil
that nothing in the law shows any such limitation. If we Code that —
are to interpret this portion of the Code as intended only "The claims or credits enumerated in the two
for insolvency cases, then other creditor-debtor preceding articles shall be considered as mortgages or
relationships where there are concurrence of credits pledges of real or personal property, or liens within the
would be left without any rules to govern them, and it purview of legal provisions governing insolvency.
would render purposeless the special laws on And the rule is further clarified in the Report of the Code
insolvency. Commission, as follows:
"The question as to whether the Civil Code and
Upon motion by appellants, however, the Court the Insolvency Law can be harmonized is settled by this
reconsidered its decision. Justice J.B.L. Reyes, Article (2243). The preferences named in Articles 2261
speaking for the Court, explained the reasons for the and 2262 (now 2241 and 2242) are to be enforced in
reversal: accordance with the Insolvency Law."
The previous decision failed to take fully into account Thus, it becomes evident that one preferred creditor's
the radical changes introduced by the Civil Code of the third-party claim to the proceeds of a foreclosure sale
Philippines into the system of priorities among creditors (as in the case now before us) is not the proceeding
ordained by the Civil Code of 1889. contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant
Pursuant to the former Code, conflicts among creditors were enforcing a credit for taxes that enjoy absolute
entitled to preference as to specific real property under priority. If none of the claims is for taxes, a dispute
Article 1923 were to be resolved according to an order between two creditors will not enable the Court to
of priorities established by Article 1927, whereby one ascertain the pro rata dividend corresponding to each,
class of creditors could exclude the creditors of lower because the rights of the other creditors likewise
order until the claims of the former were fully satisfied enjoying preference under Article 2242 cannot be
out of the proceeds of the sale of the real property ascertained.
subject of the preference, and could even exhaust
proceeds if necessary. Although Barretto involved specific immovable
property, the ruling therein should apply equally in this
Under the system of the Civil Code of the Philippines, case where specific movable property is involved. As
however, only taxes enjoy a similar absolute the extrajudicial foreclosure instituted by PNB and DBP
preference. All the remaining thirteen classes of is not the liquidation proceeding contemplated by the
preferred creditors under Article 2242 enjoy no priority Civil Code, Remington cannot claim its pro rata share
among themselves, but must be paid pro rata, i.e., in from DBP.
proportion to the amount of the respective credits.
Thus, Article 2249 provides: Thus, Remington cannot enforce its lien against DBP
"If there are two or more credits with respect to because there was no liquidation proceeding. The
the same specific real property or real rights, they shall liquidation proceeding contemplated by the Civil Code
be satisfied pro rata, after the payment of the taxes and is not the extrajudicial foreclosure done by DBP. The
assessments upon the immovable property or real proceeding contemplated is where the claims of all the
rights." preferred creditors may be bindingly adjudicated such
as insolvency, settlement of decedent's estate or other
But in order to make this prorating fully effective, the similar proceedings.
preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of them as have credits What was the proceeding involved here?
outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent This time, it is an extrajudicial foreclosure proceeding but
that the full application of Articles 2249 and 2242 nevertheless, it is not the kind of proceeding
demands that there must be first some proceeding contemplated in order to concurrence and preference of
where the claims of all the preferred creditors may be credits.
bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the In this case, take note of what was the subject of the
Rules of Court, or other liquidation proceedings of chattel mortgage. Last meeting we discussed after
acquired assets which could be a valid subject matter in (6) Support during the insolvency proceedings, and for
a chattel mortgage. This chattel mortgage here provides three months thereafter;
for such stipulation. The mortgage also covered all of (7) Fines and civil indemnification arising from a criminal
Marinduque Mining's chattels, as well as assets of offense;
whatever kind, nature and description which Marinduque (8) Legal expenses, and expenses incurred in the
Mining may subsequently acquire in substitution or administration of the insolvent's estate for the common
replenishment or in addition to the properties covered by interest of the creditors, when properly authorized and
the previous Deed of Real and Chattel Mortgage. It approved by the court;
involves what we have mentioned earlier after acquired Also notice here...Taxes and assessments due the
assets. Pwede sya sa chattel mortgage agreements. national government,province or city... Nasa baba na sila
unlike 2241 and 2242. What would be the example of
Now, the second class of credits which is Ordinary this? Unpaid income tax. That is personal and not in
Preferred Credit. What happens here? You have a relation to the property.What is the effect? Kung mayroon
situation wherein a particular credit is not secured by any pang matira, babayaran mo ang BIR. Pero kung wala
particular movable or immovable property. However, this nang matira, wala. Insolvency na.
credit happens to be one of those enumerated as ordinary
preferred credit. The credit to enjoy preference over Another example is you have unpaid taxes with regard to
properties which are not encumbered including free a property, whether movable or immovable, and then
portion of the debtor’s property. giproportion natin. Ang macover lang sa value ng property
is (recall) 375 000. Paano yung 125 000 na hindi
When would this happen? Let us say you have a property, mabayaran sa proceeds nung specific property? Dito din
whether it is a car, a house or a movable property, but it is sya mahulog. I think 9, 10, 11 yan. In other words, hindi
not subject to any lien or encumbrance, those provided na sya number 1. Ordinary preferred credit, but meron
under 2241 and 2242. If this would be sold, saan in apply pang nauna.
ang proceeds? You have article 2244. This would also be
applicable, for example, ang value ng property is 2M and Then you have (12) Damages for death or personal
your total liabilities is 2.5M. What if masmataas ang value injuries caused by a quasi-delict;
ng property, 3M, and the liabilities in relation to that (13) Gifts due to public and private institutions of charity
property is 2.5M. Maroon pang 500 000. Saan gamitin or beneficence;
yung 500 000? Tingnan natin kung mayroong Ordinary (14) Credits which, without special privilege, appear in (a)
Preferred Credits as provided in 2244. a public instrument; or (b) in a final judgment, if they have
been the subject of litigation.
First thing that you should take note of here is that this
time, this is in order. May heirarchy it sya. So ang With regard to this credit evidenced by final judgment and
application from 1, pababa. public instrument, they are placed in the same order of
preference last sa 2244. Preference among them will be
Second thing to note is in 2244, ang nakalagaysa Civil determined by considering the priority of dates of the
Code is 1, proper funeral expenses. 2, credits for services instruments and of the final judgments.
rendered by employees, laborers, or household helpers.
In relation to the Labor Code and the cases that we will Again, 2244 not only enumerates the ordinary preferred
discuss, what is the effect of the preference with regard to credits with respect to other property, real or personal, of
wages dun sa laborers? The effect thereof is ang credits the debtor, but also gives the order of preference in the (-
for services rendered under 2244 will now become --). This time, taxes and assessments are mentioned only
number 1 and then number 2 na yang proper funeral as 9, 10, 11.
expenses and then the rest will follow.
(3) Expenses during the last illness of the debtor or of his How to apply what we have discussed so far? If you have
or her spouse and children under his or her parental a specific property. You sell it, go for special preferred
authority. credits, which must be paid from the value of the movable
(4) Compensation due the laborers or their dependents or immovable property, applying 2241 and 2242. Taxes
under laws providing for indemnity for damages in cases enjoy priority under the said articles. While the rest of the
of labor accident, or illness resulting from the nature of the credits are paid proportionately. Thereafter, look for
employment; ordinary preferred credit enumerated in 2244. They will
(5) Credits and advancements made to the debtor for then be paid in the order of priority as they are
support of himself or herself, and family, during the last enumerated. Assets (--) ordinary preferred credit are
year preceding the insolvency;
those which are free from encumbrances. under 2241 and held liable for the unpaid wages, 13th month pay,
2242, and the free portion under the said articles. incentive leave pay and separation pay of the
employees of PSC
The non-preferred credits will now be paid with that with
whatever free portion remains. The terms 'declaration' of bankruptcy or 'judicial'
liquidation in Article 110 of the Labor Code have been
Before we go to ordinary preferred credit, let’s take into eliminated by RA 6715, which took effect on March 21,
consideration what is provided under the Labor Code, 1989. Does this mean then that liquidation proceedings
preference of claims for unpaid wages and other have been done away with?
monetary claims. We have article 110 of the Labor Code.
That does not purport to create a lien in favor of workers RULING: We opine in the negative. Because of its
or employees for unpaid wages and other monetary impact on the entire system of credit, Article 110 of the
claims either upon all of the properties, or upon any Labor Code cannot be viewed in isolation but must be
particular property owned by their employer. Claims for read in relation to the Civil Code scheme on
unpaid wages do not fall at all within the category of classification and preference of credits.
specially preferred claims under 2241 and 2242, except
to the extent that such claims are those provided under In the event of insolvency, a principal objective should
the said articles. be to effect an equitable distribution of the insolvent's
property among his creditors. To accomplish this there
Article 110 did not alter 2241 and 2242 of the Civil Code, must first be some proceeding where notice to all of the
so much as creditors with lien over certain property are insolvent's creditors may be given and where the
still given special preference over the proceeds of that claims of preferred creditors may be bindingly
property. Claims for unpaid wages and other monetary adjudicated.
claims of laborers or workers of the insolvent, from
second to first priority in the order of preference The right of first preference as regards unpaid wages
established in 2244. recognized by Article 110 does not constitute a lien on
the property of the insolvent debtor in favor or workers.
DEVELOPMENT BANK OF THE PHILIPPINES VS. It is but a preference of credit in their favor, a
NLRC preference in application. It is a method adopted to
[242 SCRA 59 (1995)] determine and specify the order in which credits should
be paid in the final distribution of the proceeds of the
FACTS: PSC obtained a loan in 1983 from the DBP to insolvent's assets. The DBP anchors its claim on a
finance its iron smelting and steel manufacturing mortgage credit, which directly and immediately
business. To secure said loan, PSC mortgaged to DBP subjects the property upon which it is imposed,
real properties with all the buildings and improvements whoever the possessor may be, to the fulfillment of the
thereon and chattels. By virtue of the said loan obligation for whose security it was constituted (Art.
agreement, DBP became the majority stockholder of 2176, CC). It creates a real right which is enforceable
PSC, with stockholdings. Subsequently, it took over the against the whole world. It is a lien on an identified
management of PSC. When PSC failed to pay its immovable property, which a preference is not.
obligation with DBP, DBP foreclosed and acquired the
mortgaged real estate and chattels of PSC in the Even if Article 110 and its Implementing Rule, as
auction sales in 1987. Petitioners filed a Petition for amended, should be interpreted to mean `absolute
Involuntary Insolvency in the RTC against PSC and preference,' the same should be given only prospective
DBP, impleading as co-respondents therein Olecram effect in line with the cardinal rule that laws shall have
Mining Corporation and Jose Panganiban Ice Plant and no retroactive effect, unless the contrary is provided
Cold Storage, with said petitioners representing (Art. 4, CC). Thereby, any infringement on the
themselves as unpaid employees of said private constitutional guarantee on non-impairment of
respondents. Herein private respondents filed a obligation of contracts (Sec. 10, Art. III, 1987 Consti.) is
complaint with the Department of Labor against PSC, also avoided. In point of fact, DBP's mortgage credit
including later on DBP, for non-payment of salaries, antedated by several years the amendatory law, RA
13th month pay, incentive leave pay and separation 6715. To give Article 110 retroactive effect would be to
pay. DBP submits that when it foreclosed the assets of wipe out the mortgage in DBP's favor and expose it to
PSC, it did so as a foreclosing creditor. a risk which it sought to protect itself against by
requiring a collateral in the form of real property.
ISSUE: Whether DBP, as foreclosing creditor, could be
In fine, the right to preference given to workers

under Article 110 of the Labor Code cannot exist in REPUBLIC VS. PERALTA
any effective way prior to the time of its [150 SCRA 37(1987)]
presentation in distribution proceedings. It will find
application when, in proceedings such as insolvency, FACTS: The Republic of the Philippines seeks the
such unpaid wages shall be paid in full before the review on certiorari of the Order of the CFI of Manila in
`claims of the Government and other creditors' may be its Civil Case No. 108395 entitled "In the Matter of
paid. But, for an orderly settlement of a debtor's assets, Voluntary Insolvency of Quality Tobacco Corporation,
all creditors must be convened, their claims Quality Tobacco.”
ascertained and inventoried, and thereafter the
preference determined in the course of judicial In its questioned Order, the trial court held that the
proceedings which have for their object the subjection above enumerated claims of USTC and FOITAF
of the property of the debtor to the payment of his debts (hereafter collectively referred to as the "Unions") for
or other lawful obligations. Thereby, an orderly separation pay of their respective members embodied
determination of preference of creditors' claims is in final awards of the NLRC were to be preferred over
assured; the adjudication made will be binding on all the claims of the Bureau of Customs and the BIR. The
parties-in-interest, since those proceedings are trial court, in so ruling, relied primarily upon Article 110
proceedings in rem; and the legal scheme of of the Labor Code.
classification, concurrence and preference of credits in
the Civil Code, the Insolvency Law, and the Labor Code The Solicitor General, in seeking the reversal of the
is preserved in harmony. questioned Orders, argues that Article 110 of the Labor
Code is not applicable as it speaks of "wages," a term
Assuming that there is this insolvency proceeding, how which he asserts does not include the separation pay
will article 110 be applied? claimed by the Unions.
The emphasis of the necessity of the declaration of "Separation pay," the Solicitor General contends: is
bankruptcy or a judicial liquidation before the workers given to a laborer for a separation from employment
preference may be enforced. 110 cannot be invoked by computed on the basis of the number of years the
the respondent in the absence of a formal declaration of laborer was employed by the SEC.
bankruptcy or liquidation order.
1. Requirements for Issuance of License. Every
Further in this case also took note as to hoe this 110 be applicant for license to operate a private employment
interpreted in consonance with the civil code provision. All agency or manning agency shall submit a written
creditors here must be convened, their claims ascertained application together with the following requirements:
and inventoried, and thereafter the preferences xxx xxx
determined.
f. A verified undertaking stating that the applicant:
In this case, there was no declaration of bankruptcy.
Assuming there was, this preference in 110 do not attach xxx xxx xxx(3) Shall assume joint and solidary liability
a specific property. The right of first preference as regard with the employer for all claims and liabilities which may
to unpaid wages, does constitute a lien on the property of arise in connection with the implementation of the
the insolvent debtor in favor of the workers. It is only a contract; including but not limited to payment of wages,
preference of credit in their favor. A preference in health and disability compensation and reparation.
application.
employer; it is a form of penalty or damage against the
That phrase there, first preference does not mean na employer in favor of the employee for the latter's
dapat sila ang unang bayaran sa hanay ng mga creditors, dismissal or separation from service
kasi first you have to apply 2241 and 2242. Kung meron
pang natira na pambayad ang debtor, yan na ang first ISSUE: WON separation pay of their respective
preference sa unpaid wages. members embodied in final awards of the NLRC were
to be preferred over the claims of the Bureau of
Article 110 of the Labor Code does not purport to create Customs and the BIR (WON separation pay is included
a lien in favor of workers or employees for unpaid wages in the term “wages”)
either upon all of the properties or upon any particular
property owned by their employer. HELD: YES. For the specific purposes of Article 1109
and in the context of insolvency termination or under a written or unwritten contract of employment for
separation pay is reasonably regarded as forming part work done or to be done, or for services rendered or to
of the remuneration or other money benefits accruing be rendered, and includes the fair and reasonable
to employees or workers by reason of their having value, as determined by the Secretary of Labor, of
previously rendered services to their employer; as board, lodging, or other facilities customarily furnished
such, they fall within the scope of "remuneration or by the employer to the employee. 'Fair and reasonable
earnings — for services rendered or to be rendered value' shall not include any profit to the employer or to
— ." any person affiliated with the employer.(emphasis
supplied)
Liability for separation pay might indeed have the effect
of a penalty, so far as the employer is concerned. So Article 110. Worker preference in case of
far as concerns the employees, however, separation bankruptcy — In the event of bankruptcy or
pay is additional remuneration to which they become liquidation of an employer's business, his workers
entitled because, having previously rendered services, shall enjoy first preference as regards wages due
they are separated from the employer's service. them for services rendered during the period prior
to the bankruptcy or liquidation, any provision of
Reasoning law to the contrary notwithstanding. Union paid
We note, in this connection, that in Philippine wages shall be paid in full before other creditors
Commercial and Industrial Bank (PCIB) us. National may establish any claim to a share in the assets of
Mines and Allied Workers Union, the Solicitor General the employer. (emphasis supplied).
took a different view and there urged that the term
"wages" under Article 110 of the Labor Code may be This time, there is an insolvency proceeding. How to apply
regarded as embracing within its scope severance pay these provisions under the civil code in relation to 110? It
or termination or separation pay. In PCIB, this Court was emphasized that 110 must be read in relation to the
agreed with the position advanced by the Solicitor provisions of the civil code concerning, classification,
General. We see no reason for overturning this concurrence and preference of credits, which finds
particular position. application in insolvency proceedings, similar to the
instant case.
The resolution of the issue of priority among the several
claims filed in the insolvency proceedings instituted by There are 3 credits that were claimed here. Customs
the Insolvent cannot, however, rest on a reading of duties in favor of BoC; unpaid Tobacco inspection fees in
Article 110 of the labor Code alone. favor of the BIR and the unpaid wages.
Article 110 of the Labor Code, in determining the reach Take note here yung due to the BIR and due to the BoC,
of its terms, cannot be viewed in isolation. Rather, these are liens in relation to specific movable properties.
Article 110 must be read in relation to the provisions of They are considered as No. 1 priority under 2241, being
the Civil Code concerning the classification, movable properties. However with regard to the unpaid
concurrence and preference of credits, which wages that was claimed in this case, the term first
provisions find particular application in insolvency preference there does not mean na dapat yun talaga ang
proceedings where the claims of all creditors, preferred unang bayaran saka na yung taxes sa State.
or non-preferred, may be adjudicated in a binding
manner. 110 is only intended to modify order of preference as
provided under 2244, wherein the effect it the removal of
Disposition the 1 year limitation found under 2244 (2), and then yung
MODIFIED and REMANDED to the trial court for further 2, claims for unpaid wages will now be moved up from
proceedings in insolvency. second to first priority. No. 2 na yung funeral expenses.
Article 97 (f) of the Labor Code defines "wages" in the This is the effect of the application of the concurrence and
following terms: preference of credit. When we say 110 first preference in
Wage' paid to any employee shall mean the relation to 2244, do not forget that there are unpaid wages
remuneration or earnings, however designated, or claims in relation to the movable or immovable
capable of being expressed in terms of money, whether property. For example, yung unpaid wages is in relation
fixed or ascertained on a time, task, piece, or to those laborers who help to construct the immovable
commission basis, or other method of calculating the property, hindi sya sa 2244 mahulog. Tingnan mo muna
same, which is payable by an employer to an employee sa 2241. The proceeds of the real estate property are not
sufficient to cover the obligation sa laborers, tapos

merong ibang property na free, sa 2244, number 1 na Article 2247. If there are two or more credits with
ngayon yug unpaid laborer. So do not forget yung unpaid respect to the same specific movable property, they
claims and wages under 2241 and 2242. shall be satisfied pro rata, after the payment of duties,
taxes and fees due the State or any subdivision thereof.
This rule on preference and concurrence of credit is under
the civil code, and this will be applied if there is an Sa immovable naman, you have 2248 and 2249.
insolvency proceeding. You will have in third year yung
special law called FRIA (Financial Rehabilitation and Article 2248. Those credits which enjoy preference in
Insolvency Act of 2010). This provides for the procedure: relation to specific real property or real rights, exclude
who will file? What are the requirements for liquidation or all others to the extent of the value of the immovable or
rehabilitation? real right to which the preference refers.
However, with regard to preference, balik ka pa rin sa Sa 2249, again, the rest concur sa 2242.
provisions dito sa civil code because the FRIA does not
enumerate kung simo una bayaran among the credits kasi Article 2249. If there are two or more credits with
nga ang mag-apply is the concurrence and preference of respect to the same specific real property or real rights,
credit. they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property
What is the effect if you still have enough assets? You or real right.
were able to pay yung mga liens provided under 2244,
pero meron ka pang konting pera na pwedeng pambayad In 2250, what if there is an excess.
sa naiwan mong creditors.
Article 2250. The excess, if any, after the payment of
Sino tong naiwan mo pang creditors? the credits which enjoy preference with respect to
specific property, real or personal, shall be added to the
This is the third classification. Common credits as free property which the debtor may have, for the
provided under 2245. payment of the other credits.
Article 2245. Credits of any other kind or class, or by Article 2251. Those credits which do not enjoy any
any other right or title not comprised in the four preference with respect to specific property, and those
preceding articles, shall enjoy no preference. which enjoy preference, as to the amount not paid,
shall be satisfied according to the following rules:
Nangutang ka sa kapitbahay mo. Mayroong promissory (1) In the order established in article 2244;
note but it is not in a public instrument. Hindi yan sya (2) Common credits referred to in article 2245 shall be
nahulog sa 2241, 2242, 2243 and 2244. Ano ang paid pro rata regardless of dates.
mangyari dyan? That kind of credit will be paid with the
remaining property and all those common credits will now Take note of the order provided in 2244.
be paid pro rata, regardless of the dates.
PART XIII: LETTERS OF CREDIT
For sure hindi yan sila ma fully paid. Kasi kung fully paid
yan sila to that extent, it means that the debtor is not Letters of Credit are under the Code of Commerce,
insolvent. So no need to apply the rules on concurrence Articles 567-572.
and preference of credit.
The definition provided under 567 states “those issued by
So order or preference of credit, the proceeding articles, one merchant to another or for the purpose of attending
2246- 2251 emphasized what we already discussed. to a commercial transaction”.
Article 2246. Those credits which enjoy preference This definition has evolved. It is more than that as we have
with respect to specific movables, exclude all others to seen in the cases we have discussed.
the extent of the value of the personal property to which
the preference refers. A Letter of Credit is issued by the bank. It guarantees its
clients ability to pay for the imported goods or services,
2247, ito yung sinasabi natin na all the rest will concur authorizing an individual or a firm to draw drafts on the
under 2241. bank or on its correspondence for bank’s accounts under
certain conditions of the credit. Bank of America vs. CA (December 1993) - A LOC is a
financial device developed by merchants as a convenient
It is a written instrument whereby the writer requests or and relatively safe mode of dealing with sales of goods to
authorizes the addressee to pay money or deliver goods satisfy seemingly irreconcilable interest of the seller and
to a third person and assumes responsibility for payment the buyer. The buyer maybe required to contract a bank
of debt to the addressee. to issue a LOC in favor of the seller so that by virtue of the
LOC, the bank can authorize the seller to draw drafts and
Opening a letter of credit is only a mode of payment, but engage to pay them upon their presentment,
it is not a requirement for the perfection of a sale. simultaneously with the tender of documents required in
Remember there is a sale here because you have a the LOC.
purchaser here in the Philippines who would be interested
to purchase raw materials or goods from another foreign The buyer and the seller agree on what documents are to
country, example Hong Kong. Normally, if you are the be presented for payment. Ordinarily, they are documents
purchaser, you will not release or pay unless you have an of title, evidence, such as a Bill of Lading, evidencing or
assurance that it would really be delivered to you. On the attesting that the shipment goods to the buyer.
part of the seller, he would be hesitant to make delivery if
there is no payment yet. That is why they enter into this Once that credit is established, the seller will now ship the
kind of transaction. goods to the buyer. Actually what would happen is that for
the security of the bank, iship to the bank. To get paid, the
So you have here Philippines and Hong Kong (business). seller executes a draft and presents it together with the
Between them, there is a contract of sale. Philippines will issuing bank. The bank redeem the draft and pay cash to
apply from a bank a Letter of Credit. Usually this is a bank the seller if it finds that the documents submitted by the
to bank transaction. seller conform with what is provided in the LOC.
This letter of credit is only a mode of payment. How would The bank obtains possession of the document upon
a seller be paid by the purchaser? While it is not an paying the seller. The transaction is completed when the
essential requisite for the contract of sale between the buyer reimburses the bank and acquires the documents
seller and the buyer because a sale is a consensual and titles to the goods. In this arrangement, the seller gets
contract. The non-opening of letter of credit will not paid only if he delivers the documents of title over the
prevent the perfection of a contract of sale. goods while the buyer acquires the said documents and
control over the goods only after reimbursing the bank.
LOC does not mean that the bank is a guarantor or a
surety because the liability under the letter of credit What is the purpose of this LOC? To substitute for and
primary in nature. It is not subsidiary unlike that of a therefore support the agreement of the buyer-importer to
contract of guaranty. pay money under a contract or other arrangement, but,
again, it does not necessarily constitute as a condition for
LOC was also mentioned in Negotiable Instruments Law. the perfection of such arrangement.
Is an LOC negotiable or not? It is not negotiable because
it is payable to a specific person - the seller. It is not What are the essential conditions in this LOC?
payable to order and not payable to bearer. Therefore it is a) it is issued in favor of a definite person. It is not payable
not a negotiable instrument. to order and not payable to bearer;
b) It is limited to a fixed or specified amount or to one or
Jurisprudence: Prudential Bank vs. IAC (December 1992) more undetermined amounts but within the maximum limit
- Definition of Letter of Credit. An engagement by a bank which must be stated exactly.
or other person made at the request of a customer that
the issuer may honor drafts or other demands of payment Article 572 of the Code of Commerce states that an LOC
upon compliance with the conditions specified in the becomes void if the bearer of the LOC does not make use
credit. thereof within the period agreed upon with the drawer or
in default of the period fixed, within 6 months counted
Through a LOC, the bank here substitutes its own from its date in any point in the Philippines, and within 12
promise to pay for the promise to pay of one of its months anywhere outside thereof, shall be void in fact and
customers who in turn promises to pay the bank the funds in law.
mentioned in the LOC - credit or commitment fees agreed
upon. Who are the parties in a LOC?
a) The buyer. Example: X procures an LOC and obliges
himself to reimburse the bank upon receipt of the make its commitment. In which case the issuing bank
documents of title. disburses a specified stamp to the beneficiary and (---) an
b) The issuing bank. Example: BDO who issues the LOC equivalent note to its customer.
and undertakes to pay the seller upon receipt of the draft
and proper documents of title and to surrender the This Standby LOC support non-financial obligations such
documents to the buyer upon reimbursement. as those bidders or financial obligations such as those of
c) The seller. Example: in compliance with the contract of borrowers. While they are security arrangement, they are
sale, ships the goods to the buyer and delivers documents not converted into contracts of guaranty as the obligation
of title to the issuing bank to recover payment. here is primary and not accessory.
Here, you could say that we have several independent Types of LOC.
contracts. You have the contract of sale between the Irrevocable and revocable:
buyer and the seller. There is a contract between the a) irrevocable LOC: obligates the issuing bank to honor
buyer and the bank in application for LOC. You have the the drafts drawn in compliance with the credit and it
LOC proper issued by the bank in favor of the seller. cannot be cancelled nor modified without the consent of
all the parties.
You must take note of the “independent principle” in the b) Revocable: it can be cancelled or amended anytime
LOC. This principle states that a bank, in determining before payment, and it is intended to serve as a means of
compliance in an LOC, is required to examine only the arranging payment but not as a guaranty of payment.
shipping documents presented by the seller and is
precluded from determining whether the main contract is Confirmed or unconfirmed:
actually accomplished or not. This arrangement assures a) confirmed: both banks are obligated to honor, thus, in
the seller of prompt payment independent of any breach compliance with the credit.
of the sales contract. There may be breach of warranty b) Unconfirmed: the obligation only of the issuing bank
with regard to the goods delivered. It may be that what and issued if the exporter has doubts about the foreign
was delivered is different from what was agreed upon or bank’s ability to pay. Such doubts may arise if the exporter
there maybe defects - that will not affect the issuance of is unsure of the financial standing of the foreign bank or if
LOC because of the independent contract in this scenario. there are political or economic conditions in the foreign
country which is unstable. A confirming bank is better able
So anong mangyari? Ang bank naman, magbayad sya as to judge the credibility of the bank issuing the LOC than
long as all the documents mentioned in that LOC are duly an ordinary merchant. That is why bank to bank
presented by the seller. You will not liable to the buyer in transaction talaga sya.
case there is breach with regard to the goods that are
delivered because this is what we mean by independent Revolving or non-revolving:
principle in relation to the different independent contracts a) Non-revolving: valid for one transaction only.
in this transaction. b) Revolving: valid for several transactions over a given
period of time. Most revolving LOCs are issued in a
Also take note of the rule on strict compliance in the LOC revocable form.
transaction. The documents tendered by the seller or
beneficiary must strictly conform with the terms of the Cumulative or non-cumulative:
LOC. It must include all the documents required in the A revolving LOC can be non-cumulative. In which case,
LOC. A bank which departs from what has been stipulated any amount not used by the beneficiary during the
under the credit, when he accepts a faulty tender, acts in specified period may not be drawn against in a later
its own risk and may not be able to recover from the buyer transaction.
or the issuing bank. Meaning, paid to the seller despite Cumulative, undrawn amounts can be carried over to
the fact that the seller did not submit the complete future transactions.
documents. It is the bank who is at fault here. He cannot
demand payment or recovery thereafter to the buyer of
the LOC.
Standby LOC. It is as bank issued option in a loan

involving three parties. The bank which issues the credit,
the party requesting for such issuance, and then the
beneficiary. The beneficiary has the right to trigger the You can never cross the ocean, unless you lose sight of
loan option, it is really a loan, if the account party fails to the shore. PURA VIDA: Live an uncluttered life.

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CREDIT TRANSACTIONS | FROM THE LECTURES OF ATTY.

February 2, 2016 (Tongo) to submit a certification from the Bureau of Forest

The mortgage is not valid. Other characteristics of real estate mortgage- it is

respondent bank and required petitioner to submit

The first Deed of Pacto de Retro (dated August 5, 1955)

registered. mortgage even if it’s not registered, there being no 3rd

STATE's registered mortgage right over the property is

so as to be able to mortgage it again. So you do not have

What do you mean by this Doctrine of Mortgagee in RULING:

Exceptions to this doctrine: Q: What do you mean by that? Registration is a matter

Prior to the application for the packing credit line,

Upon learning about the Korean importer’s non-payment, HELD:

and legal contracts, and the amounts named as

In foreclosures, the mortgaged property is subjected to

General Banking Act. Because it has already been foreclosed. To do so would

with the property is generally not bound by such liens or ISSUES:

approval of the bond, order that a writ of possession

still failed to pay. Hence, respondent Carmencita San

the sale, together with the tender of the same amount,

Recall under Obli/Con and Sales, the mere gross

pending such latter proceeding, the purchaser at a

who drafted it. correspondence relative to the mortgage including

Mamerto died in 1986, leaving behind 3 titled parcels of

certificate of foreclosure sale which in no case shall be

• Half of the mortgaged hacienda was levied

ISSUE: WON the transaction between the parties was

Heirs of Bangis made no judicial or extrajudicial demand MACAPINLAC VS. REPIDE

Now here, plaintiff had made a written offer to the RAMIREZ v. CA

March 1, 2016 (Tongo) fulfilment obligation or by the destruction of the property

alleging that he was in connivance with Salvador

Articles 334 and 335 of the Civil Code supply no absolute

“_____________________________” (G.R. No. 42551, September 4, 1935)

What is the requirement under the law regarding the Sec. 7.

But that is NOT APPLICABLE with regard to a Chattel So, to distinguish:

RIGHT OF MORTGAGEE TO POSSESSION FACTS:

foreclose the property, he can file for an ordinary action

ISSUES: We already held that the execution was not justified

So even if for example it is a family home, if you executed Article 2239:

remitted directly to petitioners. property of the debtor is subjected to the claims of

interest or lien in connection with the subject property.

In fine, the right to preference given to workers

sufficient to cover the obligation sa laborers, tapos

Standby LOC. It is as bank issued option in a loan

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