d2015member

WEEK 9
DIGEST
CREDITS

Alejandra Torres et. al. plaintiff-appellees

vs.
Francisco Limjap, Special Administrator of deceased Jose B. Henson, defendant-appellant
G.R. No. 34385

FACTS: The plaintiffs alleged that the defendant, in his lifetime, executed in their favor a chattel
mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson,
to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for
P20,000. The defendant denied generally and specifically the plaintiffs' allegations and set up the
defense that the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No.
34286) are null and void for lack of sufficient particularity in the description of the property
mortgaged. A judgment was rendered in favor of the plaintiff and against the defendant,
confirming the attachment of said drug store by the sheriff of the City of Manila and the delivery
thereof to the plaintiff.

The defendant appealed from the judgment and made the assignments of error, among others, that
the lower court erred in failing to make a finding on the question of the sufficiency of the
description of the chattels mortgaged and in failing to hold that the chattel mortgages were null and
void for lack of particularity in the description of the chattels mortgaged and in refusing to allow
the defendant to introduce evidence tending to show that the stock of merchandise found in the two
drug stores was in existence or owned by the mortgagor at the time of execution of the mortgages
in question. Defendant then insists that a stipulation authorizing the disposal and substitution of
chattels mortgage does not operate to extend the mortgage to after-acquired party, and that such
stipulation is in contravention of the express provision of the last paragraph of section 7 Act No.
1508, which provides that “A chattel mortgage shall be deemed to cover only the property
described therein and not like or substituted property thereafter acquired by the mortgagor and
placed in the same depository as the property originally mortgaged, anything in the mortgage to
the contrary notwithstanding”.

ISSUE: Whether or not the provision in the chattel mortgage law that extends coverage to after-
acquired property is valid and binding. Yes.

HELD: We are of the opinion that (a.) the provision of the last paragraph of section 7 of Act No.
1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and
floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect
to after-acquired property, is valid and binding; and (c) that the lower court committed no error in
not permitting the defendant-appellant to introduce evidence tending to show that the goods seized
by the sheriff were in the nature of after-acquired property.

In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law
(Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed
on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim
of that law-making body was undoubtedly to promote business and trade in these Islands and to
give impetus to the economic development of the country. Bearing this in mind, it could not have
been the intention of the Philippine Commission to apply the provision of section 7 above quoted
to stores open to the public for retail business, where the goods are constantly sold and substituted
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with new stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were
intended to apply to this class of business, it would be practically impossible to constitute a
mortgage on such stores without closing them, contrary to the very spirit about a handicap to trade
and business, would restrain the circulation of capital, and would defeat the purpose for which the
law was enacted, to wit, the promotion of business and the economic development of the country.

The judgment appealed from is in accordance with the facts and the law, and the same should be
and is hereby affirmed, with costs.

Philippine Refining Co vs. Jarque

March 25, 1935
Malcolm

FACTS:
 Philippine Refining Co., Inc., and Francisco Jarque executed three mortgages on the motor
vessels Pandan and Zaragoza.
 These documents were recorded in the record of transfers and incumbrances of vessels for
the port of Cebu and each was therein denominated a "chattel mortgage".
 Neither of the first two mortgages had appended an affidavit of good faith. The third
mortgage contained such an affidavit, but this mortgage was not registered in the customs
house until May 17, 1932, or within the period of thirty days prior to the commencement of
insolvency proceedings against Francisco Jarque
 These proceedings were begun on June 2, 1932, when a petition was filed with the Court of
First Instance of Cebu in which it was prayed that Francisco Jarque be declared an
insolvent debtor, which soon thereafter was granted
 Judge Jose M. Hontiveros declined to order the foreclosure of the mortgages, but on the
contrary sustained the special defenses of fatal defectiveness of the mortgages

ISSUE: WON the Chattel mortgages were defective

HELD: Yes. Ships are personal property subject to provisions of the Chattel Mortgage Law.
Unenforceable against third persons for not having affidavits of good faith
 Vessels are considered personal property under the civil law
 Since the term "personal property" includes vessels, they are subject to mortgage agreeably
to the provisions of the Chattel Mortgage Law.
 The only difference between a chattel mortgage of a vessel and a chattel mortgage of other
personalty is that it is not now necessary for a chattel mortgage of a vessel to be noted n the
registry of the register of deeds, but it is essential that a record of documents affecting the
title to a vessel be entered in the record of the Collector of Customs at the port of entry

Servicewide Specialists Inc v. CA, Hilda Tee, and Alberto Villafranca (1999)
Purisima, J.

Laus bought a car on credit from Fortune Motors, then executed a promissory note and that in
case of default on any payment, total principal becomes due. The security for this note was the
car. Incorporated in the chattel mortgage was an assignment by Fortune of its credit and
mortgage rights to Filinvest. Filinvest assigned the credit to Servicewide. Laus defaulted and
also failed to surrender possession of the car. Servicewide instituted a complaint for replevin
impleading Dee and Tee who were in possession of the car at that time. A certain Villafranca
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files a third party claim saying that he was the true owner of the car. Villafranca was substituted
as defendant. LC dimissed Servicewide’s case for insufficiency of evidence and CA affirms and
notes that evidence pointed to Laus as the party liable but was not impleaded by Servicewide.

 Leticia Laus purchased on credit a Colt Galant from Fortune Motors then executed a
promissory note payable within 48 mos demandable on the 17th of each month starting
Aug 1976.
o Agreed upon: In case of default of any installment, the total principal plus interest
shall become immediately due and payable.
 SECURITY for the promissory note: chattel mortgage over the car with a deed of
assignment incorporated therein such that the credit and mortgage rights of Fortune
Motors (creditor/seller/mortgagee) IN FAVOR OF Filinvest Credit Corp WITH
CONSENT of mortgagor (debtor/buyer) Laus.
o Car was registered in name of Laus with the chattel mortgage annotated on the
certificate.
 Filinvest ASSIGNED the credt in favor of Servicewide Specialists (transferred all
of Filinvest’s rights under the promissory note and chattel mortgage. This was done
with a notice of the assignment sent to Laus (registered car owner).
 Laus failed to pay the installments from Apr 1977 and the succeeding 17 mos so
Servicewide demanded payment of the entire outstanding balance at around P46,000.
Still, Laus failed to pay all the installments due until July 1980.
 July 1984: Servicewide sent a statement of account to Laus and demanded payment of
P86,000 (balance plus interests, expenses, damages, etc).
o Laus failed to settle her obligation or at least surrender possession of the car
for foreclosure.
 Servicewide instituted a complaint for replevin impleading Dee and Tee who had
custody of the car at that time.
 COMPLAINT of Servicewide:
o That it had superior lien over the mortgaged car;
o That it is lawfully entitled to the possession of the car with accessories and
equipment;
o That Tee was wrongfully detaining the car to defeat its mortgage lien
 Villafranca files THIRD PARTY CLAIM:
o That he is absolute owner of the car evidenced by Bureau of Land Transpo’s Cert
of Reg
o That he got the car from a certain Yan under a deed of sale May 1984
which was free of lien and encumbrances
o That the car was taken from his residence by Deputy Sheriff because of a seizure
order
 Upon motion by Servicewide, Villafranca was subsitituted as defendant.
 Villafranca moved for the dismissal because there is another action pending between
the same parties in RTC-Makati, involving the seizure of car and the indemnity bond
posted by Servicewide. MTD set aside.
 LC held Villafranca to have failed to file his answer. Declared in default and
Servicewide’s evidence was received ex parte.
o LC dismissed for insufficiency of evidence
 CA: Servicewide says a suit for replevin aimed at the foreclosure of a chattel is an
action quasi in rem, and does not require the inclusion of the principal obligor (Laus)
in the Complaint.
o Servicewide admits that the mortage contract was executed by Laus, who, for
reasons not explained, was never impleaded.
o In this case, main case is for judicial foreclosure of the chattel mortgage against
Tee and John Doe who were later substituted by Villafranca.
o As there is no privity of contract, not even a causal link, between Servicewide
and Villafranca, the LC was correct when it dismissed for insufficiency of
evidence against Tee and Villafranca since the evidence pointed to Laus as the
party liable for the obligation.
o Affirmed LC
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Issue/Held: Whether or not a case for replevin may be pursued against Villafranca, without
impleading the absconding debtor- mortgagor (Laus)? ---NO

Ratio:

Rule 60 Revised Rules of Court requires that an applicant for replevin must show that he "is the
owner of the property claimed, particularly describing it, or is entitled to the possession thereof."
 Where the right of the plaintiff to the possession of the property is so conceded or
evident, the action need only be maintained against those who currently possesses
the property. I
 Northern Motors vs. Herrera: SC said in BA Finance (which is similar with the present
case):
o Persons having a special right of property, the recovery of which is sought
(like a chattel mortgagee) may maintain an action for replevin.
o Where the mortgage authorizes the mortgagee (creditor) to take possession of the
property on default, he may maintain an action to recover possession of the
mortgaged chattels from the mortgagor (debtor) OR from any person in
whose hands he may find them.
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 Thus, in default of the mortgagor, the mortgagee (creditor) is constituted as attorney-

in-fact of the mortgagor, ENABLING such mortgagee (creditor) to act in behalf of the
owner.

That the defendant is not privy to the chattel mortgage should be inconsequential.
 By the fact that the object of replevin is traced to his possession, one can be a defendant in an
action for replevin.
o It is assumed that the plaintiff's right to possess the thing is not or cannot be disputed.

If the right of possession of the plaintiff is put to doubt (defendant contests the legal bases for
plaintiff’s cause of action), it could become essential to have other persons impleaded for a
complete determination and resolution of the controversy.
 In this case, there is an independent claim of ownership by Tee and Dee (evinced by
the pending case in the CA involving the car between the same parties here).

In a suit for replevin, a clear right of possession must be established.

 A foreclosure under a chattel mortgage may properly be commenced ONLY once there
is default on the part of the mortgagor (debtor) secured by the mortgage.
 The replevin here was resorted to to pave the way for the foreclosure of what is covered by the
chattel mortgage.
 The conditions essential for such foreclosure would be to show:
1. The existence of the chattel mortgage; and
2. The default of the mortgagor.
 These requirements must be shown because the validity of the plaintiff’s exercise of the right
of foreclosure is dependent thereon.
 When the mortgagee (creditor) seeks a replevin to effect the foreclosure, it is not only
the existence of, but also the mortgagor's default that can properly uphold the right to
replevy the property.

Since the mortgagee's(creditor’s) right of possession is conditioned upon the actual fact of default
which itself may be controverted, the inclusion of other parties, like the debtor or the mortgagor
himself, may be required in order to allow a full and conclusive determination of the case.
 The burden to establish a valid justification for replevin lies with the plaintiff.
 An adverse possessor, who is NOT the mortgagor, CANNOT be deprived of his
possession, let alone be bound by the terms of the chattel mortgage, simply because the
mortgagee brings up an action for replevin.
 Laus, being an indispensable party, should have been impleaded in the complaint for replevin
and damages.

Indispensible party:
 An indispensable party is one whose interest will be affected by the court's action, and
without whom no final determination of the case can be had. The party's interest in the
subject matter of the suit and in the relief sought are so inextricably intertwined with the
other parties that his legal presence as a party is an absolute necessity. In his absence, there
cannot be a resolution of the dispute of the parties before the Court which is effective,
complete, or equitable.
 A party is not indispensable to the suit if his interest in the controversy or subject matter is
distinct and divisible from the interest of the other parties and will not necessarily be
prejudiced by a judgment which does complete justice to the parties in Court. He is not
indispensable if his presence would merely complete relief between him and those already
parties to the action or will simply avoid multiple litigation.
 Without the presence of indispensable parties to a suit or proceeding, a judgment of a Court
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cannot attain real finality.

That Servicewide could not locate the mortgagor, Leticia Laus, is no excuse for resorting to a
procedural short-cut.
 It could have availed of substituted service of summons.
 If it deemed such a mode to be unavailing, it could have proceeded in accordance with Sec 24.
 Servicewide had other proper remedies, it could have resorted to but failed to avail of:
o It could have properly impleaded the mortgagor.
 Such failure is fatal to petitioner's cause.

Petition denied.

Makati Leasing and Finance Corp. v. Wearever Textile Mills, Inc.

GR No. L-58469
Property Law: Immovable Property

Facts:
In order to obtain financial accommodations from petitioner Makati Leasing and Finance Corporation,
the private respondent Wearever Textile Mills, Inc., discounted and assigned several receivables with
the former under a Receivable Purchase Agreement. To secure the collection of the receivables
assigned, private respondent executed a Chattel Mortgage over certain raw materials inventory as well
as machinery described as an Artos Aero Dryer Stentering Range.

Upon default, petitioner filed a petition for extrajudicial foreclosure of the properties mortgage to it.
Acting on petitioner’s application for replevin, the lower court issued a writ of seizure. Then after, the
sheriff enforcing the seizure order repaired to the premises of private respondent and removed the main
drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings ordered the return of the seized drive
motor, after ruling that the machinery in suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the New Civil Code, the same being
attached to the ground by means of bolts and the only way to remove it from respondent’s plant would
be to drill out or destroy the concrete floor, the reason why all that the sheriff could do to enforce the
writ was to take the main drive motor of said machinery.

Issue:
Whether the seized drive motor cannot be a subject of chattel mortgage, because it is a real property
pursuant to Article 415 of the new Civil Code

Held:
No. The seized drive motor can be a subject of chattel mortgage.

Examining the records of the instance case, the Supreme Court found no logical justification to exclude
and rule out, as the appellate court did, the present case from the application of the pronouncement in
the TUMALAD v. VICENCIO CASE (41 SCRA 143) where a similar, if not identical issue was raised.
If a house of strong materials, like what was involved in the Tumalad case may be considered as
personal property for purposes of executing a chattel mortgage thereon as long as the parties to the
contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized only by destination or
purpose, may not be likewise treated as such. This is really because one who has so agreed is estopped
from denying the existence of the chattel mortgage.
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In rejecting petitioner’s assertion on the applicability of the Tumalad doctrine, the Court of Appeals
lays stress on the fact that the house involved therein was built on a land that did not belong to the
owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and we should not lay down distinctions not contemplated by law.

Private respondent contends that estoppel cannot apply against it because it had never represented nor
agreed that the machinery in suit be considered as personal property but was merely required and
dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank form at
the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner and not
denied by the respondent, the status of the subject machinery as movable or immovable was never
placed in issue before the lower court and the Court of Appeals except in a supplemental memorandum
in support of the petition filed in the appellate court.

RCBC v. ROYAL CARGO

J. Gutierrez

Petitioner: Rizal Commercial Banking
Corporation
Respondents: Royal Cargo Corporation
FACTS: Terrymanila Inc. filed a petition for
voluntary insolvency with RTC of Bataan. One
of its creditors was RCBC (P3M secured by
chattel mortgage)
Royal Cargo filed a petition for annulment of
auction sale before Manila RTC, against the
Provincial Sheriff of Bataan RTC and RCBC.
- Questioned the failure to duly notify
Royal Cargo
of the sale at least 10 days prior to the
sale
- Basis: Act No. 1508, Sec. 14

Royal Cargo Corporation, another creditor of
Terrymanila, filed an action before the RTC of
Manila for collection of sum of money and
preliminarily attached "some" of
Terrymanila's personal properties to secure
the satisfaction of judgment award of
P296,662.16, exclusive of interests and atty's
fees.
Bataan RTC declared Terry insolvent
Manila RTC judgment in favor of Royal Cargo
In the meantime, RCBC sought in the
insolvency proceedings at Bataan RTC
permission to extrajudicially foreclose the
chattel mortgage - granted
Provincial Sheriff scheduled the public auction
sale of mortgaged personal properties in Bataan.
At the auction sale, RCBC was the sole bidder,
and purchased them for P1.5M.
Manila RTC judged in favor of Royal Cargo
CA affirmed and increased atty's fees and
awarded exemplary damages and interest on
principal amount
ISSUES/HELD:
(1) WON Royal Cargo should have been
notified of the foreclosure sale - NO
Petitioner: Chattel Mortgage Law only allows
an attaching creditor or judgment creditor to
"redeem" the mortgage, BEFORE the holding of
the auction.
SC: Agrees. Sec. 13 of the Chattel Mortgage
Law allows the would-be redemptioner to
redeem the mortgaged property only BEFORE
its sale.
The redemption cited in Sec. 13 partakes of an
equity of redemption, which is the right of the
mortgagor to redeem the mortgaged property
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after his default in the performance of conditions

of the mortgage, but before the sale of property,
to clear it from encumbrance of the mortgage.

Royal Cargo attached Terry's equity of

redemption.
Thus it had to be informed of the date of sale of
mortgaged assets for it to exercise such equity of
redemption over some of those foreclosed
properties.

Royal Cargo was aware of the auction sale

- It was informed about the Order of the
insolvency court that granted leave to RCBC to
foreclose the chattel mortgage.
- Its negligence or omission to exercise its
equity of redemption within a reasonable time,
or even on the day of auction sale, warrants a
presumption that it had either abandoned it or
opted not to assert it

Royal Cargo was not prejudiced by the

auction sale
- Terry had sufficient, unencumbered assets to
cover obligations owing to its other creditors

RCBC had a superior lien over the

mortgaged assets
- The right of those who acquire properties
should not and cannot be superior to that of a
creditor, who has in his favor an instrument of
mortgage, executed with the formalities of law,
in good faith, and without the least indication of
fraud
- Right of Royal Cargo was subordinate to the
lien of the mortgagee, who has in his favor a
valid chattel mortgage

(2) WON RCBC was guilty of constructive

fraud in failing to provide Royal Cargo with
a 10-day notice - NO

Foreclosure suits may be initiated even during

insolvency proceedings, as long as leave must
first be obtained from the insolvency court, as
what RCBC did.
G.R. No. 147950 December 11, 2003
CALIFORNIA BUS LINES, INC., petitioner,
vs.
STATE INVESTMENT HOUSE, INC., respondent.

FACTS: Delta (not party to the case) loaned from SIHI (respondent) the amount of
P24,010,269.32. Meanwhile, petitioner CBLI purchased on installment basis 35 buses
from Delta. To secure the payment, CBLI executed sixteen (16) promissory notes and
chattel mortgages over the 35 buses in Delta’s favor. (In short, CBLI owed Delta and
Delta owed SIHI.)

When CBLI defaulted on all payments due, it entered into a restructuring agreement with
Delta, which provided for a new schedule of payments of CBLI’s past due installments. In
case of default, Delta would have the authority to take over the management and
operations of CBLI until past due account is paid. On the other hand, the loan agreements
of Delta to SIHI were also restructured since Delta also defaulted in its payments.

CBLI continued having trouble meeting its obligations to Delta. This prompted Delta to
threaten CBLI with the enforcement of the management takeover clause (Delta
eventually took over the operations of CBLI).

On September 15, 1983, Delta executed a Deed of Sale assigning to SIHI five (5) of the
sixteen (16) promissory notes from CBLI. SIHI subsequently sent a demand letter to
CBLI requiring CBLI to remit the payments due on the five promissory notes directly to
it.

Series of cases have been filed by the three parties against each other.

As regards Delta’s remaining obligation to SIHI, Delta offered its available bus units as
payment in kind. SIHI accepted Delta’s offer, and Delta transferred the ownership of its
available buses to SIHI, which in turn acknowledged full payment of Delta’s remaining
obligation. But SIHI was unable to take possession of the buses. SIHI filed a petition for
recovery of possession, which was granted by the court, and it was able to take
possession of 16 bus units belonging to Delta (originally to CBLI).

Thereafter, Delta and CBLI entered into a compromise agreement. CBLI agreed that Delta
would exercise its right to extrajudicially foreclose on the chattel mortgages over the 35
bus units. Following this, CBLI vehemently refused to pay SIHI the value of the five
promissory notes, contending that the compromise agreement with Delta was in full
settlement of all its obligations to Delta including its obligations under the promissory
notes.
 The lower court discharged CBLI from liability on the five promissory notes. It also directed
SIHI to return the 16 buses or to pay its value with interest at 12%. In ruling against
SIHI, the trial court held that the restructuring agreement between Delta and CBLI
novated the five promissory notes; hence, at the time Delta assigned the five promissory
notes to SIHI, the notes were already merged in the restructuring agreement and cannot
be enforced against CBLI.

CA, on the other hand, reversed the ruling of the trial court and found CBLI liable for the
value of the five (5) promissory notes less the proceeds from the attached sixteen (16)
buses.

ISSUES:
(1) whether the Restructuring Agreement between CBLI and Delta novated the five
promissory notes Delta Motors, Corp. assigned to respondent SIHI, and
(2) whether the compromise agreement superseded and/or discharged the subject
five promissory notes

HELD: No, CBLI is still liable for the five promissory notes.

An extinctive novation results either by changing the object or principal conditions

(objective or real), or by substituting the person of the debtor or subrogating a third
person in the rights of the creditor (subjective or personal). Novation is never presumed,
and the animus novandi, whether totally or partially, must appear by express agreement
of the parties, or by their acts that are too clear and unequivocal to be mistaken.

There are two ways which could indicate the presence of novation and thereby produce the
effect of extinguishing an obligation by another which substitutes the same. The first is
when novation has been explicitly stated and declared in unequivocal terms. The second
is when the old and the new obligations are incompatible on every point. The test of
incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter obligation
novates the first.

In this case, the attendant facts do not make out a case of novation. The restructuring
agreement between Delta and CBLI shows that the parties did not expressly stipulate
that the restructuring agreement novated the promissory notes. There is no
incompatibility between the promissory notes and the restructuring agreement.

There was no change in the object of the prior obligations. The restructuring agreement
merely provided for a new schedule of payments and additional security giving Delta
authority to take over the management and operations of CBLI in case
CBLI fails to pay. Where the parties to the new obligation expressly recognize the continuing existence
and validity of the old one, there can be no novation.

The addition of other obligations likewise did not extinguish the promissory notes. A change in the
incidental elements of, or an addition of such element to, an obligation, unless otherwise expressed by
the parties will not result in its extinguishment.

With regard to the 5 promissory notes, Delta relinquished all its rights to the subject promissory notes in
favor of SIHI. This had the effect of separating the five promissory notes from the 16 promissory
notes. From that time, CBLI’s obligations to SIHI embodied in the five promissory notes became
separate and distinct from CBLI’s obligations in eleven (11) other promissory notes that remained
with Delta.
Thus, any breach of these independent obligations gives rise to a separate cause of action in favor of SIHI
against CBLI.

Having previously assigned the five promissory notes to SIHI, Delta had no more right to compromise the
same. Delta’s authority to collect in behalf of SIHI was, by express provision of the Continuing Deed
of Assignment, automatically revoked when SIHI opted to collect directly from CBLI. As regards
CBLI, SIHI’s demand letter requiring CBLI to remit the payments directly to SIHI effectively revoked
Delta’s limited right to collect in behalf of SIHI.

The extrajudicial foreclosure of the chattel mortgages Delta effected cannot prejudice SIHI’s rights. As
stated earlier, the assignment of the five notes operated to create a separate and independent
obligation on the part of CBLI to SIHI, distinct and separate from CBLI’s obligations to Delta.

WHEREFORE, the decision of CA is AFFIRMED. CBLI is ordered to pay respondent SIHI the value
of the five (5) promissory notes less the proceeds from the sale of the attached sixteen (16) buses.