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Perfecto Dy v. CA, Gelac Trading, and Antonio Gonzales (1991) Gutierrez, Jr., J. Wilfredo bought a truck and tractor with Libras help. Both were then mortgaged to Libra as security for the loan. While the mortgage was still subsisting, his brother, Perfecto, wanted to buy the tractor. He wrote to Libra asking to buy the tractor and that he was going to assume the mortgage debt. Libra agreed. The brothers executed a deed of absolute sale. But Libra would not give the tractor until both tractor and truck were paid. So their sister gave a check to Libra to extinguish Wilfredos obligation. While waiting for the check to clear, Gelac won a collection case against Wilfredo. The tractor was sold at public auction and Gelac was the only bidder. Gelac sold it to one of its stockholders. He and Perfecto are now fighting for the tractor. Perfecto and Wilfredo Dy are brothers. Wilfredo bought a truck and farm tractor through financing extended by Libra Finance. Both were mortgaged to Libra as security for the loan. Perfecto wanted to buy the tractor from his brother so he wrote to Libra requesting that he be allowed to buy this from Wilfredo and assume the mortgage debt. o Libra through its manager approved this request. Wilfredo then executed a Deed of Absolute Sale (of the tractor) in favor of Perfecto. But at this time, the tractor was in the possession of Libra because of Wilfredos failure to pay the amortizations. Despite the offer of full payment by Perfecto to Libra for the tractor, the immediate release could not be effected because Wilfredo had obtained financing not only for the tractor but also for a truck and Libra insisted on full payment for both. Perfecto convinced his sister Carol to buy the truck so that full payment could be made for both. A PNB check was issued in favor of Libra, thus settling in full the indebtedness of Wilfredo. But Libra insisted that the check be cleared first Libra would release the chattels. Meanwhile, a collection case filed by Gelac Trading was pending in another court against Wilfredo. o Dec 1979: Sheriff seized and levied on the tractor, which was in the premises of Libra. The tractor was sold at public auction where Gelac was the lone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio Gonzales. Jan 1980: Check was cleared and only then that Perfecto learned about Gelac having taken custody of the tractor. He filed an action to recover the tractor from Gelac. RTC granted. CA reversed, ruling that the tractor still belonged to Wilfredo when it was seized and levied.

Issue/Held: Whether or not ownership of the tractor had already passed to Perfecto when tractor was levied on by the sheriff pursuant to an alias writ of execution issued in another case in favor of respondent Gelac Trading --- YES. Ownership already passed to Perfecto. Gelacs argument: at the time of the execution of the deed of sale, no constructive delivery was effected since the consummation of the sale depended upon the clearance of the check which was issued in payment of the tractor. Ratio: Mortgagor (debtor) retains ownership. Servicewide Specialists v. IAC (1989): o The mortgagor (debtor) who gave the property as security under a chattel mortgage did not part with ownership. He had the right to sell it although he was under the obligation to secure the written CONSENT of the mortgagee (creditor) or the mortgagor (debtor) lays himself open to criminal prosecution under the provision of RPC 319 par. 2. And even if no consent was obtained from the mortgagee (creditor), the validity of the sale would still not be affected. SC sees no reason why Wilfredo, as the chattel mortgagor cannot sell the tractor. Consent of Libra was even obtained. The sale between the brothers was valid and binding as between them and to the mortgagee (creditor), as well. Ownership is acquired from delivery (and other applicable NCC provisions) NCC 1496 states that the ownership of the thing sold is acquired by the buyer from the moment it is DELIVERED to him in any of the ways specified in NCC 1497-1501 or in any other manner signing an agreement that the possession is transferred from the seller to the buyer. NCC 1498 states that when the sale is made through a public instrument, the execution thereof shall be equivalent to the delivery of the thing which is the object of the contract, if from the deed the contrary does not appear or cannot clearly be inferred. NCC 1499 provides that the DELIVERY of movable property may be made by the MERE CONSENT or agreement of the contracting parties, IF the thing sold CANNOT be transferred to the possession of the buyer at the time of the sale, or if the buyer already had it in his possession for any other reason. Application in this case: Wilfredo was still the owner and he was allowed to sell it to another Actual delivery of the tractor could not be made. However, there was CONSTRUCTIVE DELIVERY already upon the execution of the public instrument pursuant to NCC 1498 and upon the agreement of the parties when the thing sold cannot be immediately transferred to the possession of the buyer (Perfecto) The CA says that the seller (Wilfredo) must first have possession of the thing before he could transfer ownership by constructive delivery. Here, it was Libra which was in possession of the tractor. As mortgagee (creditor), Libra has the right of foreclosure upon default by the mortgagor. The law implies that the mortgagee (creditor) is entitled to possess the mortgaged property because possession is necessary in order to enable him to have the property sold.

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While Wilfredo was not in actual possession of the tractor, his right of ownership was NOT divested from him upon his default. Neither could it be said that Libra was the owner because the mortgagee (creditor) CANNOT become the owner of and appropriate to himself the property mortgaged (NCC 2088). Property continues to belong to the mortgagor. The only remedy is to have the property sold at public auction and the proceeds of the sale applied to the payment of the obligation secured by the mortgagee. There is no showing that Libra has already foreclosed the mortgage and that it was the new owner of the tractor. And Libra consented to the sale of the tractor to Perfecto. Where a third person (Perfecto) purchases the mortgaged property, he automatically steps into the shoes of the original mortgagor. His right of ownership shall be subject to the mortgage of the thing sold to him. In this case, Perfecto was fully aware of the existing mortgage of the tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the mortgage debt.

Clearing of the check not determinative of consummation of sale The payment of the check was intended to extinguish the mortgage so that the tractor could be released to Perfecto. It was never intended as payment of the purchase price because the relationship between Libra and the Perfecto is not a sale but still a mortgage. The clearing of the check which produced the effect of payment determined the full payment of the money obligation and the release of the chattel mortgage. It was NOT determinative of the consummation of the sale. The transaction between the brothers is distinct and apart from the transaction between Libra and the Perfecto. The contention, therefore, that the consummation of the sale depended upon the encashment of the check is untenable. The sale of the tractor was consummated upon the execution of the public instrument (Sept 1979). At this time constructive delivery was already effected. The tractor was no longer owned by Wilfredo when it was levied by the sheriff in December 1979. Only properties owned by the debtor and which are not exempt by law from execution should be levied upon. Gelac claims that at that time the sheriff levied on the tractor and took custody, no one ever protested or filed a third party claim. It is inconsequential whether a third party claim has been filed during the time the sheriff levied on the tractor. A person other than the debtor who claims ownership or right over levied properties is not precluded from taking other legal remedies to prosecute his claim. Other issues: SC accords great respect and weight to the findings of fact of the TC. There is no sufficient evidence to show that the sale of the tractor was in fraud of Wilfredo and creditors. While they are brothers, this fact does not give rise to the presumption that the sale was fraudulent. Relationship is not a badge of fraud. Fraud cannot be presumed; it must be established by clear convincing evidence. Gelacs acts were violative of the provisions on human relations. As found by the TC, Gelac knew of the transfer of the property to Perfecto when it received summons based on the complaint for replevin filed by Perfecto. Notwithstanding the summons, it continued to sell the tractor to one of its stockholders. Petition granted.