ASSOCIATED INSURANCE and SURETY COMPANY, INC.

,
vs. ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, G.R. Nos. L-10837-38 May 30, 1958

Facts:
Valino & Valino were the owners and possessors of a house of strong materials in Rizal, which they purchased
on installment basis. To enable her to purchase on credit rice from NARIC, Valino filed a bond (P11,000)
subscribed by Associated Insurance and Surety Co Inc, and as a counter-guaranty, Valino executed an alleged
chattel mortgage on the aforementioned house in favour of the surety company. At the same time, the parcel of
land which the house was erected was registered in the name of Philippine Realty Corporation.

Valino, to secure payment of an indebtedness (P12,000) executed a real estate mortgage over the lot and the
house in favour of Iya. Valino failed to satisfy her obligation to NARIC, so the surety company was compelled
to pay the same pursuant to the undertaking of the bond. In turn, surety company demanded reimbursement
from Valino, and as they failed to do so, the company foreclosed the chattel mortgage over the house. As a
result, public sale was conducted and the property was awarded to the surety company.

The surety company then learned of the existence of the real estate mortgage over the lot and the improvements
thereon; thus, they prayed for the exclusion of the residential house from the real estate mortgage and the
declaration of its ownership in virtue of the award given during bidding.

Iya alleged that she acquired a real right over the lot and the house constructed thereon, and that the auction
sale resulting from the foreclosure of chattel mortgage was null and void.
Surety company argued that as the lot on which the house was constructed did not belong to the spouses at the
time the chattel mortgage was executed, the house might be considered as personal property, and they prayed
that the said building be excluded from the real estate mortgage.
Issue:
There is no question over Iya’s right over the land by real estate mortgage; however, as the building instructed
thereon has been the subject of two mortgages, controversy arise as to which of these encumbrances should
receive preference over the other.
Held:
The building is subject to the real estate mortgage, in favour of Iya. Iya’s right to foreclose not only the land but
also the building erected thereon is recognised.
While it is true that real estate connotes the land and the building constructed thereon, it is obvious that the
inclusion of the building, separate and distinct from the land, in the enumeration of what may constitute real
properties (Article 415), could only mean that a building is by itself an immovable property. Moreover, in view
of the absence of any specific provision to the contrary, a building is an immovable property irrespective of
whether or not said structure and the land on which it is adhered to belong to the same owner.

A building certainly cannot be divested of its character of a realty by the fact that the land on which it is
constructed belongs to another.

In the case at bar, as personal properties could only be the subject of a chattel mortgage and as obviously the
structure in question is not one, the execution of the chattel mortgage covering said building is clearly invalid
and a nullity. While it is true that said document was correspondingly registered in Chattel Mortgage Registry
of Rizal, this act produced no effect whatsoever, for where the interest conveyed is in the nature of real
property, the registration of the document in the registry of chattels is merely a futile act. Thus, the registration
of the chattel mortgage of a building of strong materials produced no effect as far as the building is concerned.

SALDANA vs. PHILIPPINE GUARANTY, January 29, 1960

Facts: In order to secure an indebtedness of P15,000.00, Josefina Vda. de Aleazar executed in favor of the
plaintiff-appellant Buenaventura Saldana a chattel mortgage covering properties described as follows: A
building of strong materials, used for restaurant business, located in front of the San Juan de Dios Hospital at
Dewey Boulevard, Pasay City, and the following personal properties therein contained: 1 Radio, Zenith, cabinet
type. 1 Cooler. 1 Electric range, stateside, 4 burners. 1 Frigidaire, 8 cubic feet. 1 G.E. Deepfreezer. 8 Tables,
stateside. 32 Chromium chairs, stateside. 1 Sala set upholstered, 6 pieces. 1 Bedroom set, 6 pieces. And all other
furniture's, fixtures or equipment found in the said premises. Subsequent to the execution of the mortgage, a
writ of execution was duly issued as a result of a civil case instituted by Hospital de San Juan de Dios against
Josefina Eleazar; whereupon the following properties of Josefina Eleazar were levied upon: 8 Tables with 4
(upholstered) chairs each. 1 Table with 4 (wooden) chairs. 1 Table (large) with 5 chairs. 1 Radio-phono (Zenith,
8 tubes). 2 Showcases (big, with mirrors). 1 Rattan sala set with 4 chairs, 1 table and 3 sidetables . 1 Wooden
drawer. 1 Tocador (brown with mirror). 1 Aparador . 2 Beds (single type). 1 Freezer (deep freeze). 1 Gas range
(magic chef, with 4 burners). 1 Freezer (G.E.). On January 31, 1957, the plaintiff-appellant Saldana filed a
third-party claim asserting that the above-described properties levied are subject to his chattel mortgage of May
8, 1953. In virtue thereof, the sheriff released only some of the property originally included in the levy of
January 28, 1957, to wit: 1 Radio, Zenith, cabinet type. 8 Tables, stateside. 32 Chromiun chairs, stateside. 1
G.E. Deep freezer. Appellants claims that the phrase in the chattel mortgage contract — "and all other
furnitures, fixtures and equipment found in the said premises", validly and sufficiently covered within its terms
the personal properties disposed of in the auction sale
Issue: WON the properties levied are covered by the mortgage. YES.
Held: Section 7 of Act No. 1508, commonly and better known as the Chattel Mortgage Law, does not demand a
minute and specific description of every chattel mortgaged in the deal of mortgage but only requires that the
description of the properties be such "as to enable the parties in the mortgage, or any other person, after
reasonable inquiry and investigation to identify the same". Gauged by this standard, general description have
been held by this Court. the description in the mortgage must point out its subject matter so that such person
may identify the chattels observed, but it is not essential that the description be so specific that the property may
be identified by it alone, if such description or means of identification which, if pursued will disclose the
property conveyed. The specifications in the chattel mortgage contract in the instant case, we believe, in
substantial compliance with the "reasonable description rule" fixed by the chattel Mortgage Act. We may notice
in the agreement, moreover, that the phrase in question is found after an enumeration of other specific articles.
It can thus be reasonably inferred therefrom that the "furnitures, fixture and equipment" referred to are
properties of like nature, similarly situated or similarly used in the restaurant of the mortgagor located in front
of the San Juan de Dos Hospital at Dewey Boulevard, Pasay City, which articles can be definitely pointed out or
ascertain by simple inquiry at or about the premises. A contrary view would unduly impose a more rigid
condition than what the law prescribes, which is that the description be only such as to enable identification
after a reasonable inquiry and investigation.
OLAF N. BORLOUGH vs. FORTUNE ENTERPRISES, INC., March 29, 1957
Facts: Fortune Enterprises, Inc. sold to Salvador Aguinaldo a Chevrolet sedan, which it from United Car
Exchange, and for not having paid it in full, the latter executed on the same date a promissory note in the
amount of P2,400 payable in 20 installments. To secure the payment of this note, Aguinaldo executed a deed of
chattel mortgage over said car. The deed was duly registered in the office of the Register of Deeds of Manila.
As the buyer-mortgagor defaulted in the payment of the installments due, counsel for Fortune Enterprises Inc.
addressed a letter on May 16, 1952, requesting him to make the necessary payment and to keep his account up
to date, so that no court action would be resorted to. The above-described car found its way again into the
United Car Exchange which sold the same in cash for P4,000 to one O. N. Borlough. Accordingly, he registered
it on the following day with the Motor Vehicles Office. 0. N. Borlough took possession of the vehicle from the
time he purchased it, On July 10, 1952, Fortune Enterprises, Inc. brought action against Salvador Aguinaldo to
recover the balance of the purchase price. Borlough filed a third-party complaint, claiming the vehicle.
Thereupon, Fortune Enterprises, Inc. amended its complaint, including Borlough as a defendant and alleging
that he was in connivance with Salvador Aguinaldo and was unlawfully hiding and concealing the vehicle in
order to evade seizure by judicial process. Borlough answered alleging that he was in legal possession thereof,
having purchased it in good faith and for the full price of P4,000, and that he had a certificate of registration of
the vehicle issued by the Motor Vehicles Office, and he prayed for the dismissal of the complaint, the return of
the vehicle and for damages against the plaintiff.
Issue: WON the mortgage binds Borlough who is a purchaser in good faith. NO.
Held: Two recording laws are here being invoked, one by each contending party — the Chattel Mortgage Law
(Act No. 1508), by the mortgagor and the Revised Motor Vehicles Law (Act No. 3992), by a purchaser in
possession. The Revised Motor Vehicles Law is a special legislation enacted to "amend and compile the laws
relative to motor vehicles," whereas the Chattel Mortgage Law is a general law covering mortgages of all kinds
of personal property. The former is the latest attempt to assemble and compile the motor vehicle laws of the
Philippines, all the earlier laws on the subject having been found to be very deficient in form as well as in
substance; it had been designed primarily to control the registration and operation of motor vehicles. Counsel
for petitioner contends that the passage of the Revised Motor Vehicles Law had the effect of repealing the
Chattel Mortgage Law, as regards registration of motor vehicles and of the recording of transaction affecting the
same. We do not believe that it could have been the intention of the legislature to bring about such a repeal. In
the first place, the provisions of the Revised Motor Vehicles Law on registration are not inconsistent with does
of the Chattel Mortgage Law. In the second place, implied repeals are not favored; implied repeals are permitted
only in cases of clear and positive inconsistency. The first paragraph of section 5 indicates that the provisions of
the Revised Motor Vehicles Law regarding registration and recording of mortgage are not incompatible with a
mortgage under the Chattel Mortgage Law. The section merely requires report to the Motor Vehicles Office of a
mortgage; it does not state that the registration of the mortgage under the Chattel Mortgage Law is to be
dispensed with. We have, therefore, an additional requirements in the Revised Motor Vehicles Law, aside from
the registration of a chattel mortgage, which is to report a mortgage to the Motor Vehicles Office, if the subject
of the mortgage is a motor vehicle; the report merely supplements or complements the registration. The
recording provisions of the Revised Motor Vehicles Law, therefore, are merely complementary to those of the
Chattel Mortgage Law. A mortgage in order to affect third persons should not only be registered in the Chattel
Mortgage Registry, but the same should also be recorded in the motor Vehicles Office as required by section 5
(e) of the Revised Motor Vehicles Law [Whenever any owner hypothecates or mortgage any motor vehicle as
surety for a debt or other obligation, the creditor or person in whose favor the mortgage is made shall, within
seven days, notify the Chief of the Motor Vehicles Office in writing]. And the failure of the respondent
mortgage to report the mortgage executed in its favor had the effect of making said mortgage ineffective against
Borlough, who had his purchase registered in the said Motor Vehicles Office. One holding a lien on a motor
vehicle, in so far as he can reasonably do so, must protect himself and others thereafter dealing in good faith by
complying and requiring compliance with the provisions of the laws concerning certificates of title to motor
vehicles, such as statutes providing for the notation of liens or claims against the motor vehicle certificate of
title or manufacturer's certificate, or for the issuance to the mortgagee of a new certificate of ownership. The
holder of a lien who is derelict in his duty to comply and require compliance with the statutory provisions acts
at his own peril, and must suffer the consequence of his own negligence; and accordingly, he is not entitled to
the lien as against a subsequent innocent purchaser filed as provided by other chattel mortgage statutes. The
above authorities leave no room for doubt that purchaser O. N. Borlough's right to the vehicle should be upheld
as against the previous and prior mortgage Fortune Enterprises, Inc., which failed to record its lien in
accordance with the Revised Motor Vehicles Law.
Philippine Refining Co., Inc. v Jarque et. al., March 25, 1935
Doctrine:
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. Otherwise a mortgage on a vessel is generally like other chattel mortgages as to its
requisites and validity

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 the period of thirty days prior to the
commencement of insolvency proceedings against Francisco Jarque;

A fourth mortgage was executed by Francisco Jarque and Ramon Aboitiz on the motorship Zaragoza and was
entered in the chattel mortgage registry of the register of deeds on within the thirty-day period before the
institution of insolvency proceedings.

Francisco was declared an insolvent with the result that an assignment of all the properties of the insolvent was
executed in favor of Jose Corominas.

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 mortgages were defective.

Held:

Yes. Vessels are considered personal property under the civil law. Similarly under the common law, vessels are
personal property although occasionally referred to as a peculiar kind of personal property. 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 in 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. Otherwise a mortgage on a vessel is generally like other chattel mortgages as to its
requisites and validity.

In the case, the absence of the affidavit vitiates a mortgage as against creditors and subsequent encumbrancers.
As a consequence, a chattel mortgage of a vessel wherein the affidavit of good faith required by the Chattel
Mortgage Law is lacking, is unenforceable against third persons.
ACME Shoes vs. CA, G.R. No. 103576 August 22, 1996

FACTS:
Petitioner Chua Pac, the president and general manager of co-petitioner Acme executed a chattel mortgage in
favor of private respondent Producers Bank as a security for a loan of P3,000,000. A provision in the chattel
mortgage agreement was to this effect:

"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former
note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this
mortgage shall also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage shall have the same force
and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This
mortgage shall also stand as security for said obligations and any and all other obligations of the
MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been
contracted before, during or after the constitution of this mortgage."

In due time, the loan of P3,000,000.00 was paid. Subsequently it obtained additional loan totalling
P2,700,000.00 which was also duly paid.

Another loan was again extended (P1,000,000.00) covered by four promissory notes for P250,000.00 each, but
went unsettled prompting the bank to apply for an extrajudicial foreclosure with the Sheriff.

ISSUE: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend
its coverage to obligations yet to be contracted or incurred?

HELD:
No. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so
long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of
the borrower of the financing agreement whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage
sought to be foreclosed.
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO TEVES, VICTORIA TEVES and
HIRAM DIDAY PULIDO vs HON. COURT OF APPEALS and DEVELOPMENT BANK OF THE
PHILIPPINES, G.R. No. 106435, July 14, 1999
FACTS: On April 17, 1980, petitioner PAMECA obtained 2Mworth loan from respondent Bank. By virtue of
this loan, petitioner PAMECA, through its President, petitioner Teves, executed a promissory note for the said
amount, promising to pay the loan by installment. As security for the said loan, a chattel mortgage was also
executed over PAMECA's properties in Dumaguete City, consisting of inventories, furniture and equipment, to
cover the whole value of the loan. On January 18, 1984, and upon petitioner PAMECA's failure to pay,
respondent bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction,
purchased the foreclosed properties. On June 29, 1984, respondent bank filed a complaint for the collection of
the balance against petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA
under the promissory note.
RTC ruled in favor of respondent Bank. CA affirmed RTC’s decision. Petitioners now claim that respondent
appellate court gravely erred in not holding that the public auction sale of petitioner PAMECA's chattels were
tainted with fraud, as the chattels of the said petitioner were bought by private respondent as sole bidder in only
1/6 of the market value of the property, hence unconscionable and inequitable (P322,350.00 from 2M), and
therefore null and void. Petitioners contend that the amount of P322,350.00 at which respondent bank bid for
and purchased the mortgaged properties was unconscionable and inequitable considering that, at the time of the
public sale, the mortgaged properties had a total value of more than P2,000,000.00. According to petitioners,
this is evident from an inventory which valued the properties at P2,518,621.00, in accordance with the terms of
the chattel mortgage contract between the parties that required that the inventories "be maintained at a level no
less than P2 million". Petitioners argue that respondent bank's act of bidding and purchasing the mortgaged
properties for P322,350.00 or only about 1/6 of their actual value in a public sale in which it was the sole bidder
was fraudulent, unconscionable and inequitable, and constitutes sufficient ground for the annulment of the
auction sale.
Issue: WON the auction sale is null and void on grounds of fraud and inadequacy of price. – NO
Held: There is no merit in petitioners' submission that the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and only in the Court of
Appeals did they attempt to prove inadequacy of price. Having nonetheless examined the inventory and chattel
mortgage document as part of the records, We are not convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At
best, the chattel mortgage contract only indicates the obligation of the mortgagor to maintain the inventory at a
value of at least P2,000,000.00, but does not evidence compliance therewith. Furthermore, the mere fact that
respondent bank was the sole bidder for the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a serious allegation that requires full and
convincing evidence, and may not be inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties.
NOTE: The mere fact that the mortgagee was the sole bidder for the mortgaged property in the public sale does
not warrant the conclusion that the transaction was attended with fraud.
RCBC vs ROYAL CARGO, October 2, 2009
FACTS:
 Terry manila filed a petition for voluntary insolvency with the RTC of Bataan on February 13, 1991. 
 One of its creditors was RCBC with which it had an obligation of P3 Million that was secured by
a chattel mortgage executed on February 16, 1989. The chattel mortgage was duly recorded.
 Royal Cargo another creditor of Terrymanila, filed an action with RTC Manila for collection of sum of
money and preliminarily attached personal properties on March 5, 1991.
 On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.
 On June 11, 1991, Manila RTC, rendered judgment in the collection case in favor of Royal Cargo.
 In the meantime, RCBC sought in the insolvency proceedings at the Bataan RTC permission to
extrajudicially foreclose the chattel mortgage which was granted by Order of February 3, 1992.
 The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale of the
mortgaged personal properties. At the auction sale, RCBC was the sole bidder of the properties and purchased
them for P1.5 Million. Eventually, RCBC sold the properties to Domingo Bondoc and Victoriano See. 
 Royal Cargo filed on July 30, 1992 a petition before the  RTC of Manila against the Provincial Sheriff of the
RTC Bataan and RCBC, for annulment of the auction sale. Apart from questioning the inclusion in the auction
sale of some of the properties which it had attached, respondent questioned the failure to duly notify it of the
sale at least 10 days before the sale.
ISSUE: WON Royal Cargo should have been given a 10-day prior notice of the foreclosure
sale.
HELD:
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the mortgaged
property only before its sale. [T]here is no law in our statute books which vests the right of redemption
over personal property. The right of redemption applies to real properties, not personal properties, sold on
execution. The redemption cited in Section 13 partakes of an equity of redemption, which is the right of the
mortgagor to redeem the mortgaged property after his default in the performance of the conditions of the
mortgage but before the sale of the property to clear it from the encumbrance of the mortgage. It is not the same
as right of redemption which is the right of the mortgagor to redeem the mortgaged property after registration of
the foreclosure sale, and even after confirmation of the sale.
While respondent had attached some of Terrymanila assets to secure the satisfaction of a judgment what it
effectively attached was Terrymanila’s equity of redemption. Having thus attached Terrymanila’s equity of
redemption, respondent had to be informed of the date of sale of the mortgaged assets for it to exercise such
equity of redemption over some of those foreclosed properties, as provided for in Section 13.
Recall, however, that respondent filed a motion to reconsider the February 3, 1992. Order of the RTC Bataan-
insolvency court which granted leave to petitioner to foreclose the chattel mortgage. Thus, even prior to
receiving, through counsel, a mailed notice of the auction sale on the date of the auction sale itself on June 16,
1992, respondent was already put on notice of the impending foreclosure sale of the mortgaged chattels. It could
thus have expediently exercised its equity of redemption, at the earliest when it received the insolvency court
Order of March 20, 1992 denying its Motion for Reconsideration of the February 3, 1992 Order.
In any event, even if respondent would have participated in the auction sale and matched petitioner’s bid, the
superiority of petitioner’s lien over the mortgaged assets would preclude respondent from recovering the
chattels. The right of those who acquire said properties should not and cannot be superior to that of the creditor
who has in his favor an instrument of mortgage executed with the formalities of the law, in good faith, and
without the least indication of fraud.
It bears noting that the chattel mortgage in favor of petitioner was registered more than two years before the
issuance of a writ of attachment over some of Terrymanila’s chattels in favor of respondent. Since the
registration of a chattel mortgage is an effective and binding notice to other creditors of its existence and creates
a real right or lien that follows the property wherever it may be, the right of respondent, as an attaching creditor
or as purchaser, had it purchased the mortgaged chattel at the auction sale, is subordinate to the lien of the
mortgagee who has in his favor a valid chattel mortgage.
VALLEY GOLF & COUNTRY CLUB, INC., vs. ROSA VDA. DE CARAM, G.R. No. 158805, April 16,
2009
FACTS:
Petitioner is a duly constituted non-stock, non-profit corporation which operates a golf course. The members
and their guests are entitled to play golf on the said course and avail of the facilities and privilege. The
shareholders are likewise assessed monthly membership dues.
Cong. Fermin Z. Caram, Jr., respondent’s husband, subscribed and paid in full 1 Golf Share of the petitioner
and was subsequently issued with a stock certificate which indicated a par value of P9,000.00. It was alleged by
the petitioner that Caram stopped paying his monthly dues and that it has sent 5 letters to Caram concerning his
delinquent account. The Golf Share was subsequently sold at public auction for P25,000.00 after the BOD had
authorized the sale and the Notice of Auction Sale was published in the Philippine Daily Inquirer.

Caram thereafter died and his wife initiated intestate proceedings before the RTC of IloIlo. Unaware of the
pending controversy over the Golf Share, the Caram family and the RTC included the Golf Share as part
of Caram’s estate. The RTC approved a project of partition of Caram’s estate and the Golf Share was
adjudicated to the wife, who paid the corresponding estate tax due, including that on the golf Share.

It was only through a letter that the heirs of Caram learned of the sale of the Golf Share following their inquiry
with Valley Golf about the Golf Share. After a series of correspondence, the Caram heirs were subsequently
informed in a letter that they were entitled to the refund of P11,066.52 out of the proceeds of the sale of the Golf
Share, which amount had been in the custody of the petitioner.

Caram’s wife filed an action for reconveyance of the Golf Share with damages before the SEC against Valley
Golf.  The SEC Hearing Officer rendered a decision in favor of the wife, ordering Valley Golf to convey
ownership of the Golf Share, or in the alternative. to issue one fully paid share of stock of Valley Golf of the
same class as the Golf Share to the wife. Damages totaling P90,000.00 were also awarded to the wife.  

The SEC hearing officer ruled that under Section 67, paragraph 2 of the Corporation Code, a share stock could
only be deemed delinquent and sold in an extrajudicial sale at public auction only upon the failure of the
stockholder to pay the unpaid subscription or balance for the share. However, the section could not have applied
in Caram’s case since he had fully paid for the Golf Share and he had been assessed not for the share itself but
for his delinquent club dues. Proceeding from the foregoing premises, the SEC hearing officer concluded that
the auction sale had no basis in law and was thus a nullity.  The SEC en banc and the Court of Appeals affirmed
the hearing officer’s decision, and so the petitioner appealed before SC.

ISSUE: WON a non-stock corporation seize and dispose of the membership share of a fully-paid member on
account of its unpaid debts to the corporation when it is authorized to do so under the corporate by-laws but not
by the Articles of Incorporation?

Held:

The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock Corporations of the
Corporation Code dealing with the termination of membership in a non-stock corporation such as Valley Golf.    

Section 91 of the Corporation Code provides: Termination of membership.—Membership shall be terminated in

the manner and for the causes provided in the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of a member in the corporation or in its property,
unless otherwise provided in the articles of incorporation or the by-laws.

A share can only be deemed delinquent and sold at public auction only upon the failure of the stockholder to
pay the unpaid subscription. Delinquency in monthly club dues was merely an ordinary debt enforceable by
judicial action in a civil case. A provision creating a lien upon shares of stock for unpaid debts, liabilities, or
assessments of stockholders to the corporation, should be embodied in the Articles of Incorporation, and not
merely in the by-laws. Moreover, the by-laws of petitioner should have provided formal notice and hearing
procedure before a member’s share may be seized and sold. The procedure for stock corporation’s
recourse on unpaid subscription is not applicable in member’s shares in a non-stock corporation.

SC proceeded to declare the sale as invalid.  SC found that Valley Golf acted in bad faith when it sent the final
notice to Caram under the pretense they believed him to be still alive, when in fact they had very well known
that he had already died.  The Court stated: Whatever the reason Caram was unable to respond to the earlier
notices, the fact remains that at the time of the final notice, Valley Golf knew that Caram, having died and
gone, would not be able to settle the obligation himself, yet they persisted in sending him notice to provide a
color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the Golf Share, is
sufficient to nullify the sale and sustain the rulings of the SEC and the Court of Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the final notice to Caram on
the deliberate pretense that he was still alive could bring into operation Articles 19, 20 and 21 under the Chapter
on Human Relations of the Civil Code. These provisions enunciate a general obligation under law for every
person to act fairly and in good faith towards one another. Non-stock corporations and its officers are not
exempt from that obligation.

PNB vs. Luzon Surety Co., Inc., November 28, 1975

Facts:

Prior to 27 November 1951, defendant Augusto Villarosa, a sugar planter adhered to the Lopez Sugar Central
Milling Company applied for a crop loan with the PNB; this application was approved in 1952 in the amount of
P32,400, according to the complaint; but the document of approval has not been exhibited; at any rate, the
planter Villarosa executed a Chattel Mortgage on standing crops to guarantee the crop loan, in consideration of
periodical sums of money by him received from PNB, planter Villarosa executed these promissory notes from
which will be seen that the credit line was that the original amount of P32,400 and was thus maintained up to
the promissory note but afterwards it was increased and promissory notes were based on the increased credit
line; and as of 1953, there was a balance of P63,222.78 but as of the date when the complaint was filed in 1960,
because of the interest accrued, it had reached a much higher sum; that was why due to its non-payment,
plaintiff filed this complaint, as has been said, on 8 June, 1960;

The complaint sought relief not only against the planter but also against the 3 bondsmen, Luzon Surety, Central
Surety and Associated Surety because Luzon Surety had filed the bond in the sum of P10,000; Central Surety in
the sum of P20,000 and Associated Surety the bond in the sum of P15,000; in gist, the obligation of each of the
bondsmen being to guarantee the faithful performance of the obligation of the planter with PNB; now each of
the defendants in their answers raised various defenses but as far as principal defendant Villarosa and other
defendants Central Surety and Associated Surety are concerned, their liability is no longer material because they
have not appealed.

Issue: WON the CA was justified in absolving Luzon Surety Co., Inc., from liability to petitioner PNB. We
have examined the record thoroughly and found the appealed decision to be erroneous.

Held:

Luzon Surety to petitioner Philippine National Bank is not merely as a guarantor but as surety-liable as a regular
party to the undertaking. The CA, however, in absolving the bonding company ratiocinates that the Surety
Bond, made specific references to a crop loan contract executed by Villarosa. And, therefore, the Chattel
Mortgage, could not have been the obligations guaranteed by the surety bond.

The Court of Appeals, to Our mind did not give credence to an otherwise significant and unrebutted testimony
of petitioner's witness, Brillantes, that Exhibit B was the only chattel mortgage executed by Villarosa
evidencing the crop loan contract and upon which Luzon Surety agreed to assume liability up to the amount of
P10,000 by posting the said surety bond. Moreover Article 1354 of our New Civil Code which provides:
Although the cause is not stated in the contract., it is presumed that it exist and is lawful, unless the

Considering too that Luzon Surety company is engaged in the business of furnishing guarantees, for a
consideration, there is no reason that it should be entitled to a rule of strictissimi juris or a strained and over-
strict interpretation of its undertaking. The presumption indulged in by the law in favor of guarantors was
premised on the fact that guarantees were originally gratuitous obligations, which is not true at present, at least
in the great majority of cases.

The principal obligation has never been put in issue by Luzon Surety Co., On the other hand it raised as its
defense the alleged material alteration of the terms and conditions of the contract as the basis of its prayer for
release. Even this defense of Luzon Surety Co., Inc. is untenable under the facts obtaining. As a surety, said
bonding company is charged as an original promissory and is an insurer of the debt. While it is an accepted rule
in our jurisdiction that an alteration of the contract is a ground for release, this alteration, We stress must be
material. A cursory examination of the record shows that the alterations in the form of increases were made
with the full consent of Luzon Surety Co., Inc.

The next question to take up is the liability of Luzon Surety Co. for interest which, it contends, would increase
its liability to more than P10,000 which is the maximum of its bond. We cannot agree to this reasoning. If a
surety upon demand fails to pay, he can be held liable for interest, even if in thus paying, the liability becomes
more than that in the principal obligation. The increased liability is not because of the contract but because of
the default and the necessity of judicial collection. It should be noted, however, that the interest runs from the
time the complaint is filed, not from the time the debt becomes due and demandable.