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G.R. No. L-19227 February 17, 1968 DIOSDADO YULIONGSIU, plaintiff-appellant, vs.

PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee. Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant. Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee. BENGZON, J.P., J.: 1 Plaintiff-appellant Diosdado Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was 2 payable at P50,000 a year, due on or before the end of the current year. On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of 3 Cebu. Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by 4 plaintiff on their respective due dates. On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof one of the co-accused had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification 5 was returned unsatisfied as plaintiff was totally insolvent. Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit

"4", transferring the two pledged vessels and plaintiff's equity in FS-203, to 6 defendant bank for P30,042.72. The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951. On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of facts dated October 2, 1958, reciting most of the facts above-narrated. During the course of the trial, defendant amended its answer reducing its claim from P202,000 to 8 P8,846.01, but increasing its alleged damages to P35,000. The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiffpledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the indemnity which plaintiff was ordered to pay to it in the criminal cases. When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the amount involved being more than P200,000.00. In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default. The submission is without merit. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract 3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)1wph1.t Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it.
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The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly 10 made "subject to the order of the pledgee." The provision of Art. 2110 of the 11 present Civil Code being new cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority

supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as 12 trustee for the pledgee. Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the chattels pledged. But then there is also Banco Espaol-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged carabaos were easily capable of actual, manual delivery unto the pledgee. In Banco Espaol-Filipino v. Peterson, the objects pledged goods contained in a warehouse were hardly capable of actual, manual delivery in the sense that it was impractical as a whole for the particular transaction and would have been an unreasonable requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient. Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000. The stand We have taken is not without precedent. The Supreme Court of 13 14 Spain, in a similar case involving Art. 1863 of the old Civil Code, has ruled: Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo. In the second assignment of error imputed to the lower court plaintiffappellant attacks the validity of the private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that the cases holding that the statutory requirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the

passage of Act 3135, as amended; second, that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales; and third, that the price obtained at the sale is unconscionable. There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers only, and is limited, to foreclosure 15 of real estate mortgages. So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so. Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank. The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue of the taking of the vessels. But in view of the results reached above, there is no more need to discuss the same. On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not come to court with clean hands. WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.1wph1.t G.R. No. L-21069 October 26, 1967 MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs. RODOLFO R. VELAYO, defendant-appellant. Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own behalf as defendant-appellant. REYES, J.B.L., J.: Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from July

13, 1954; P120.93 as premiums with interest at the same rate from June 13, 1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs. Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the Philippines (1950). The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp. 12-15). Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites: Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to the contrary. The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of this opinion. Thereupon, Velayo resorted to this Court on appeal. The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72): It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added protection to the latter. There was no understanding that, should the same

be sold at public auction and the value thereof should be short of the undertaking, the defendant would have no further liability to the plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor less than that of a mortgage given as a collateral for the principal obligation in which the creditor is entitled to a deficiency judgment for the balance should the collateral not command the price equal to the undertaking. It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation has already been sold for only the amount of P235.00, the liability of the defendant should be limited to the difference between the amounts of P2,800.00 and P235.00 or P2,565.00. We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation, which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no significance nor is it an obstacle to the application of Article 2115 of the Civil Code. The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable. It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933. WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this respect the decision of the Court below is affirmed. No costs. So ordered. Concepcion, C.J., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

G.R. No. L-19468 October 30, 1964 SALVADOR PIANSAY and CLAUDIA V. VDA. DE UY KIM, plaintiffs-appellants, vs. CONRADO S. DAVID and MARCOS MANGUBAT, defendants-appellees. Santiago F. Alidio for plaintiffs-appellants. Marcos Mangubat in his own behalf and for co-defendant-appellee Conrado S. David. CONCEPCION, J.: This is an appeal from an order of the Court of First Instance of Manila in Civil Case No. 47664 thereof. The pertinent facts are set forth in said order from which we quote: It appears from the complaint that on December 11, 1948, defendant herein Conrado S. David received a loan of P3,000 with interest at 12% per annum from Claudia B. Vda. de Uy Kim, one of the plaintiffs, and to secure the payment of the same, Conrado S. David executed a chattel mortgage on a house situated at 1259 Sande Street, Tondo, Manila; that the chattel mortgage was registered with the Register of Deeds of Manila on December 19, 1948; that on February 10, 1953, the mortgaged house was sold at public auction to satisfy the indebtedness to Claudia B. Vda. de Uy Kim, and the house was sold to Claudia B. Vda. de Uy Kim in the said foreclosure proceedings; that on March 22, 1954, Claudia B. Vda. de Uy Kim sold the said house to Marcos Mangubat, and on March 1, 1956. Marcos Mangubat filed a complaint against Conrado S. David, Civil Case No. 29078, in the Court of First Instance of Manila, for the collection of the loan of P2,000; that on March 24, 1956, the complaint was amended to include the plaintiffs herein Salvador Piansay and Claudia B. Vda. de Uy Kim as party defendants and praying that auction sale executed by the Sheriff on February 10, 1953, and the deed of absolute sale executed by Claudia B. Vda. de Uy Kim in favor of Salvador Piansay be annulled; that decision was rendered in Civil Case No. 29078 ordering Conrado S. David to pay the plaintiff the sum of P2,000, damages and attorney's fees, and dismissing the complaint with respect to Claudia B. Vda. de Uy Kim, Leonardo Uy Kim and Salvador Piansay; that upon appeal, the Court of Appeals affirmed the decision but setting aside the award of damages in favor of Claudia B. Vda. de Uy Kim; that in the execution of Civil Case No. 29078, which was affirmed by the Court of Appeals in CA-G.R. No. 21797-R, the house, which had been bought by Uy Kim at the foreclosure proceedings and sold by her to Salvador Piansay, was levied upon at the instance of the defendant Marcos Mangubat; that to prevent the sale at public auction of the house here in question, the plaintiffs herein filed a petition for certiorari and mandamus with preliminary injunction in the Court of Appeals, CA-G.R. No. 28974-R, entitled Claudia B. Vda. de Uy Kim and Salvador Piansay versus Hon. Judge Jesus Y. Perez, et al.; that acting upon the said petition, the

Court of Appeals in its order of April 28, 1961, denied the petition to lift or discharge the writ of execution. Thereupon, or on July 31, 1961, Piansay and Mrs. Uy Kim, hereinafter referred to as the plaintiffs, instituted the present action which was docketed as Civil Case No. 47664 of the Court of First Instance of Manila, against David and Mangubat, hereinafter referred to as the defendants. In their complaint, plaintiffs, after averring the foregoing facts, allege that, in the proceedings for the execution of the decision in Civil Case No. 29078. David demanded from Piansay the payment of rentals for the use and occupation of the house aforementioned, which, Piansay claims, is his property, and that the defendants are threatening to cause said house to be levied upon and sold at public auction in violation of the alleged rights of the plaintiffs. Accordingly plaintiffs prayed that a writ of preliminary injunction to restrain said levy and sale at public auction be issued and that, after appropriate proceedings, judgment be rendered declaring that Piansay is the true and lawful owner of said house sentencing the defendants to pay damages and making the preliminary injunction permanent. Mangubat moved to dismiss said complaint, upon the theory that the same is barred by the principle of res adjudicata and that plaintiffs have no personality to bring this action or to question the levy upon the house in question, because they have no interest therein. After due hearing the lower court issued the order appealed from, granting said motion and dismissing the complaint, with costs against the plaintiffs. A reconsideration of said order having been denied, plaintiffs interposed the present appeal directly to this Court only questions of law being raised in the appeal, namely: (1) applicability of the principle of res adjudicata; and (2) validity of the chattel mortgage constituted in favor of Mrs. Uy Kim. With reference to the first question, it should be noted that in case CA-G.R. No. 21797-R, the Court of Appeals affirmed the decision in Case No. 29078 of the Court of First Instance of Manila stating: In the case of Ladera, et al., vs. Hodges, et al. (CA-G.R. No. 8027-R, promulgated Sept. 23, 1952) this Court, thru Justice J. B. L. Reyes, said, among others: Since it is a rule in our law that buildings and constructions are regarded as mere accesories to the land (following the Roman maxim omne quod solo inaedificatur solo credit) it is logical that said accessories should partaked of the nature of the principal thing, which is the land forming, as they do, but a single object (res) with it in contemplation of law. ... While it is true that said document was correspondingly registered in the Chattel Mortgage Register 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 (Leung Yee vs. Strong

Machinery Co., 37 Phil. 644). Nor can we give any consideration to that contention of the surety that it has acquired ownership over the property in question by reason of the sale conducted by the Provincial Sheriff of Rizal for as this court has aptly pronounced: A mortgage creditor who purchases real properties at an extra-judicial foreclosure sale thereof by virtue of a chattel mortgage constituted in his favor, which mortgage has been declared null and void with respect to said real properties acquires no right thereto by virtue of said sale. (De la Riva vs. Ah Kee, 60 Phil. 899). Thus, Mrs. Uy Kim had no right to foreclose the alleged chattel mortgage constituted in her favor, because it was in reality a mere contract of an unsecured loan. It follows that the Sheriff was not authorized to sell the house as a result of the foreclosure of such chattel mortgage. And as Mrs. Uy Kim could not have acquired the house when the Sheriff sold it at public auction, she could not, in the same token, it validly to Salvador Piansay. Conceding that the contract of sale between Mrs. Uy Kim and Salvador Piansay was of no effect, we cannot nevertheless set it aside upon instance of Mangubat because, as the court below opined, he is not a party thereto nor has he any interest in the subject matter therein, as it was never sold or mortgaged to him (Emphasis supplied); that, thereafter, the records of the case were remanded to the Court of First Instance of Manila, which caused the corresponding writ of execution to be issued; that upon the request of Mangubat, the house in question was levied upon; that Piansay filed with the trial court, presided over by Hon. Jesus Y. Perez, Judge, a motion to set aside said levy; that this motion was denied by said court, in an order dated February 4, 1961, upon the following ground: Considering that the decision rendered by the Court of Appeals in this case when the same was elevated to said Court recognizes that defendant Claudia B. de Uy Kim did not acquire the house of defendant Conrado S. David and can therefore be executed by the plaintiff to satisfy the judgment rendered against said defendant David in favor of the plaintiff. The mere fact that the dispositive part of the decision states that the complaint is dismissed with respect to defendants Claudia B. de Uy Kim, Leonardo Uy Kim and Salvador Piansay is of no moment because the chattel mortgage executed by David in favor of Claudia B. de Uy Kim might not be annulled but it did not transmit any right from defendant David to Claudia B. de Uy Kim. The house in question can therefore be levied upon because it had remained the property of defendant David (Emphasis supplied); that a reconsideration of this order of February 4, 1961 having been denied by Judge Perez, on February 25, 1961, plaintiffs instituted case CA-G.R. No. 28974-R of the Court of Appeals, for a writ of certiorari and mandamus to annul said orders of Judge Perez and to compel him to release said house from the aforementioned

levy; and that on March 3, 1961, the Court of Appeals denied said petition for certiorari and mandamus "insofar as it prays that the order of respondent Judge denying the lifting and discharge of the writ of execution be set aside and revoked." In other words, in Civil Case No. 29078 of the Court of First Instance of Manila, Piansay assailed the right of Mangubat to levy execution upon the house in question alleging that the same belongs to him, he having bought it from Mrs. Uy Kim, who had acquired it at the auction sale held in connection with the extrajudicial foreclosure of the chattel mortgage constituted in her favor by David. This pretense was, however, overruled by Judge Perez, who presided at said court, in its order of February 4, 1961, upon the theory that the chattel mortgage and sale in favor of Mrs. Uy Kim had been annulled in the original decision in said case, as affirmed by the Court of Appeals in CA-G.R. No. 21797-R. Regardless of whether this theory is accurate or not, the fact is that said order became final and executory upon the denial of the petition for certiorari and mandamus, to annul the same in CA-G.R. No. 28974-R of the Court of Appeals. Hence, plaintiffs are now barred from asserting that the aforementioned chattel mortgage and sale are valid. At any rate, regardless of the validity of a contract constituting a chattel mortgage on a house, as between the parties to said contract (Standard Oil Co. of N. Y. vs. Jaramillo, 44 Phil. 632-633), the same cannot and does not bind third persons, who are not parties to the aforementioned contract or their privies (Leung Yee vs. Strong Machinery Co., 37 Phil. 644; Evangelista vs. Alto Surety, G.R. No. L-11139, April 23, 1958; Navarro vs. Pineda, G.R. No. L-18456, November 30, 1963). As a consequence, the sale of the house in question in the proceedings for the extrajudicial foreclosure of said chattel mortgage, is null and void insofar as defendant Mangubat is concerned, and did not confer upon Mrs. Uy Kim, as buyer in said sale, any dominical right in and to said house (De la Riva vs. Ah Yee, 60 Phil. 800), so that she could not have transmitted to her assignee, plaintiff Piansay any such right as against defendant Mangubat. In short plaintiffs have no cause of action against the defendants herein. WHEREFORE, the others appealed from are hereby affirmed, with costs against plaintiffs Salvador Piansay and Claudia B. Vda. de Uy Kim. It is so ordered. Bengzon, C.J., Bautista Angelo, Reyes, J.B.L. Barrera, Paredes, Dizon Regala, Makalintal, Bengzon, J.P. and Zaldivar, JJ., concur. G.R. No. L-40018 December 15, 1975 NORTHERN MOTORS, INC., petitioner, vs. HON. JORGE R. COQUIA, etc., et al., respondents, FILINVEST CREDIT CORPORATION, intervenor. AQUINO, J.: Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said cabs by Honesto Ong, the assignee

of the unsecured judgment creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc. On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed that the sheriff should be required to deliver to it the proceeds of the execution sale of the mortgaged taxicabs without deducting the expenses of execution. 1. Respondents' motion for reconsideration. Honesto Ong in his motion invokes his supposed "legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only recourse was to levy upon the taxicabs which were in the possession of the judgment debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and mortgagee, "has still an independent legal remedy" against the mortgagor for the recovery of the unpaid balance of the price. That contention is not a justification for setting aside the holding that Ong had no right to levy upon the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity of redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer for the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To require him to do so would be a nullification of his lien and would defeat the purpose of the chattel mortgage which is to give him preference over the mortgaged chattels for the satisfaction of his credit. (See art. 2087, Civil Code). It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of the chattel mortgage credit, realized that to vindicate its claim by independent action would be illusory. For that pragmatic reason, it was constrained to enter into a compromise with Honesto Ong by agreeing to pay him P145,000. That amount was characterized by Northern Motors, Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong. Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not affect him because he is not privy of such contract is untenable. The registration of the chattel mortgage is an effective and binding notice to him of its existence (Ong Liong Tiak vs. Luneta Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus ad rem, XI Enciclopedia Juridica Espaola 294) or a lien which, being recorded, follows the chattel wherever it goes. Honesto Ong's contention that Northern Motors, Inc., was negligent because it did not sue the sheriff within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is not correct. Such action was filed on April 14, 1975 in the Court of First Instance of Rizal, Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters Guaranty Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor, Tropical Commercial Corporation, was impleaded as a defendant therein. That might explain his unawareness of the pendency of such action.

The other arguments of Honesto Ong in his motion may be boiled down to the proposition that the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail over the chattel mortgage credit. That proposition is devoid of any legal sanction and is glaringly contrary to the nature of a chattel mortgage. To uphold that contention is to destroy the essence of chattel mortgage as a paramount encumbrance on the mortgaged chattel. Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to that of the judgment creditor". But he contends that the rights of the purchasers of the cars at the execution sale should be respected. He reasons out they were not parties to the mortgage and that they acquired the cars prior to the mortgagee's assertion of its rights thereto. That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should have alerted the purchasers to the risk which they were taking when they took part in the auction sale. Moreover, at an execution sale the buyers acquire only the right of the judgment debtor which in this case was a mere right or equity of redemption. The sale did not extinguish the pre-existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros and Provincial Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103). Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a "respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc. "only to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to" Northern Motors, Inc. That argument is not clear. Ong probably means that the installments already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted from the proceeds of the execution sale. If that is the point which Ong is trying to put across, and it is something which does not directly affect him, then, that matter should be raised by Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of First Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc. et al." Ong's contention, that the writ of execution, which was enforced against the seven taxicabs (whose sale at public auction was stopped) should have precedence over the mortgage lien, cannot be sustained. Those cabs cannot be sold at an execution sale because, as explained in the resolution under reconsideration, the levy thereon was wrongful. The motion for reconsideration of Ong and the sheriff should be denied. 2. Petitioners motion for partial reconsideration. The lower court in its order of January 3, 1975 cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled without notice to Northern Motors, Inc. as thirdparty claimant.

We already held that the cancellation of the bonds constituted a grave abuse of discretion but we previously denied petitioner's prayer for the reinstatement of the bonds because Northern Motors Inc. had given the impression that it had not filed any action for damages against the sheriff within the one hundred twenty-day period contemplated in Section 17, Rule 39 of the Rules of Court. As already noted above, the truth is that such an action for damages was filed on April 14, 1975 against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the Court of First Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond for P240,000 (No. 0032 posted on December 18, 1974). It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of Rizal at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a replevin case (where an amended complaint dated January 15, 1975 was filed), the surety, Filwriters Guaranty Assurance Corporation, was impleaded as a defendant by reason of its bond for P240,000. Northern Motors, Inc. in that case prayed that the surety be ordered to pay to it damages in the event that the eight taxicabs could not be surrendered to the mortgagee. Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for the reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said bond is not reinstated or if the lower court's orders cancelling it are allowed to stand, the aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions against the surety. That injustice should be corrected. Hence, our resolution of August 29, 1975, insofar as it did not disturb the lower court's orders cancelling the indemnity bonds, should be reconsidered. Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution allowing the sheriff to deduct expenses from the proceeds of the execution sale for the eight taxicabs which sale was held on December 18, 1974. It argues that Honesto Ong or Manila Yellow Taxicab Co., Inc. should shoulder such expenses of execution. We already held that the execution was not justified and that Northern Motors, Inc., as mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have been levied upon and sold at public auction to satisfy the judgment credit which was inferior to the chattel mortgage. Since the cabs could no longer be recovered because apparently they had been transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of motion), the proceeds of the execution sale may be regarded as a partial substitute for the unrecovarable cabs (See arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without deduction of the expenses of execution. WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's motion for partial reconsideration is granted. The resolution of August 29, 1975 is modified in the sense that the lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond for P240,000 (as reaffirmed in its order of January 17, 1975), are set aside. The said indemnity bond for P240,000 is regarded

as in full force and Respondent Sheriff of Manila is further directed to deliver to Northern Motors, Inc. the entire proceeds of the execution sale held on December 18, 1974 for the eight taxicabs which were mortgaged to that firm. SO ORDERED. Makalintal, C.J., Teehankee, Makasiar, Antonio, Esguerra, Muoz Palma, Concepcion Jr., and Martin, JJ., concur. Castro, Fernando, and Barredo JJ., took no part.