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CREDIT TRANSACTIONS (Atty.

Jazzie Sarona) 1
3RD EXAM COVERAGE - CASES
CORDOVA v. REYES
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 146555

July 3, 2007

JOSE C. CORDOVA, Petitioner,


vs.
REYES DAWAY LIM BERNARDO LINDO ROSALES
LAW OFFICES, ATTY. WENDELL CORONEL and the
SECURITIES AND EXCHANGE
COMMISSION,*** Respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari 1 of a
decision2 and resolution3 of the Court of Appeals (CA)
dated July 31, 2000 and December 27, 2000,
respectively, in CA-G.R. SP No. 55311.
Sometime in 1977 and 1978, petitioner Jose C.
Cordova bought from Philippine Underwriters Finance
Corporation (Philfinance) certificates of stock of
Celebrity Sports Plaza Incorporated (CSPI) and shares
of stock of various other corporations. He was issued a
confirmation of sale.4 The CSPI shares were physically
delivered by Philfinance to the former Filmanbank 5 and
Philtrust Bank, as custodian banks, to hold these
shares in behalf of and for the benefit of petitioner.6
On June 18, 1981, Philfinance was placed under
receivership by public respondent Securities and
Exchange Commission (SEC). Thereafter, private
respondents Reyes Daway Lim Bernardo Lindo
Rosales Law Offices and Atty. Wendell Coronel
(private
respondents)
were
appointed
as
liquidators.7 Sometime in 1991, without the knowledge
and consent of petitioner and without authority from
the SEC, private respondents withdrew the CSPI
shares from the custodian banks.8 On May 27, 1996,
they sold the shares to Northeast Corporation and
included the proceeds thereof in the funds of
Philfinance. Petitioner learned about the unauthorized
sale of his shares only on September 10, 1996. 9 He
lodged a complaint with private respondents but the
latter ignored it10 prompting him to file, on May 6,
1997,11 a formal complaint against private respondents
in the receivership proceedings with the SEC, for the
return of the shares.

Meanwhile, on April 18, 1997, the SEC approved a


15% rate of recovery for Philfinances creditors and
investors.12 On May 13, 1997, the liquidators began
the process of settling the claims against Philfinance,
from its assets.13
On April 14, 1998, the SEC rendered judgment
dismissing the petition. However, it reconsidered this
decision in a resolution dated September 24, 1999 and
granted the claims of petitioner. It held that petitioner
was the owner of the CSPI shares by virtue of a
confirmation of sale (which was considered as a deed
of assignment) issued to him by Philfinance. But since
the shares had already been sold and the proceeds
commingled with the other assets of Philfinance,
petitioners status was converted into that of an
ordinary creditor for the value of such shares. Thus, it
ordered private respondents to pay petitioner the
amount of P5,062,500 representing 15% of the
monetary value of his CSPI shares plus interest at the
legal rate from the time of their unauthorized sale.
On October 27, 1999, the SEC issued an order
clarifying its September 24, 1999 resolution. While it
reiterated its earlier order to pay petitioner the amount
of P5,062,500, it deleted the award of legal interest. It
clarified that it never meant to award interest since this
would be unfair to the other claimants.
On appeal, the CA affirmed the SEC. It agreed that
petitioner was indeed the owner of the CSPI shares
but the recovery of such shares had become
impossible. It also declared that the clarificatory order
merely harmonized the dispositive portion with the
body of the resolution. Petitioners motion for
reconsideration was denied.
Hence this petition raising the following issues:
1) whether petitioner should be considered as a
preferred (and secured) creditor of Philfinance;
2) whether petitioner can recover the full value of his
CSPI shares or merely 15% thereof like all other
ordinary creditors of Philfinance and
3) whether petitioner is entitled to legal interest. 14
To resolve these issues, we first have to determine if
petitioner was indeed a creditor of Philfinance.
There is no dispute that petitioner was the owner of the
CSPI shares. However, private respondents, as
liquidators of Philfinance, illegally withdrew said
certificates of stock without the knowledge and

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3RD EXAM COVERAGE - CASES
consent of petitioner and authority of the SEC. 15 After
selling the CSPI shares, private respondents added
the proceeds of the sale to the assets of
Philfinance.16 Under these circumstances, did the
petitioner become a creditor of Philfinance? We rule in
the affirmative.
The SEC, after holding that petitioner was the owner of
the shares, stated:
Petitioner is seeking the return of his CSPI shares
which, for the present, is no longer possible,
considering that the same had already been sold by
the respondents, the proceeds of which are
ADMITTEDLY commingled with the assets of
Philfinance.
This being the case, [petitioner] is now but a claimant
for the value of those shares. As a claimant, he shall
be treated as an ordinary creditor in so far as the value
of those certificates is concerned.17
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the
grossly abusive and illicit contrivance employed by
private
respondents
against
petitioner,
we,
nevertheless, concur with public respondent that the
return of petitioners CSPI shares is well-nigh
impossible, if not already an utter impossibility,
inasmuch as the certificates of stocks have already
been alienated or transferred in favor of Northeast
Corporation, as early as May 27, 1996, in
consequence whereof the proceeds of the sale have
been transmuted into corporate assets of Philfinance,
undercustodia legis, ready for distribution to its
creditors and/or investors. Case law holds that the
assets of an institution under receivership or liquidation
shall be deemed in custodia legis in the hands of the
receiver or liquidator, and shall from the moment of
such receivership or liquidation, be exempt from any
order, garnishment, levy, attachment, or execution.
Concomitantly, petitioners filing of his claim over the
subject CSPI shares before the SEC in the liquidation
proceedings bound him to the terms and conditions
thereof. He cannot demand any special treatment
[from] the liquidator, for this flies in the face of, and will
contravene, the Supreme Court dictum that when a
corporation threatened by bankruptcy is taken over by
a receiver, all the creditors shall stand on equal
footing. Not one of them should be given preference by
paying one or some [of] them ahead of the others. This
is precisely the philosophy underlying the suspension

of all pending claims against the corporation under


receivership. The rule of thumb is equality in equity.18
We agree with both the SEC and the CA that petitioner
had become an ordinary creditor of Philfinance.
Certainly, petitioner had the right to demand the return
of his CSPI shares.19 He in fact filed a complaint in the
liquidation proceedings in the SEC to get them back
but was confronted by an impossible situation as they
had already been sold. Consequently, he sought
instead to recover their monetary value.
Petitioners CSPI shares were specific or determinate
movable properties.20 But after they were sold, the
money raised from the sale became generic 21 and
were commingled with the cash and other assets of
Philfinance. Unlike shares of stock, money is a generic
thing. It is designated merely by its class or genus
without any particular designation or physical
segregation from all others of the same class. 22 This
means that once a certain amount is added to the cash
balance, one can no longer pinpoint the specific
amount included which then becomes part of a whole
mass of money.
It thus became impossible to identify the exact
proceeds of the sale of the CSPI shares since they
could no longer be particularly designated nor distinctly
segregated from the assets of Philfinance. Petitioners
only remedy was to file a claim on the whole mass of
these assets, to which unfortunately all of the other
creditors and investors of Philfinance also had a claim.
Petitioners right of action against Philfinance was a
"claim" properly to be litigated in the liquidation
proceedings.23 In Finasia Investments and Finance
Corporation v. CA,24 we discussed the definition of
"claims" in the context of liquidation proceedings:
We agree with the public respondent that the word
claim as used in Sec. 6(c) of P.D. 902-A, 25 as
amended, refers to debts or demands of a pecuniary
nature. It means "the assertion of a right to have
money paid. It is used in special proceedings like
those before [the administrative court] on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced
to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an
equitable remedy for breach of performance if such
breach gives rise to a right to payment, whether or not

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3RD EXAM COVERAGE - CASES
such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured,
disputed, undisputed, secured, unsecured.26
Undoubtedly, petitioner had a right to the payment of
the value of his shares. His demand was of a
pecuniary nature since he was claiming the monetary
value of his shares. It was in this sense (i.e. as a
claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and
preference of credits are applicable to the liquidation
proceedings.27 The next question is, was petitioner a
preferred or ordinary creditor under these provisions?
Petitioner argues that he was a preferred creditor
because private respondents illegally withdrew his
CSPI shares from the custodian banks and sold them
without his knowledge and consent and without
authority from the SEC. He quotes Article 2241 (2) of
the Civil Code:
With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
xxx

xxx

xxx

Like all the other ordinary creditors or claimants


against Philfinance, he was entitled to a rate of
recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner
would have given petitioner an unfair advantage or
preference over the other creditors. 28 Petitioner
counters that he was entitled to 12% legal interest per
annumunder Article 2209 of the Civil Code from the
time he was deprived of the shares until fully paid.
The guidelines for awarding interest were laid down
in Eastern Shipping Lines, Inc. v. CA:29
I. When an obligation, regardless of its source, i.e.,
law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the
measure of recoverable damages.

xxx

(2) Claims arising from misappropriation, breach of


trust, or malfeasance by public officials committed in
the performance of their duties, on the movables,
money or securities obtained by them;
xxx

Common credits referred to in Article 2245 shall be


paid pro rata regardless of dates.

xxx

(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled
to the entire monetary value of his shares.
Petitioners argument is incorrect. Article 2241 refers
only to specific movable property. His claim was for the
payment of money, which, as already discussed, is
generic property and not specific or determinate.
Considering that petitioner did not fall under any of the
provisions applicable to preferred creditors, he was
deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right
or title not comprised in the four preceding articles,
shall enjoy no preference.
This being so, Article 2251 (2) states that:

II. With regard particularly to an award of interest in the


concept of actual and compensatory damages, the
rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in
the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be
that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall
be 12% per annum to be computed from default, i.e.,
from judicial or extrajudicial demand under and subject
to the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest on
the amount of damages awarded may be imposed at
the discretion of the court at the rate of 6%per annum.
No interest, however, shall be adjudged on
unliquidated claims or damages except when or until
the demand can be established with reasonable
certainty.
Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such

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3RD EXAM COVERAGE - CASES
certainty cannot be so reasonably established at the
time the demand is made, the interest shall begin to
run only from the date of the judgment of the court is
made (at which time the quantification of damages
may be deemed to have been reasonably
ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount of
finally adjudged.
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit.30 (Emphasis supplied)
Under this ruling, petitioner was not entitled to legal
interest of 12% per annum (from demand) because the
amount owing to him was not a loan31 or forbearance
of money.32
Neither was he entitled to legal interest of 6% per
annum under Article 2209 of the Civil Code 33 since this
provision applies only when there is a delay in the
payment of a sum of money.34 This was not the case
here. In fact, petitioner himself manifested before the
CA that the SEC (as liquidator) had already paid
him P5,062,500 representing 15% of P33,750,000.35
Accordingly, petitioner was not entitled to interest
under the law and current jurisprudence.
Considering that petitioner had already received the
amount of P5,062,500, the obligation of the SEC as
liquidator of Philfinance was totally extinguished.36
We note that there is an undisputed finding by the SEC
and CA that private respondents sold the subject
shares without authority from the SEC. Petitioner
evidently has a cause of action against private
respondents for their bad faith and unauthorized acts,
and the resulting damage caused to him.37
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.
BARRETTO v. VILLANUEVA
Republic of the Philippines
SUPREME COURT
Manila

EN BANC
G.R. No. L-14938

January 28, 1961

MAGDALENA C. DE BARRETO, ET AL., plaintiffsappellants,


vs.
JOSE G. VILLANUEVA, ET AL., defendantsappellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.
Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as
administratix of the intestate estate of her deceased
husband Pedro Cruzado in Special Proceedings No.
4959 of the Court of First Instance of Manila, obtained
from the defunct Rehabilitation Finance Corporation
(hereinafter referred to as the RFC a loan in the
amount of P11,000.00. To secure payment thereof, she
mortgaged the land then covered by Transfer
Certificate of Title No. 61358 issued in her name and
that of her deceased. husband. As she failed to pay
certain installments on the loan, the mortgage was
foreclosed and the RFC acquired the property for
P11,000.00, subject to her rights as mortgagor to repurchase the same. On July 26, 1951, upon her
application, the land was sold back to her conditionally
for the amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953
Rosario Cruzado, as guardian of her minor children in
Special Proceedings No. 14198 of the Court of First
Instance of Manila, was authorized by the court, to sell
with the previous consent of the RFC the land in
question together with the improvements thereon for a
sum not less than P19,000. Pursuant to such authority
and with the consent of the RFC, she sold to Pura L.
Villanueva for P19,000.00 "all their rights, interest,' title
and dominion and over the herein described parcel of
land together with the existing improvements thereon,
including one use and an annex thereon; free from all
charges and encumbrances, , with the exception of the
sum of P11,009.52, is stipulated interest thereon,
which the vendor, is still presently obligated to the RFC
and which the vendee herein now assumes to pay to
the RFC under the same terms and conditions
specified in that deed of sale dated July 26, 1951."
Having paid in advance the sum of P500.00, Pura L.
Villanueva, the vendee, in consideration of the
aforesaid sale, executed in favor of the vendor Rosario
Cruzado a promissory note dated March 9, 1953,
undertaking to pay the balance of P17,500.00 in

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3RD EXAM COVERAGE - CASES
monthly installments. On April 22, 1953, she made an
additional payment of P5,500.00 on the promissory
note. She was, subsequently, able to secure in her
name Transfer Certificate of Title No. 32526 covering
the house and lot above referred to, and on July 10,
1953, she mortgaged the said property to Magdalena
C. Barretto as security for a loan the amount of
P30,000.00.

Article 2242, paragraph 2 of the same Code." The


Barrettos filed a motion for reconsideration on
September 12, 1958, but on that same date, the sheriff
of Manila, acting in pursuance of the order of the court
granting the writ of execution, sold at public auction the
property in question. As highest bidder, the Barrettos
themselves acquired the properties for the sum of
P49,000.00.

As said Pura L. Villanueva had failed to pay the


remaining installments on the unpaid balance of
P12,000.00 her promissory note for the sale of the
property in question, a complaint for the recovery of
the same from her and her husband was filed on
September 21, 1963 by Rosario Cruzado in her own
right and in her capacity as judicial guardian of her
minor children. Pending trial of the case, a lien was
constituted upon the property in the nature of a levy in
attachment in favor of the Cruzados said lien being
annotated at the back of Transfer Certificate of Title
No. 32526. After trial, decision was rendered ordering
Pura Villanueva and her husband, jointly and severally,
to pay Rosario Cruzado the sum of P12,000.00, with
legal interest thereon from the date of the filing of the
complaint until fully paid plus the sum of P1,500.00 as
attorney's fees.

On October 4, 1958, 'the Court of First Instance issued


an order confirming the aforesaid sale and directing
the Register of Deeds of the City of Manila to issue to
the Barrettos the corresponding certificate of title,
subject, however, to the order of August 18, 1958
concerning,. the vendor's lien. On the same date, the
motion of the Barettos seeking reconsideration of the
order of the court giving due course to the said
vendor's lien was denied. From this last order, the
Barretto spouses interposed the present appeal.

Pura Villanueva having, likewise, failed to pay her


indebtedness of P30,000.00 to Magdalena C. Barretto,
the latter, jointly with her husband, instituted against
the Villanueva spouses an action for foreclosure of
mortgage, impleading Rosario Cruzado and her
children as parties defendants. On November 11,
1956, decision was rendered in the case absolving the
Cruzados from the complaint and sentencing the
Villanuevas to pay the Barrettos, jointly and severally,
the sum of P30,000.00, with interest thereon at the
rate of 12% per annum from January 11, 1954 plus the
sum of P4,000.00 as attorney's fees. Upon the finality
of this decision, the Barrettos filed a motion for the
issuance of a writ of execution which was granted by
the lower court on July 31, 1958. On August 14, 1958,
the Cruzados filed their "Vendor's Lien" in the amount
of P12,000.00, plus legal interest, over the real
property subject of the foreclosure suit, the said
amount representing the unpaid balance of the
purchase price of the said property. Giving due course
to the line, the court on August 18, 1958 ordered the
same annotated in Transfer Certificate of Title No.
32526 of the Registry of Deeds of Manila, decreeing
that should the realty in question be sold at public
auction in the foreclosure proceedings, the Cruzados
shall be credited with their pro-rata share in the
proceeds thereof, "pursuant to the provision of articles
2248 and 2249 of the new Civil Code in relation to

The appeal is devoid of merit.


In claiming that the decision of the Court, of First
Instance of Manila in Civil Case No. 20075 . awarding
the amount of P12,000.00 in favor of Rosario Cruzado
and her minor children . cannot constitute a basis for
the vendor's lien filed by the appellee Rosario
Cruzado, appellants allege that the action in said civil
case was merely to recover the balance of a
promissory note. But while, apparently, the action was
to recover the remaining obligation of promissor Pura
Villanueva on the note, the fact remains that Rosario P.
Cruzado as guardian of her minor children, was an
unpaid vendor., of the realty in question, and the
promissory note, was, precisely, for the unpaid balance
of the price of the property bought by, said Pura
Villanueva.
Article 2242 of the new Civil, Code enumerates the
claims, mortgage and liens that constitute an
encumbrance on specific immovable property, and
among them are: .
(2) For the unpaid price of real property sold, upon the
immovable sold; and
(5) Mortgage credits recorded in the Registry of
Property."
Article 2249 of the same Code provides that "if there
are two or more credits with respect to the same
specific real property or real rights, they shall be
satisfied pro-rata after the payment of the taxes and
assessment upon the immovable property or real
rights.

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3RD EXAM COVERAGE - CASES
Application of the above-quoted provisions to the case
at bar would mean that the herein appellee Rosario
Cruzado as an unpaid vendor of the property in
question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the
unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered
rights over the property. There is nothing to this
argument. Note must be taken of the fact that article
2242 of the new Civil Code enumerating the preferred
claims, mortgages and liens on immovables,
specifically requires that . unlike the unpaid price of
real property sold . mortgage credits, in order to be
given preference, should be recorded in the Registry of
Property. If the legislative intent was to impose the
same requirement in the case of the vendor's lien, or
the unpaid price of real property sold, the lawmakers
could have easily inserted the same qualification which
now modifies the mortgage credits. The law, however,
does not make any distinction between registered and
unregistered vendor's lien, which only goes to show
that any lien of that kind enjoys the preferred credit
status.
Appellants also argue that to give the unrecorded
vendor's lien the same standing as the registered
mortgage credit would be to nullify the principle in land
registration system that prior unrecorded interests
cannot prejudice persons who subsequently acquire
interests over the same property. The Land
Registration Act itself, however, respects without
reserve or qualification the paramount rights of lien
holders on real property. Thus, section 70 of that Act
provides that .
Registered land, and ownership therein shall in all
respects be subject to the same burdens and incidents
attached by law to unregistered land. Nothing
contained in this Act shall in any way be construed to
relieve registered land or the owners thereof from any
rights incident to the relation of husband and wife, or
from liability to attachment on mesne process or levy,
on execution, or from liability to any lien of any
description established by law on land and the
buildings thereon, or the interest of the owners of such
land or buildings, or to change the laws of descent, or
the rights of partition between co-owners, joint tenants
and other co-tenants or the right to take the same by
eminent domain, or to relieve such land from liability to
be appropriated in any lawful manner for the payment
of debts, or to change or affect in any other way any
other rights or liabilities created by law and applicable
to unregistered land, except as otherwise expressly

provided in this Act or in the amendments thereof,


(Emphasis supplied)
As to the point made that the articles of the Civil Code
on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we
are to interpret this portion of the Code as intended
only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits
would be left without any rules to govern them, and it
would render purposeless the special laws an
insolvency.
Premises considered, the order appealed from is
hereby affirmed. Costs against the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes
and
Dizon,
JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in
the result.

RESOLUTION ON MOTION TO RECONSIDER


December 29, 1962

REYES, J.B.L., J.:


Appellants, spouses Barretto, have filed a motion
vigorously urging, for reason to be discussed in the
course of this resolution, that our decision of 28
January 1961 be reconsidered and set aside, and a
new one entered declaring that their right as
mortgagees remain superior to the unrecorded claim of
herein appellee for the balance of the purchase price
of her rights, title, and interests in the mortgaged
property.
It will be recalled that, with Court authority, Rosario
Cruzado sold all her right, title, and interest and that of
her children in the house and lot herein involved to
Pura I. Villanueva for P19,000.00. The purchaser paid
Pl,500 in advance, and executed a promissory note for
the balance of P17,506.00. However, the buyer could
only pay P5,500 On account of the note, for which
reason the vendor obtained judgment for the unpaid
balance. In the meantime, the buyer Villanueva was
able to secure a clean certificate of title (No. 32626),
and mortgaged the property to appellant Magdalena C.
Barretto, married to Jose C. Barretto, to secure a loan
of P30,000.03, said mortgage having been duly
recorded.

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3RD EXAM COVERAGE - CASES
Pura Villanueva defaulted on the mortgage loan in
favor of Barretto. The latter foreclosed the mortgage in
her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14
August 1958, Cruzado filed a motion for recognition for
her "vendor's lien" in the amount of Pl2,000.00, plus
legal interest, invoking Articles 2242, 2243, and 2249
of the new Civil Code. After hearing, the court below
ordered the "lien" annotated on the back of Certificate
of Title No. 32526, with the proviso that in case of sale
under the foreclosure decree the vendor's lien and the
mortgage credit of appellant Barretto should be
paid pro rata from the proceeds. Our original decision
affirmed this order of the Court of First Instance of
Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of
the new, Civil Code of the Philippines, can only
become effective in the event of insolvency of the
vendee, which has not been proved to exist in the
instant case; and .
(2) That the appellee Cruzado is not a true vendor of
the foreclosed property. We have given protracted and
mature consideration to the facts and law of this case,
and have reached the conclusion that our original
decision must be reconsidered and set aside, for the
following reasons:
A. The previous decision failed to take fully into
account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities
among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors
entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order
of priorities established by Article 1927, whereby one
class of creditors could exclude the creditors of lower
order until the claims of the former were fully satisfied
out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust
proceeds if necessary.
Under the system of the Civil Code of the Philippines
however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro-rata i.e., in
proportion to the amount of the respective credits.
Thus, Article 2249 provides:

If there are two or more credits with respect to the


same specific real property or real rights, they, shall be
satisfied pro-rata after the payment of the taxes and
assessments upon the immovable property or real
rights."
But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of their, as have credits
outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent
that the full, application (of Articles 2249 and 2242
demands that there must be first some proceedings
where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the
settlement of decedents estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of the new Civil
Code that
The claims or credits enumerated in the two preceding
articles" shall be considered as mortgages or pledges
of real or personal property, or liens within the purview
of legal provisions governing insolvency . . . (Emphasis
supplied),
And the rule is further clarified in he Report of the
Code Commission, as follows:
The question as to whether the Civil Code and the
insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be enforced in
accordance with the Insolvency Law." (Emphasis
supplied) .
Thus, it becomes evident that one preferred creditor's
third-party claim to the proceeds of a foreclosure sale
(as in the case now before us) is not the proceeding
contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to
ascertain the pro-rata dividend corresponding to each,
because the rights of the other creditors likewise"
enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that
the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect, and
must be reversed.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 8


3RD EXAM COVERAGE - CASES
In the absence of insolvency proceedings (or other
equivalent general liquidation of the debtor's estate),
the conflict between the parties now before us must be
decided pursuant to the well established principle
concerning registered lands; that a purchaser in good
faith and for value (as the appellant concededly is)
takes registered property free from liens and
encumbrances other than statutory liens and those
recorded in the certificate of title. There being no
insolvency or liquidation, the claim of the appellee, as
unpaid vendor, did not require the character and rank
of a statutory lien co-equal to the mortgagee's
recorded encumbrance, and must remain subordinate
to the latter.
We are understandably loathed (absent a clear
precept of law so commanding) to adopt a rule that
would undermine the faith and credit to be accorded to
registered Torrens titles and nullify the beneficient
objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that
if a person dealing with registered land were to be held
to take it in every instance subject to all the fourteen
preferred claims enumerate in Article 2242 of the new
Civil Code, even if the existence and import thereof
can not be ascertained from the records, all confidence
in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be
hampered, if not prevented, with incalculable results.
Loans on real estate security would become aleatory
and risky transactions, for no, prospective lender could
accurately estimate the hidden liens on the property
offered as security, unless he indulged in complicated,
tedious investigations, . The logical result might well be
a contraction of credit unforeseeable proportions that
could lead to economic disaster.
Upon the other hand, it does not appear excessively
burdensome to require the privileged creditors to
cause their claims to be recorded in the books of the
Register of deeds should they desire to protect their
rights even outside of insolvency or liquidation
proceedings.
B. The close study of the facts disclosed by the
records lasts strong doubt on the proposition that
appellees Cruzados should be regarded as unpaid
vendors of the property( land, buildings, and
improvements ) involved in the case at bar so as to be
entitled to preference under Article 2242. The record
on appeal, specially the final decision of the Court of
First Instance of Manila in the suit of the ,Cruzados
against Villanueva, clearly establishes that after her
husband's death, and with due court authority, Rosario
Cruzado, for herself and as administratrix of her

husband's state, mortgaged the property to the


Rehabilitation Finance Corporation (RFC) to secure
payment of a loan of P11,000, installments, but that
the debtor failed to pay some of the installments;
wherefore the RFC, on 24 August 1949, foreclosed the
mortgage, and acquired the property, subject to the
debtor's right to redeem or repurchase the said
property; and that on 25 September 1950, the RFC
consolidated its ownership, and the certificate of title of
the Cruzados was cancelled and a new certificate
issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed
selling back the property to the erstwhile mortgagors
and former owners Cruzados in installments, subject to
the condition (among others) that the title to the
property and its improvements "shall remain in the
name of Corporation (RFC) until after said purchase
price, advances and interests shall have been fully
paid", as of 27 September 1952, Cruzado had only
paid a total of P1,360, and had defaulted on six
monthly amortizations; for which reason the RFC
rescinded the sale, and forfeited the payments made,
in accordance with the terms of the contract of 26 July
1951.
It was only on 10 March 1953 that the Cruzados sold
to Pura L. Villanueva all "their rights, title, interest and
dominion on and over" the property, lot, house, and
improvements for P19,000.00, the buyer undertaking
to assume payment of the obligation to the RFC, and
by resolution of 30 April 1953, the RFC approved "the
transfer of the rights and interest of Rosario P.
Cruzado and her children in their property herein
above-described in favor of Pura L. Villanueva"; and
on 7 May 1953 the RFC executed a deed of absolute
sale of the property to said party, who had fully paid
the price of P14,269.03. Thereupon, the spouses
Villanueva obtained a new Transfer Certificate of Title
No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the
property to the spouses Barretto, appellants herein.
It is clear from the facts above-stated that ownership of
the property had passed to the Rehabilitation Finance
Corporation since 1950, when it consolidated its
purchase at the foreclosure sale and obtained a
certificate of title in its corporate name. The
subsequent contract of resale in favor of the Cruzados
did not revest ownership in them, since they failed to
comply with its terms and conditions, and the contract
itself provided that the title should remain in the name
of the RFC until the price was fully paid.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 9


3RD EXAM COVERAGE - CASES
Therefore, when after defaulting in their payments due
under the resale contract with the RFC the appellants
Cruzados sold to Villanueva "their rights, title, interest
and dominion" to the property, they merely assigned
whatever rights or claims they might still have thereto;
the ownership of the property rested with the RFC. The
sale from Cruzado to Villanueva, therefore, was not so
much a sale of the land and its improvements as it was
a quit-claim deed in favor of Villanueva. In law, the
operative sale was that from the RFC to the latter, and
it was the RFC that should be regarded as the true
vendor of the property. At the most, the Cruzados
transferred to Villanueva an option to acquire the
property, but not the property itself, and their credit,
therefore, can not legally constitute a vendor's lien on
the corpus of that property that should stand on an
equal footing with the mortgaged credit held by
appellant Barretto.
In view of the foregoing, the previous decision of this
Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered
reversing the judgment appealed from and declaring
the appellants Barretto entitled to full satisfaction of
their mortgaged credit out of the proceeds of the
foreclosure sale in the hands of the Sheriff of the City
of Manila. No costs.

PHILIPPINE SAVINGS v. LANTIN


FIRST DIVISION
[G.R. No. L-33929. September 2, 1983.]

PHILIPPINE SAVINGS BANK, Petitioner, v. HON.


GREGORIO T. LANTIN, Presiding Judge, Court of
First Instance of Manila, Branch VII, and CANDIDO
RAMOS, Respondents.
Jose Diokno for Petitioner.
Romeo C . Carlos for Private Respondent.

SYLLABUS

1.
CIVIL
LAW;
CREDIT
TRANSACTION;
CONCURRENCE AND PREFERENCE OF CREDITS;
INSUFFICIENT ASSETS OF DEBTOR RAISES
QUESTION OF PREFERENCE AS WELL AS
QUESTION
OF
CONSEQUENCE
IN
CONCURRENCE OF CREDITS. Concurrence of
credits occurs when the same specific property of the
debtor or all of his property is subjected to the claims
of several creditors. The concurrence of credits raises
no questions of consequence were the value of the
property or the value of all assets of the debtor is
sufficient to pay in fall all the creditors. However, it
becomes material when said assets are insufficient for
then some creditors of necessity will not be paid or
some creditors will not obtain the full satisfaction of
their claims. In this situation, the question of
preference will then arise, that is to say who of the
creditors will be paid the all of the others (Caguioa,
Comments and Cases on Civil Law, 1970 ed., Vol. VI,
p.
472).
2. ID.; ID.; PREFERENCE OF CREDITS; ARTICLES
2249 AND 2242 OF THE NEW CIVIL CODE OF THE
PHILIPPINES; CONSTRUED. Under the system
established by Article 2249 of the civil Code of the
Philippines, only taxes and assessments upon
immovable property enjoy absolute preference. All the
remaining specified classes of preferred creditors
under Article 2242 enjoy no priority among themselves.
Their credits shall be satisfied pro-rata, i.e., in
proportion to the amount of the respective credits.
3. ID.; ID.; ARTICLE 2249 AND 2242 OF THE NEW
CIVIL CODE; PAIL REQUISITE TO THEIR FULL
APPLICATION UNDER THE DE BARRETO CASE.
Under the De Barreto decision, the full application of
Articles 2242 and 2249 demands that there must first
be some proceeding where the class of all the
preferred creditors may be bindingly adjudicated, such
as insolvency, the settlement of a decedents estate
under Rule 87 of the Rules of Court, or other
liquidation
proceedings
of
similar
import.
4. REMEDIAL LAW; INSOLVENCY PROCEEDINGS
AND SETTLEMENT OF A DECEDENTS ESTATE;
BOTH
PROCEEDINGS
IN
REM,
OTHER
EQUIVALENT GENERAL LIQUIDATION OF SIMILAR
NATURE. Insolvency proceedings end settlement of
a decedents estate are both proceedings in rem which
are binding the whole world. All persons having
interest in the subject matter involved, whether they
were notified or not, are equally bound. Consequently,
a liquidation of similar import or other equivalent
general liquidation must also necessarily be a
proceeding in rem so that all interested persons

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 10


3RD EXAM COVERAGE - CASES
whether known to the parties or not may be bound by
such
proceeding.
3. ID.; ACTION FOR COLLECTION OF UNPAID
CONTRACTORS FEE; NOT AN ACTION IN REM.
The proceedings in the court below do not partake of
the insure of insolvency proceedings or settlement of a
decedents estate. The action filed by Ramos was only
to collect the unpaid cost of the construction of the
duplex apartment. It is far from being a general
liquidation of the estate of the Tabligan spouses.
6.
CIVIL
LAW;
CREDIT
TRANSACTION;
ANNOTATION OF CLAIMS AND CREDITS AS
STATUTORY LIENS;
RELEVANCE
TO THE
STABILITY OF THE TORRENS SYSTEM. In the
case at bar, although the lower court found that "there
were no known creditors other than the plaintiff and the
defendant herein," this cannot be conclusive. It will not
bar other creditors in the event they show up and
present their claims State petitioner bank, claiming that
they also have preferred liens against the property
involved. Consequently, Transfer Certificate of Title No.
101864 issued in favor of the bank which is supposed
to be indefeasible would remain constantly unstable
and questionable. Such could not have been the
intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as
statutory liens. Neither does the De Barreto case
sanction such instability. In fact, an annotation, as
suggested above, would insure to the benefit of the
public, particularly those who may subsequently wish
to buy the property in question or who have a business
transaction in connection therewith. It would facilitate
the enforcement of a legal statutory right which cannot
be barred by laches (See Manila Railroad Co. v. Luzon
Stevedoring
Co.,
100
Phil.
135).
7. ID.; SALE; BUYER IN GOOD FAITH OF REALTY;
TAKES IT FEE FROM LIENS AND ENCUMBRANCES
OTHER THAN STATUTORY LIENS AND THOSE
ANNOTATED IN THE TITLE; CASE AT BAR. Since
the action filed by the private respondent is not one
which can be considered as "equivalent general
liquidation" having the same import as an insolvency or
settlement of the decedents estate proceeding, the
well established principle must be applied that a
purchaser in good faith and for value takes register
land free from liens and encumbrances other than
statutory liens and those recorded in the Certificate of
Title. It Is an limited fact that at the time the deeds of
real estate mortgage in favor of the petitioner bank
were constituted, the transfer certificate of title of the
spouses Tabligan was free from any recorded lien and

encumbrances, so that the only registered liens in the


title were deeds in favor of the petitioner.

DECISION

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court


of First Instance of Manila, Branch VII, presided over
by respondent Judge Gregorio T. Lantin, in Civil Case
No. 79914 entitled Candido Ramos v. Philippine
Savings Bank and of the order denying a motion for its
reconsideration. The dispositive portion of the decision
reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor
of the plaintiff and against the defendant ordering the
defendant to pay the plaintiff the sum of P15,000.00 as
his pro-rata share in the value of the duplex-apartment
house which was built by the plaintiff for the spouses
likewise Filomeno Tabligan and Socorro Espiritu, which
is now registered in the name of the defendant under
Transfer Certificate of Title No. 101864 issued by the
Register of Deeds of the City of Manila, on August 6,
1970, with legal interest from the date of the filing of
the complaint until fully paid; to pay the sum of
P500.00 as attorneys fees; and to pay the costs.
"The counterclaim interposed by the defendant is
hereby
dismissed."cralaw
virtua1aw
library
Involved in this case is a duplex-apartment house on a
lot covered by TCT No. 86195 situated at San Diego
Street, Sampaloc, Manila, and owned by the spouses
Filomeno
and
Socorro
Tabligan.
The duplex-apartment house was built for the spouses
by private respondent Candido Ramos, a duly licensed
architect and building contractor, at a total cost of
P32,927.00. The spouses paid private respondent the
sum of P7,139.00 only. Hence, the latter used his own
money, P25,788.50 in all, to finish the construction of
the
duplex-apartment.chanrobles.com:cralaw:red
Meanwhile, on December 16, 1966, February 1, 1967,
and February 28, 1967, the spouses Tabligan obtained
from petitioner Philippine Savings Bank three (3) loans
in the total amount of P35,000.00, the purpose of
which was to complete the construction of the duplexapartment. To secure payment of the l2oans, the
spouses executed in favor of the petitioner three (3)
promissory notes and three (3) deeds of real estate

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 11


3RD EXAM COVERAGE - CASES
mortgages over the property subject matter of this
litigation.
On December 19, 1966, the petitioner registered the
December 16, 1966 deed of real estate mortgage with
the Register of Deeds of Manila. The subsequent
mortgages of February 1, 1967, and February 28,
1967, were registered with the Register of Deeds of
Manila on February 2, 1967 and March 1, 1967,
respectively. At the time of the registration of these
mortgages, Transfer Certificate of Title No. 86195 was
free
from
all
liens
and
encumbrances.
The spouses failed to pay their monthly amortizations.
As a result thereof, the petitioner bank foreclosed the
mortgages, and at the public auction held on July 23,
1969,
was
the
highest
bidder.
On August 5, 1969, the petitioner bank registered the
certificate of sale issued in its favor. On August 9,
1970, the bank consolidated its ownership over the
property in question, and Transfer Certificate of Title
No. 101864 was issued by the Register of Deeds of
Manila in the name of the petitioner bank.
Upon the other hand, the private respondent filed an
action against the spouses to collect the unpaid cost of
the construction of the duplex-apartment before the
Court of First Instance of Manila, Branch I, which case
was docketed therein as Civil Case No. 69228. During
its pendency, the private respondent succeeded in
obtaining the issuance of a writ of preliminary
attachment, and pursuant thereto, had the property in
question attached. Consequently, a notice of adverse
claim was annotated at the back of Transfer Certificate
of
Title
No.
86195.
On August 26, 1968, a decision was rendered in Civil
Case No. 69228 in favor of the private respondent and
against the spouses. A writ of execution was
accordingly issued but was returned unsatisfied.
As the spouses did not have any properties to satisfy
the judgment in Civil Case No. 69228, the private
respondent addressed a letter to the petitioner for the
delivery to him (private respondent) of his pro-rata
share in the value of the duplex-apartment in
accordance with Article 2242 of the Civil Code. The
petitioner refused to pay the pro-rata value prompting
the private respondent to file the instant action. As
earlier stated, a decision was rendered in favor of the
private Respondent.chanrobles
virtual
lawlibrary
The parties are agreed that the only issue is whether
or not the private respondent is entitled to claim a pro-

rata share in the value of the property in question. The


applicable provision, Article 2242 of the Civil Code,
reads
as
follows:jgc:chanrobles.com.ph
"ART. 2242. With reference to specific immovable
property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred, and
shall constitute an encumbrance on the immovable or
real
right:jgc:chanrobles.com.ph
"(1)

Taxes

due

upon

the

land

or

building;

"(2) For the unpaid price of real property sold, upon the
immovable
sold;
"(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and
contractors,
engaged
in
the
construction,
reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
"(4) Claims of furnishers of materials used in the
construction reconstruction, or repair of buildings,
canals or other works upon said buildings, canals or
other
works;
"(5) Mortgage credits recorded in the Registry of
Property, upon the real estate mortgaged;
"(6) Expenses for the preservation or improvement of
real property when the law authorizes reimbursement,
upon the immovable preserved or improved;
"(7) Credits annotated in the Registry of Property, in
virtue of a judicial order, by attachments or executions,
upon the property affected, and only as to later credits;
"(8) Claims of co-heirs for warranty in the partition of
an immovable among them, upon the real property
thus
divided;
"(9) Claims of donors of real property for pecuniary
charges or other conditions imposed upon the donee,
upon
the
immovable
donated;
"(10) Credits of insurers upon the property insured, for
the insurance premium for two years."cralaw virtua1aw
library
Both the petitioner bank and private respondent
Ramos rely on the case of De Barreto v. Villanueva (6
SCRA
928).
The petitioner bank would impress upon this Court that
the proceedings had before the court below is not one

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 12


3RD EXAM COVERAGE - CASES
of the proceedings contemplated in the De Barreto
case that will sustain the authority of the respondent
court to adjudicate the claims of all preferred creditors
under Article 2242 of the Civil Code. Petitioner argues
that for Article 2242 of the Civil Code to apply, there
must have been an insolvency proceeding or other
liquidation proceedings of similar import. And under the
facts then obtaining, there could have been no
insolvency proceeding as there were only two known
creditors. ** Consequently, it is argued that private
respondents unpaid contractors claim did not acquire
the character of a statutory lien equal to the petitioners
registered
mortgage.
Upon the other hand, private respondent Ramos
maintains that the proceedings had before the court
below can qualify as a general liquidation of the estate
of the spouses Tabligan because the only existing
property of said spouses is the property subject matter
of
this
litigation.chanrobles
virtualawlibrary
chanrobles.com:chanrobles.com.ph
Concurrence of credits occurs when the same specific
property of the debtor or all of his property is subjected
to the claims of several creditors. The concurrence of
credits raises no questions of consequence where the
value of the property or the value of all assets of the
debtor is sufficient to pay in full all the creditors.
However, it becomes material when said assets are
insufficient for then some creditors of necessity will not
be paid or some creditors will not obtain the full
satisfaction of their claims. In this situation, the
question of preference will then arise, that is to say
who of the creditors will be paid ahead of the others.
(Caguioa, Comments and Cases on Civil Law, 1970
ed.,
Vol.
VI,
p.
472.)
Under the system established by Article 2249 of the
Civil Code of the Philippines, only taxes and
assessments upon immovable property enjoy absolute
preference. All the remaining specified classes of
preferred creditors under Article 2242 enjoy no priority
among themselves. Their credits shall be satisfied prorata, i.e., in proportion to the amount of the respective
credits.
Under the De Barreto decision, the full application of
Articles 2242 and 2249 demands that there must first
be some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such
as insolvency, the settlement of a decedents estate
under Rule 87 of the Rules of Court, or other
liquidation
proceedings
of
similar
import.
The

pertinent

ruling

reads:jgc:chanrobles.com.ph

"Thus, it becomes evident that one preferred creditors


third-party claim to the proceeds of a foreclosure sale
(as in the case now before us) is not the proceeding
contemplated by law for the enforcement of
preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each
because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that
the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect and
must
be
reversed.
"In the absence of insolvency proceedings (or other
equivalent general liquidation of the debtors estate),
the conflict between the parties now before us must be
decided pursuant to the well established principle
concerning registered lands; that a purchaser in good
faith and for value (as the appellant concededly is)
takes registered property free from liens and
encumbrances other then statutory liens and those
recorded in the certificate of title. There being no
insolvency or liquidation, the claim of the appellee, as
unpaid vendor, did not acquire the character and rank
of a statutory lien co-equal to the mortgagees
recorded encumbrance, and must remain subordinate
to
the
latter."cralaw
virtua1aw
library
The resolution of this petition, therefore, hinges on the
determination of whether an insolvency proceeding or
other liquidation proceeding of similar import may be
considered to have been conducted in the court below.
The respondent court ruled in the affirmative holding
that:jgc:chanrobles.com.ph
"There were no known creditors, other than the plaintiff
and defendant herein, and the proceedings in the
present case may ascertain and bindingly adjudicate
the respective claims of the plaintiff and the defendant,
serving as a substantial compliance with what the
Supreme
Court
stated:jgc:chanrobles.com.ph
". . . it is thus apparent that the full application of
Articles 2242 and 2249 demands that there must be
first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such
as insolvency, the settlement of a decedents estate
under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import. (de Barretto

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 13


3RD EXAM COVERAGE - CASES
v. Villanueva, Et Al., G.R. No. L-14938, December 29,
1962)."
A careful considering of this petition leads us to agree
with the petitioner. The conclusions of the lower court
are not supported by the law and the facts.

and risky transactions, for no prospective lender could


accurately estimate the hidden liens on the property
offered as security, unless he indulged in complicated,
tedious investigations. The logical result might well be
a contraction of credit to unforeseable proportions that
could
lead
to
economic
disaster.

The proceedings in the court below do not partake of


the nature of the insolvency proceedings or settlement
of a decedents estate. The action filed by Ramos was
only to collect the unpaid cost of the construction of the
duplex apartment. It is far from being a general
liquidation of the estate of the Tabligan spouses.

"Upon the other hand, it does not appear excessively


burdensome to require the privileged creditors to
cause their claims to be recorded in the books of the
Register of Deeds should they desire to protect their
rights even outside of insolvency or liquidation
proceedings.

Insolvency proceedings and settlement of a decedents


estate are both proceedings in rem which are binding
against the whole world. All persons having interest in
the subject matter involved, whether they were notified
or not, are equally bound. Consequently, a liquidation
of similar import or "other equivalent general
liquidation must also necessarily be a proceeding in
rem so that all interested persons whether known to
the parties or not may be bound by such proceeding.

In fact, an annotation, as suggested above, would


inure to the benefit of the public, particularly those who
may subsequently wish to buy the property in question
or who have a business transaction in connection
therewith. It would facilitate the enforcement of a legal
statutory right which cannot be barred by laches. (See
Manila Railroad Co. v. Luzon Stevedoring Co., 100
Phil.
135).chanrobles
law
library

In the case at bar, although the lower court found that


"there were no known creditors other than the plaintiff
and the defendant herein", this can not be conclusive.
It will not bar other creditors in the event they show up
and present their claims against the petitioner bank,
claiming that they also have preferred liens against the
property involved. Consequently, Transfer Certificate of
Title No. 101864 issued in favor of the bank which is
supposed to be indefeasible would remain constantly
unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although
it considers claims and credits under Article 2242 as
statutory liens. Neither does the De Barretto case
sanction such instability. It emphasized the
following:jgc:chanrobles.com.ph
"We are understandably loath (absent a clear precept
of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to
registered Torrens titles and nullify the beneficient
objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that
if a person dealing with registered land were to be held
to take it in every instance subject to all the fourteen
preferred claims enumerated in Article 2242 of the new
Civil Code, even if the existence and import thereof
can not be ascertained from the records, all confidence
in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be
hampered, if not prevented, with incalculable results.
Loans on real estate security would become aleatory

Respondent Ramos admitted in the partial stipulation


of facts submitted by both parties that at the time of the
loans to the spouses, the petitioners bank had no
actual or constructive knowledge of any lien against
the property in question. The duplex apartment house
was built for P32,927.00. The spouses Tabligan
borrowed P35,000.00 for the construction of the
apartment house. The bank could not have known of
any contractors lien because, as far as it was
concerned, it financed the entire construction even if
the stated purpose of the loans was only to "complete"
the
construction.
Since the action filed by the private respondent is not
one which can be considered as "equivalent general
liquidation" having the same import as an insolvency or
settlement of the decedents estate proceeding, the
well established principle must be applied that a
purchaser in good faith and for value takes registered
land free from liens and encumbrances other than
statutory liens and those recorded in the Certificate of
Title. It is an admitted fact that at the time the deeds of
real estate mortgage in favor of the petitioner bank
were constituted, the transfer certificate of title of the
spouses Tabligan was free from any recorded lien and
encumbrances, so that the only registered liens in the
title were deeds in favor of the petitioner.
Prescinding from the foregoing, the private
respondents claim must remain subordinate to the
petitioner banks title over the property evidenced by
TCT
No.
101864.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 14


3RD EXAM COVERAGE - CASES
WHEREFORE, the petition is granted. The decision of
the Court of First Instance of Manila, Branch VII is,
hereby, reversed and set aside. The complaint and the
counterclaim
are
dismissed.
SO ORDERED.

J.L. BERNARDO v. CA
THIRD DIVISION
[G.R. No. 105827. January 31, 2000]
J.L. BERNARDO CONSTRUCTION, represented by
attorneys-in-fact Santiago R. Sugay, Edwin A.
Sugay and Fernando S.A. Erana, SANTIAGO R.
SUGAY, EDWIN A. SUGAY and FERNANDO S. A.
ERANA, petitioners, vs. COURT OF APPEALS and
MAYOR JOSE L. SALONGA, respondents.
DECISION
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul
and set aside the following:
1. Decision dated February 6, 1992 issued by the
Eleventh Division of the Court of Appeals in CA-G.R.
No. 26336 which nullified the order of the Regional
Trial Court of Cabanatuan City in Civil Case No. 1016AF granting plaintiffs (petitioners herein) a writ of
attachment and a contractors lien upon the San
Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the
former Eleventh Division of the Court of Appeals in CAG.R. No. 26336 denying the motions for
reconsideration filed by both parties.
The factual antecedents of this case, as culled from
the pleadings, are as follows:
Sometime in 1990, the municipal government of San
Antonio, Nueva Ecija approved the construction of the
San Antonio Public Market. The construction of the
market was to be funded by the Economic Support
Fund Secretariat (ESFS), a government agency
working with the USAID. Under ESFS "grant-loanequity" financing program, the funding for the market
would be composed of a (a) grant from ESFS, (b) loan
extended by ESFS to the Municipality of San Antonio,

and (c) equity


Municipality.

or

counterpart

funds

from

the

It is claimed by petitioners Santiago R. Sugay, Edwin


A. Sugay, Fernando S.A. Erana and J.L. Bernardo
Construction, a single proprietorship owned by Juanito
L. Bernardo, that they entered into a business venture
for the purpose of participating in the bidding for the
public market. It was agreed by petitioners that
Santiago Sugay would take the lead role and be
responsible for the preparation and submission of the
bid documents, financing the entire project, providing
and utilizing his own equipment, providing the
necessary labor, supplies and materials and making
the necessary representations and doing the liaison
work with the concerned government agencies.
On April 20, 1990, J.L. Bernardo Construction, thru
petitioner Santiago Sugay, submitted its bid together
with other qualified bidders. After evaluating the bids,
the municipal pre-qualification bids and awards
committee, headed by respondent Jose L. Salonga
(then incumbent municipal mayor of San Antonio) as
Chairman, awarded the contract to petitioners. On
June 8, 1990, a Construction Agreement was entered
into by the Municipality of San Antonio thru respondent
Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction
Agreement, the Municipality agreed to assume the
expenses for the demolition, clearing and site filling of
the construction site in the amount of P1,150,000 and,
in addition, to provide cash equity of P767,305.99 to
be remitted directly to petitioners.
Petitioners allege that, although the whole amount of
the cash equity became due, the Municipality refused
to pay the same, despite repeated demands and
notwithstanding that the public market was more than
ninety-eight percent (98%) complete as of July 20,
1991. Furthermore, petitioners maintain that Salonga
induced them to advance the expenses for the
demolition, clearing and site filling work by making
representations that the Municipality had the financial
capability to reimburse them later on. However,
petitioners claim that they have not been reimbursed
for their expenses.[1]
On July 31, 1991, J.L. Bernardo Construction,
Santiago Sugay, Edwin Sugay and Fernando Erana,
with the latter three bringing the case in their own
personal capacities and also in representation of J.L.
Bernardo Construction, filed a complaint for breach of
contract, specific performance, and collection of a sum
of money, with prayer for preliminary attachment and

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3RD EXAM COVERAGE - CASES
enforcement of contractors lien against the
Municipality of San Antonio, Nueva Ecija and Salonga,
in his personal and official capacity as municipal
mayor. After defendants filed their answer, the
Regional Trial Court held hearings on the ancillary
remedies prayed for by plaintiffs.[2]
On September 5, 1991, the Regional Trial Court issued
the writ of preliminary attachment prayed for by
plaintiffs. It also granted J.L. Bernardo Construction
the right to maintain possession of the public market
and to operate the same. The dispositive portion of the
decision provides:
IN VIEW OF THE FOREGOING DISQUISITION, the
Court finds the auxiliary reliefs of attachment prayed
for by the plaintiffs to be well-taken and the same is
hereby GRANTED. Conformably thereto, let a writ of
preliminary attachment be issued upon the filing by the
plaintiffs of a bond in the amount of P2,653,576.84 to
answer for costs and damages which the defendants
may suffer should the Court finally adjudged (sic) that
the plaintiffs are not entitled to the said attachment,
and thereafter, the Deputy Sheriff of this court is
hereby ordered to attach the properties of the
defendants JOSE LAPUZ SALONGA and the
MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA
which are not exempt from execution.
CORROLARILY, the Court grants the plaintiffs J.L.
BERNARDO CONSTRUCTION, represented by
SANTIAGO R. SUGAY, EDWIN A. SUGAY and
FERNANDO S.A. ERANA, the authority to hold on to
the possession of the public market in question and to
open and operate the same based on fair and
reasonable guidelines and other mechanics of
operation to be submitted by plaintiffs within fifteen
(15) days from their receipt of this Order which shall be
subject to Courts approval and to deposit the income
they may derive therefrom to the Provincial Treasurer
of Nueva Ecija after deducting the necessary
expenses for the operation and management of said
market, subject to further orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs claims that
defendants were guilty of fraud in incurring their
contractual obligations as evidenced by the complaint
and the affidavits of plaintiffs Santiago Sugay and
Erana. The court ruled that defendants acts of "
obtaining property, credit or services by false
representations as to material facts made by the
defendant to the plaintiff with intent to deceive
constitutes fraud warranting attachment" and that " a

debt is considered fradulently contracted if at the time


of contracting it, the debtor entertained an intention not
to pay."
With regards to the contractors lien, the trial court held
that since plaintiffs have not been reimbursed for the
cash equity and for the demolition, clearing and site
filling expenses, they stand in the position of an unpaid
contractor and as such are entitled, pursuant to articles
2242 and 2243 of the Civil Code, to a lien in the
amount of P2,653,576.84 (as of August 1, 1991),
excluding the other claimed damages, attorneys fees
and litigation expenses, upon the public market which
they constructed. It was explained that, although the
usual way of enforcing a lien is by a decree for the sale
of the property and the application of the proceeds to
the payment of the debt secured by it, it is more
practical and reasonable to permit plaintiffs to operate
the public market and to apply to their claims the
income derived therefrom, in the form of rentals and
goodwill from the prospective stallholders of the
market, as prayed for by plaintiffs.
The trial court made short shrift of defendants
argument that the case was not instituted in the name
of the real parties-in-interest. It explained that the
plaintiff in the cause of action for money claims for
unpaid cash equity and demolition and site filling
expenses is J.L. Bernardo Construction, while the
plaintiffs in the claim for damages for violation of their
rights under the Civil Code provisions on human
relations are plaintiffs Santiago Sugay, Edwin Sugay
and Erana.[3]
The defendants moved for reconsideration of the trial
courts order, to which the plaintiffs filed an opposition.
On October 10, 1991 the motion was denied. The
following day, the trial court approved the guidelines
for the operation of the San Antonio Public Market filed
by plaintiffs.
Respondent Salonga filed a motion for the approval of
his counterbond which was treated by the trial court in
its October 29, 1991 order as a motion to fix
counterbond and for which it scheduled a hearing on
November 19, 1991.
On October 21, 1991, during the pendency of his
motion, respondent Salonga filed with the Court of
Appeals a petition for certiorari under Rule 65 with
prayer for a writ of preliminary injunction and
temporary restraining order which case was docketed
as CA-G.R. SP No. 26336.[4] Petitioners opposed the
petition, claming that respondent had in fact a plain,
speedy and adequate remedy as evidenced by the

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 16


3RD EXAM COVERAGE - CASES
filing of a motion to approve counter-bond with the trial
court.[5]

was filed by them "without prejudice to the petition for


certiorari."

On February 6, 1992, the Court of Appeals reversed


the trial courts decision and ruled in favor of Salonga.
The dispositive portion of its decision states

As to the contractors lien, the appellate court ruled


that Articles 2242 of the Civil Code finds application
only in the context of insolvency proceedings, as
expressly stated in Article 2243. Even if it is conceded
that plaintiffs are entitled to retain possession of the
market under its contractors lien, the appellate court
held that the same right cannot be expanded to include
the right to use the building. Therefore, the trial courts
grant of authority to plaintiffs to operate the San
Antonio Public Market amounts to a grave abuse of
discretion.

FOR ALL THE FOREGOING, the petition is hereby


granted as follows:
1. The respondent judges ORDER dated September
5, 1991 for the issuance of a writ of attachment and for
the enforcement of a contractors lien, is hereby
NULLIFIED and SET ASIDE; the writ of attachment
issued pursuant thereto and the proceedings
conducted by the Sheriffs assigned to implement the
same are, as a consequence, also hereby NULLIFIED
and SET ASIDE;
2. The respondent judges ORDER dated October 11,
1991 further enforcing the contractors lien and
approving the guidelines for the operation of the San
Antonio Public Market is also NULLIFIED and SET
ASIDE.
Petitioners prayers for the dismissal of Civil Case No.
1016 (now pending before respondent judge) and for
his deletion from said case as defendant in his private
capacity are, however, DENIED.
The respondent judge may now proceed to hearing of
Civil Case No. 1016 on the merits.
SO ORDERED.
The appellate court reasoned that since the
Construction Agreement was only between Juanito
Bernardo and the Municipality of San Antonio, and
since there is no sworn statement by Juanito Bernardo
alleging that he had been deceived or misled by Mayor
Salonga or the Municipality of San Antonio, it is
apparent that the applicant has not proven that the
defendants are guilty of inceptive fraud in contracting
the debt or incurring the obligation, pursuant to Rule
57 of the Rules of Court, and therefore, the writ of
attachment should be struck down for having been
improvidently and irregularly issued.
The filing of a motion for the approval of counter-bond
by defendants did not, according to the Court of
Appeals, render the petition for certiorari premature.
The appellate court held that such motion could not
cure the defect in the issuance of the writ of
attachment and that, moreover, the defendants motion

With regard to the allegations of defendants that


plaintiffs are not the proper parties, the Court of
Appeals ruled that such issue should be assigned as
an error by defendants later on should the outcome of
the case be adverse to the latter.[6]
Petitioners are now before this Court assailing the
appellate courts decision. In their petition, they make
the following assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT
THE COURT OF APPEALS OVERLOOKED AND/OR
DISREGARDED
THE
FUNDAMENTAL
REQUIREMENT AND ESTABLISHED SUPREME
COURT DECISIONS IN ACTIONS FOR CERTIORARI
CONSIDERING THAT THE FILING OF THE
PETITION BY RESPONDENT SALONGA WITH THE
COURT OF APPEALS IS OBVIOUSLY PREMATURE
AND IMPROPER SINCE THERE ADMITTEDLY
EXISTS A PLAIN, SPEEDY AND ADEQUATE
REMEDY AVAILABLE TO RESPONDENT SALONGA
WHICH IS HIS UNRESOLVED "MOTION TO
APPROVE COUNTERBOND" PENDING WITH THE
TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED
JURISPRUDENCE, THE COURT OF APPEALS HAS
SKIRTED
AND/OR
FAILED
TO
CONSIDER/DISREGARDED
THE
EQUALLY
CRUCIAL ISSUE THAT THE QUESTIONED ORDERS
ARE
CLEARLY
AND
ADMITTEDLY
INTERLOCUTORY IN NATURE AND THEREFORE
THEY CANNOT BE THE PROPER SUBJECT OF AN
ACTION FOR CERTIORARI; PROOF THAT THE
ORDERS ASSAILED BY RESPONDENT SALONGA
ARE INTERLOCUTORY IN CHARACTER IS THE
DISPOSITIVE PORTION OF THE DECISION WHEN
THE
COURT
OF
APPEALS
SAID
"THE
RESPONDENT JUDGE MAY NOW PROCEED TO
HEARING OF SAID CIVIL CASE NO. 1016 ON THE

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3RD EXAM COVERAGE - CASES
MERITS"; PETITION FILED BY RESPONDENT
SALONGA WITH THE COURT OF APPEALS
SHOULD HAVE BEEN DISMISSED OUTRIGHTLY AS
SOUGHT BY HEREIN PETITIONERS IN THEIR
VARIOUS UNACTED PLEADINGS.

RESPONDENT SALONGA LONG BEFORE IT WAS


"PROMULGATED" BY THE COURT OF APPEALS.

3. THE DECISION IS BASED ON FINDINGS OF


FACTS AND CONCLUSIONS WHICH ARE NOT
ONLY
GROSSLY
ERRONEOUS
BUT
ARE
SQUARELY CONTRADICTED BY THE EVIDENCE
ON RECORD.

1. Whether or not the Court of Appeals correctly


assumed jurisdiction over the petition for certiorari filed
by respondents herein assailing the trial courts
interlocutory orders granting the writ of attachment and
the contractors lien?

4. THE COURT OF APPEALS HAS CLEARLY


MISAPPRECIATED, MISREAD AND DISREGARDED
HEREIN PETITIONERS CAUSES OF ACTION
AGAINST RESPONDENT SALONGA AND HIS CORESPONDENT MUNICIPALITY OF SAN ANTONIO,
NUEVA ECIJA.

2. Whether or not the Court of Appeals committed


reversible errors of law in its decision?

5. THE COURT OF APPEALS HAS MADE


ERRONEOUS
AND
CONTRADICTORY
CONCLUSIONS AND FINDINGS ON THE ISSUE OF
"REAL PARTY IN INTEREST" IN COMPLETE
DISREGARD OF THE POWERS AND AUTHORITY
GRANTED
BY
JUANITO
L.
BERNARDO
CONSTRUCTION TO HEREIN PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE
IMPORTANT ISSUE OF "AGENCY COUPLED WITH
AN INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE
ISSUES OF THE CERTIORARI CASE AND ITS
FINDINGS AND CONCLUSIONS ON ISSUES NOT
RELATED TO THE CASE FOR CERTIORARI ARE
CONTRARY TO THE PLEADINGS AND DO NOT
CONFORM TO THE EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE
DISREGARDED
THE
PRECEPT
THAT
CONCLUSIONS AND FINDINGS OF FACT OF THE
TRIAL COURT ARE ENTITLED TO GREAT WEIGHT
ON APPEAL AND SHOULD NOT BE DISTURBED
SINCE THERE IS NO STRONG AND COGENT
REASON WHATSOVER TO OVERCOME THE WELLWRITTEN AND DETAILED AND ESTABLISHED
FACTUAL FINDINGS OF THE TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO
BELIEVE THAT THE DECISION OF THE COURT OF
APPEALS WAS ISSUED WITH SERIOUS INJUSTICE
AND AGAINST THE TENETS OF FAIR PLAY SINCE
THE DECISION HAD BEEN KNOWN TO AS IT WAS
OPENLY AND PUBLICLY ANNOUNCED BY

The various issues raised by petitioners may be


restated in a more summary manner as -

A petition for certiorari may be filed in case a tribunal,


board or officer exercising judicial or quasi-judicial
functions has acted without or in excess of jurisdiction,
or with grave abuse of discretion amounting to lack or
excess of jurisdiction, and there is no appeal, or any
plain, speedy, and adequate remedy in the ordinary
course of law.[7]
The office of a writ of certiorari is restricted to truly
extraordinary cases wherein the act of the lower court
or quasi-judicial body is wholly void. [8] We held in a
recent case that certiorari may be issued "only where it
is clearly shown that there is a patent and gross abuse
of discretion as to amount to an evasion of positive
duty or to virtual refusal to perform a duty enjoined by
law, or to act at all in contemplation of law, as where
the power is exercised in an arbitrary and despotic
manner by reason of passion or personal hostility." [9]
As a general rule, an interlocutory order is not
appealable until after the rendition of the judgment on
the merits for a contrary rule would delay the
administration of justice and unduly burden the courts.
[10]
However, we have held that certiorari is an
appropriate remedy to assail an interlocutory order (1)
when the tribunal issued such order without or in
excess of jurisdiction or with grave abuse of discretion
and (2) when the assailed interlocutory order is
patently erroneous and the remedy of appeal would
not afford adequate and expeditious relief.[11]
We hold that the petition for certiorari filed by Salonga
and the Municipality with the Court of Appeals
questioning the writ of attachment issued by the trial
court should not have been given due course for they
still had recourse to a plain, speedy and adequate
remedy - the filing of a motion to fix the counter-bond,
which they in fact filed with the trial court, the grant of
which would effectively prevent the issuance of the writ
of attachment. Moreover, they could also have filed a

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 18


3RD EXAM COVERAGE - CASES
motion to discharge the attachment for having been
improperly or irregularly issued or enforced, or that the
bond is insufficient, or that the attachment is
excessive.[12] With such remedies still available to the
Municipality and Salonga, the filing of a petition
for certiorari with the Court of Appeals insofar as it
questions the order of attachment was clearly
premature.

creditors with claims over the San Antonio Public


Market. The records do not contain any allegation that
petitioners are the only creditors with respect to such
property. The fact that no third party claims have been
filed in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they
also have preferred liens against the property involved.

However, with regards to the contractors lien, we


uphold the appellate courts ruling reversing the trial
courts grant of a contractors lien in favor of
petitioners.

Our decision herein is consistent with our ruling


in Philippine Savings Bank v. Lantin,[19] wherein we
also disallowed the contractor from enforcing his lien
pursuant to Article 2242 of the Civil Code in an action
filed by him for the collection of unpaid construction
costs.

Articles 2241 and 2242 of the Civil Code enumerates


certain credits which enjoy preference with respect to
specific personal or real property of the debtor.
Specifically, the contractors lien claimed by petitioners
is granted under the third paragraph of Article 2242
which provides that the claims of contractors engaged
in the construction, reconstruction or repair of buildings
or other works shall be preferred with respect to the
specific building or other immovable property
constructed.[13]
However, Article 2242 only finds application when
there is a concurrence of credits, i.e. when the same
specific property of the debtor is subjected to the
claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all the
creditors. In such a situation, the question of
preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of
the others.[14] Fundamental tenets of due process will
dictate that this statutory lien should then only be
enforced in the context of some kind of a proceeding
where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency proceedings.
[15]

This is made explicit by Article 2243 which states that


the claims and liens enumerated in articles 2241 and
2242 shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of
legal provisions governing insolvency.[16]
The action filed by petitioners in the trial court does not
partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages.
[17]
Thus, even if it is finally adjudicated that petitioners
herein actually stand in the position of unpaid
contractors and are entitled to invoke the contractors
lien granted under Article 2242, such lien cannot be
enforced in the present action for there is no way of
determining whether or not there exist other preferred

[18]

It not having been alleged in their pleadings that they


have any rights as a mortgagee under the contracts,
petitioners may only obtain possession and use of the
public market by means of a preliminary attachment
upon such property, in the event that they obtain a
favorable judgment in the trial court. Under our rules of
procedure, a writ of attachment over registered real
property is enforced by the sheriff by filing with the
registry of deeds a copy of the order of attachment,
together with a description of the property attached,
and a notice that it is attached, and by leaving a copy
of such order, description, and notice with the
occupant of the property, if any.[20] If judgment be
recovered by the attaching party and execution issue
thereon, the sheriff may cause the judgment to be
satisfied by selling so much of the property as may be
necessary to satisfy the judgment. [21] Only in the event
that petitioners are able to purchase the property will
they then acquire possession and use of the same.
Clearly, the trial courts order of September 5, 1991
granting possession and use of the public market to
petitioners does not adhere to the procedure for
attachment laid out in the Rules of Court. In issuing
such an order, the trial court gravely abused its
discretion and the appellate courts nullification of the
same should be sustained.
At this stage of the case, there is no need to pass
upon the question of whether or not petitioners herein
are the real parties-in-interest. In the event that
judgment is rendered against Salonga and the
Municipality, this issue may be assigned as an error in
their appeal from such judgment.
WHEREFORE,
Decision dated
26336 insofar
granted by the

we UPHOLD the Court of Appeals


February 6, 1992 in CA-G.R. SP No.
as it nullifies the contractors lien
trial court in favor of petitioners in its

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3RD EXAM COVERAGE - CASES
September 5, 1991 Order. Consequently, we also
UPHOLD the appellate courts nullification of the trial
courts October 11, 1991 Order approving the
guidelines for the operation of the San Antonio Public
Market. However, we REVERSE the appellate courts
order nullifying the writ of attachment granted by the
trial court.
No pronouncement as to costs.
SO ORDERED.
ATLANTIC v. HERBAL COVE
THIRD DIVISION
[G.R. No. 148568. March 20, 2003]
ATLANTIC
ERECTORS,
INC., petitioner,
vs. HERBAL
COVE
REALTY
CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
The pendency of a simple collection suit arising
from the alleged nonpayment of construction services,
materials, unrealized income and damages does not
justify the annotation of a notice of lis pendens on the
title to a property where construction has been done.
Statement of the Case
Before the Court is a Petition for Review on
Certiorari[1] under Rule 45 of the Rules of Court,
challenging the May 30, 2000 Decision[2] of the Court
of Appeals (CA) in CA-GR SP No. 56432. The
dispositive portion of the Decision is reproduced as
follows:
WHEREFORE, the petition is granted and the
assailed November 4, 1998 and October 22, 1999
orders annulled and set aside. The July 30, 1998
order of respondent judge is reinstated granting the
cancellation of the notices of lis pendens subject of this
petition.[3]
In its July 21, 2001 Resolution, [4] the CA denied
petitioners Motion for Reconsideration.
The Facts

The factual antecedents of


summarized by the CA in this wise:

the

case

are

On June 20, 1996, [respondent] and [petitioner]


entered into a Construction Contract whereby the
former agreed to construct four (4) units of
[townhouses] designated as 16-A, 16-B, 17-A and 17B and one (1) single detached unit for an original
contract price of P15,726,745.19 which was late[r]
adjusted to P16,726,745.19 as a result of additional
works. The contract period is 180 days commencing
[on] July 7, 1996 and to terminate on January 7,
1997. [Petitioner] claimed that the said period was not
followed due to reasons attributable to [respondent],
namely: suspension orders, additional works, force
majeure, and unjustifiable acts of omission or delay on
the part of said [respondent]. [Respondent], however,
denied such claim and instead pointed to [petitioner]
as having exceeded the 180 day contract period
aggravated by defective workmanship and utilization of
materials which are not in compliance with
specifications.
xxx

xxx

xxx

On November 21, 1997, [petitioner] filed a complaint


for sum of money with damages (Civil Case No. 972707) with the Regional Trial Court of Makati entitled
Atlantic Erectors, Incorporated vs. Herbal Cove Realty
Corp. and Ernest C. Escal[e]r. This case was raffled to
Branch 137, x x x Judge Santiago J. Ranada
presiding. In said initiatory pleading, [petitioner] AEI
asked for the following reliefs:
AFTER DUE NOTICE AND HEARING, to order x x x
defendant to:
1.
Pay plaintiff the sum of P4,854,229.94 for the
unpaid construction services already rendered;
2.
To x x x pay plaintiff the sum
of P1,595,551.00 for the construction materials,
equipment and tools of plaintiff held by defendant;
3.
To x x x pay plaintiff the sum
of P2,250,000.00 for the [loss] x x x of expected
income from the construction project;
4.
[T]o x x x pay plaintiff the sum
of P800,000.00 for the cost of income by way of rental
from the equipment of plaintiff held by defendants;
5.
To x x x pay plaintiff
of P5,000,000.00 for moral damages;

the

sum

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 20


3RD EXAM COVERAGE - CASES
6.
To x x x pay plaintiff
of P5,000,000.00 for exemplary damages;

the

sum

7.
To x x x pay plaintiff the sum equivalent of
25% of the total money claim plus P200,000.00
acceptance fee and P2,500.00 per court appearance;
8.

To x x x pay the cost of suit.

On the same day of November 21, 1997, [petitioner]


filed a notice of lis pendens for annotation of the
pendency of Civil Case No. 97-707 on titles TCTs nos.
T-30228, 30229, 30230, 30231 and 30232. When the
lots covered by said titles were subsequently
subdivided into 50 lots, the notices of lis pendens were
carried over to the titles of the subdivided lots, i.e.,
Transfer Certificate of Title Nos. T-36179 to T-36226
and T-36245 to T-36246 of the Register of Deeds of
Tagaytay City.
On January 30, 1998, [respondent] and x x x Ernest L.
Escaler, filed a Motion to Dismiss [petitioners]
Complaint for lack of jurisdiction and for failure to state
a cause of action. They claimed [that] the Makati RTC
has no jurisdiction over the subject matter of the case
because the parties Construction Contract contained a
clause requiring them to submit their dispute to
arbitration.
xxx

xxx

xxx

On March 17, 1998, [RTC Judge Ranada] dismissed


the Complaint as against [respondent] for [petitioners]
failure to comply with a condition precedent to the filing
of a court action which is the prior resort to arbitration
and as against x x x Escaler for failure of the Complaint
to state a cause of action x x x.
[Petitioner] filed a Motion for Reconsideration of the
March 17, 1998 dismissal order. [Respondent] filed its
Opposition thereto.
On April 24, 1998, [respondent] filed a Motion to
Cancel Notice of Lis Pendens. It argued that the
notices of lis pendens are without basis because
[petitioners] action is a purely personal action to
collect a sum of money and recover damages and x x
x does not directly affect title to, use or possession of
real property.
In his July 30, 1998 Order, [Judge Ranada] granted
[respondents] Motion to Cancel Notice of Lis Pendens
x x x:

[Petitioner] filed a Motion for Reconsideration of the


aforesaid July 30, 1998 Order to which [respondent]
filed an Opposition.
In a November 4, 1998 Order, [Judge Ranada,] while
finding no merit in the grounds raised by [petitioner] in
its Motion for Reconsideration, reversed his July 30,
1998 Order and reinstated the notices of lis pendens,
as follows:
1. The Court finds no merit in plaintiffs contention
that in dismissing the above-entitled case for lack of
jurisdiction, and at the same time granting defendant
Herbal Coves motion to cancel notice of lis pendens,
the Court [took] an inconsistent posture. The Rules
provide that prior to the transmittal of the original
record on appeal, the court may issue orders for the
protection and preservation of the rights of the parties
which do not involve any matter litigated by the appeal
(3rd par., Sec. 10, Rule 41). Even as it declared itself
without jurisdiction, this Court still has power to act on
incidents in this case, such as acting on motions for
reconsideration, for correction, for lifting of lis pendens,
or approving appeals, etc.
As correctly argued by defendant Herbal Cove, a
notice of lis pendens serves only as a precautionary
measure or warning to prospective buyers of a
property that there is a pending litigation involving the
same.
The Court notes that when it issued the Order of 30
July 1998 lifting the notice of lis pendens, there was as
yet no appeal filed by plaintiff. Subsequently, on 10
September 1998, after a notice of appeal was filed by
plaintiff on 4 September 1998, the Branch Clerk of
Court was ordered by the Court to elevate the entire
records of the above-entitled case to the Court of
Appeals. It therefore results that the above-entitled
case is still pending. After a careful consideration of all
matters relevant to the lis pendens, the Court believes
that justice will be better served by setting aside the
Order of 30 July 1998.
On November 27, 1998, [respondent] filed a Motion
for Reconsideration of the November 4, 1998 Order
arguing that allowing the notice of lis pendens to
remain annotated on the titles would defeat, not serve,
the ends of justice and that equitable considerations
cannot be resorted to when there is an applicable
provision of law.
xxx

xxx

xxx

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 21


3RD EXAM COVERAGE - CASES
On October 22, 1999, [Judge Ranada] issued an
order
denying
[respondents]
Motion
for
Reconsideration of the November 4, 1998 Order for
lack of sufficient merit.[5]
Thereafter, Respondent Herbal Cove filed with the
CA a Petition for Certiorari.
Ruling of the Court of Appeals
Setting aside the Orders of the RTC dated
November 4, 1998 and October 22, 1999, the CA
reinstated the formers July 30, 1998 Order[6] granting
Herbal Coves Motion to Cancel the Notice of Lis
Pendens. According to the appellate court, the reannotation of those notices was improper for want of
any legal basis. It specifically cited Section 76 of
Presidential Decree No. 1529 (the Property
Registration Decree). The decree provides that the
registration of such notices is allowed only when court
proceedings directly affect the title to, or the use or the
occupation of, the land or any building thereon.
The CA opined that the Complaint filed by
petitioner in Civil Case No. 97-2707 was intended
purely to collect a sum of money and to recover
damages. The appellate court ruled that the
Complaint did not aver any ownership claim to the
subject land or any right of possession over the
buildings constructed thereon. It further declared that
absent any claim on the title to the buildings or on the
possession thereof, the notices of lis pendens had no
leg to stand on.
Likewise, the CA held that Judge Ranada should
have maintained the notice cancellations, which he
had directed in his July 30, 1998 Order. Those notices
were no longer necessary to protect the rights of
petitioner, inasmuch as it could have procured
protective relief from the Construction Industry Arbitral
Commission (CIAC), where provisional remedies were
available. The CA also mentioned petitioners
admission that there was already a pending case
before the CIAC, which in fact rendered a decision on
March 11, 1999.
The appellate court further explained that the reannotation of the Notice of Lis Pendens was no longer
warranted after the court a quo had ruled that the latter
had no jurisdiction over the case. The former held that
the rationale behind the principle of lis pendens -- to
keep the subject matter of the litigation within the
power of the court until the entry of final judgment -was no longer applicable. The reason for such
inapplicability was that the Makati RTC already

declared that it had no jurisdiction or power over the


subject matter of the case.
Finally, the CA opined that petitioners Complaint
had not alleged or claimed, as basis for the continued
annotation of the Notice of Lis Pendens, the lien of
contractors and laborers under Article 2242 of the New
Civil Code. Moreover, petitioner had not even referred
to any lien of whatever nature. Verily, the CA ruled that
the failure to allege and claim the contractors lien did
not warrant the continued annotation on the property
titles of Respondent Herbal Cove.
Hence, this Petition.[7]
The Issues
Petitioner raises the following issues for our
consideration:
I. Whether
or
not
money
claims
representing cost of materials [for] and
labor [on] the houses constructed on a
property [are] a proper lien for annotation
of lis pendens on the property title[.]
II. Whether or not the trial court[,] after
having declared itself without jurisdiction
to try the case[,] may still decide on [the]
substantial issue of the case.[8]
This Courts Ruling
The Petition has no merit.
First Issue:
Proper Basis for a
Notice of Lis Pendens
Petitioner avers that its money claim on the cost
of labor and materials for the townhouses it
constructed on the respondents land is a proper lien
that justifies the annotation of a notice of lis
pendens on the land titles. According to petitioner, the
money claim constitutes a lien that can be enforced to
secure payment for the said obligations. It argues that,
to preserve the alleged improvement it had made on
the subject land, such annotation on the property titles
of respondent is necessary.
On the other hand, Respondent Herbal Cove
argues that the annotation is bereft of any factual or

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 22


3RD EXAM COVERAGE - CASES
legal basis, because petitioners Complaint[9] does not
directly affect the title to the property, or the use or the
possession thereof. It also claims that petitioners
Complaint did not assert ownership of the property or
any right to possess it. Moreover, respondent attacks
as baseless the annotation of the Notice of Lis
Pendens through the enforcement of a contractors lien
under Article 2242 of the Civil Code. It points out that
the said provision applies only to cases in which there
are several creditors carrying on a legal action against
an insolvent debtor.

However, a careful examination of petitioners


Complaint, as well as the reliefs it seeks, reveals that
no such lien or interest over the property was ever
alleged. The Complaint merely asked for the payment
of construction services and materials plus damages,
without mentioning -- much less asserting -- a lien or
an encumbrance over the property. Verily, it was a
purely personal action and a simple collection case. It
did not contain any material averment of any
enforceable right, interest or lien in connection with the
subject property.

As a general rule, the only instances in which a


notice of lis pendens may be availed of are as follows:
(a) an action to recover possession of real estate; (b)
an action for partition; and (c) any other court
proceedings that directly affect the title to the land or
the building thereon or the use or the occupation
thereof.[10] Additionally, this Court has held that
resorting to lis pendens is not necessarily confined to
cases that involve title to or possession of real
property. This annotation also applies to suits seeking
to establish a right to, or an equitable estate or interest
in, a specific real property; or to enforce a lien, a
charge or an encumbrance against it.[11]

As it is, petitioners money claim cannot be


characterized as an action that involves the
enforcement of a lien or an encumbrance, one that
would thus warrant the annotation of the Notice of Lis
Pendens. Indeed, the nature of an action is
determined by the allegations of the complaint.[12]

Apparently, petitioner proceeds on the premise


that its money claim involves the enforcement of a
lien. Since the money claim is for the nonpayment of
materials and labor used in the construction of
townhouses, the lien referred to would have to be that
provided under Article 2242 of the Civil Code. This
provision describes a contractors lien over an
immovable property as follows:
Art. 2242. With reference to specific immovable
property and real rights of the debtor, the following
claims, mortgages and liens shall be preferred,
and shall constitute an encumbrance on the
immovable or real right:
xxx

xxx

xxx

(3) Claims of laborers, masons, mechanics and


other workmen, as well as of architects, engineers and
contractors,
engaged
in
the
construction,
reconstruction or repair of buildings, canals or other
works, upon said buildings, canals or other works;
(4) Claims of furnishers of materials used in the
construction, reconstruction, or repair of buildings,
canals or other works, upon said buildings, canals or
other works[.] (Emphasis supplied)

Even assuming that petitioner had sufficiently


alleged such lien or encumbrance in its Complaint, the
annotation of the Notice of Lis Pendens would still be
unjustified, because a complaint for collection and
damages is not the proper mode for the enforcement
of a contractors lien.
In J.L. Bernardo Construction v. Court of Appeals,
the Court explained the concept of a contractors
lien under Article 2242 of the Civil Code and the proper
mode for its enforcement as follows:
[13]

Articles 2241 and 2242 of the Civil Code enumerates


certain credits which enjoy preference with respect to
specific personal or real property of the
debtor. Specifically, the contractors lien claimed
by the petitioners is granted under the third
paragraph of Article 2242 which provides that the
claims of contractors engaged in the construction,
reconstruction or repair of buildings or other
works shall be preferred with respect to the
specific building or other immovable property
constructed.
However, Article 2242 finds application when
there is a concurrence of credits, i.e., when the
same specific property of the debtor is subjected
to the claims of several creditors and the value of
such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question
of preference will arise, that is, there will be a need to
determine which of the creditors will be paid ahead of
the others. Fundamental tenets of due process will
dictate that this statutory lien should then only be
enforced in the context of some kind of a
proceeding where the claims of all the preferred

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 23


3RD EXAM COVERAGE - CASES
creditors may be bindingly adjudicated, such as
insolvency proceedings.[14] (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code
nor the enforcement of the lien thereunder is
applicable here, because petitioners Complaint failed
to satisfy the foregoing requirements. Nowhere does it
show that respondents property was subject to the
claims of other creditors or was insufficient to pay for
all concurring debts. Moreover, the Complaint did not
pertain to insolvency proceedings or to any other
action in which the adjudication of claims of preferred
creditors could be ascertained.
Another factor negates the argument of petitioner
that its money claim involves the enforcement of a lien
or the assertion of title to or possession of the subject
property: the fact that it filed its action with the RTC of
Makati, which is undisputedly bereft of any jurisdiction
over respondents property in Tagaytay City. Certainly,
actions affecting title to or possession of real property
or the assertion of any interest therein should be
commenced and tried in the proper court that has
jurisdiction over the area, where the real property
involved or a portion thereof is situated. [15] If petitioner
really intended to assert its claim or enforce its
supposed lien, interest or right over respondents
subject properties, it would have instituted the proper
proceedings or filed a real action with the RTC of
Tagaytay City, which clearly had jurisdiction over those
properties.[16]
Narciso Pea, a leading authority on the subject
of land titles and registration, gives an explicit
exposition on the inapplicability of the doctrine of lis
pendens to certain actions and proceedings that
specifically include money claims. He explains in this
wise:
By express provision of law, the doctrine of lis
pendens does not apply to attachments, levies of
execution, or to proceedings for the probate of wills, or
for administration of the estate of deceased persons in
the Court of First Instance. Also, it is held generally
that the doctrine of lis pendens has no application
to a proceeding in which the only object sought is
the recovery of a money judgment, though the title
or right of possession to property be incidentally
affected. It
is
essential
that
the
property
be directly affected, as where the relief sought in the
action or suit includes the recovery of possession, or
the enforcement of a lien, or an adjudication between
conflicting claims of title, possession, or the right of
possession to specific property, or requiring its transfer
or sale[17] (Emphasis supplied)

Pea adds that even if a party initially avails itself


of a notice of lis pendens upon the filing of a case in
court, such notice is rendered nugatory if the case
turns out to be a purely personal action. We quote him
as follows:
It may be possible also that the case when
commenced may justify a resort to lis pendens, but
during the progress thereof, it develops to be purely a
personal action for damages or otherwise. In such
event,
the
notice
of lis
pendens has
become functus officio.[18] (Emphasis supplied)
Thus, when a complaint or an action is
determined by the courts to be in personam, the
rationale for or purpose of the notice of lis
pendens ceases to exist. To be sure, this Court has
expressly and categorically declared that the
annotation of a notice of lis pendens on titles to
properties is not proper in cases wherein the
proceedings instituted are actions in personam.[19]
Second Issue:
Jurisdiction of the Trial Court
Petitioner argues that the RTC had no jurisdiction
to issue the Order canceling the Notice of Lis
Pendens as
well
as
the
Order
reinstating
it. Supposedly, since both Orders were issued by the
trial court without jurisdiction, the annotation made by
the Register of Deeds of Tagaytay City must remain in
force.
Petitioner avers that the trial court finally declared
that the latter had no jurisdiction over the case on July
27, 1998, in an Order denying the formers Motion for
Reconsideration of the March 17, 1998 Order
dismissing the Complaint. Petitioner insists that the
subsequent July 30, 1998 Order cancelling the subject
Notice of Lis Pendens is void, because it was issued
by a court that had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure,
which governs appeals from regional trial courts,
expressly provides that RTCs lose jurisdiction over a
case when an appeal is filed. The rule reads thus:
SEC. 9. Perfection of appeal; effect thereof. -- A
partys appeal by notice of appeal is deemed perfected
as to him upon the filing of the notice of appeal in due
time.
xxx

xxx

xxx

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 24


3RD EXAM COVERAGE - CASES
In appeals by notice of appeal, the court loses
jurisdiction over the case upon the perfection of
the appeals filed in due time and the expiration of
the time to appeal of the other parties. (Emphasis
supplied)
On the basis of the foregoing rule, the trial court
lost jurisdiction over the case only on August 31,
1998, when petitioner filed its Notice of Appeal.
[20]
Thus, any order issued by the RTC prior to that date
should be considered valid, because the court still had
jurisdiction over the case. Accordingly, it still had the
authority or jurisdiction to issue the July 30, 1998
Order canceling the Notice of Lis Pendens. On the
other hand, the November 4, 1998 Order that set
aside the July 30, 1998 Order and reinstated that
Notice should be considered without force and effect,
because it was issued by the trial court after it had
already lost jurisdiction.
In any case, even if we were to adopt petitioners
theory that both the July 30, 1998 and the November
4, 1998 Orders were void for having been issued
without jurisdiction, the annotation is still improper for
lack of factual and legal bases.

SO ORDERED.

DEVELOPMENT BANK v. CA
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 126200

August 16, 2001

DEVELOPMENT BANK OF THE


PHILIPPINES, petitioner,
vs.
HONORABLE COURT OF APPEALS and
REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
KAPUNAN, J.:

As discussed previously, erroneously misplaced is


the reliance of petitioner on the premise that its money
claim is an action for the enforcement of a contractors
lien. Verily, the annotation of the Notice of Lis
Pendens on the subject property titles should not have
been made in the first place. The Complaint filed
before the Makati RTC -- for the collection of a sum of
money and for damages -- did not provide sufficient
legal basis for such annotation.
Finally, petitioner vehemently insists that the trial
court had no jurisdiction to cancel the Notice. Yet, the
former filed before the CA an appeal, docketed as CAGR CV No. 65647,[21]questioning the RTCs dismissal
of the Complaint for lack of jurisdiction. Moreover, it
must be remembered that it was petitioner which had
initially invoked the jurisdiction of the trial court when
the former sought a judgment for the recovery of
money and damages against respondent. Yet again, it
was also petitioner which assailed that same
jurisdiction for issuing an order unfavorable to the
formers cause. Indeed, parties cannot invoke the
jurisdiction of a court to secure affirmative relief, then
repudiate or question that same jurisdiction after
obtaining or failing to obtain such relief.[22]
WHEREFORE,
the
Petition
is
hereby DENIED and
the
assailed
Decision AFFIRMED. Costs against petitioner.

Before the Court is a petition for review on certiorari


under Rule 45 of the Rules of Court, seeking a review
of the Decision of the Court of Appeals dated October
6, 1995 and the Resolution of the same court dated
August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque
Mining), a corporation engaged in the manufacture of
pure and refined nickel, nickel and cobalt in mixed
sulfides; copper ore/concentrates, cement and pyrite
conc., obtained from the Philippine National Bank
(PNB) various loan accommodations. To secure the
loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel
Mortgage in favor of PNB. The mortgage covered all of
Marinduque Mining's real properties, located at
Surigao del Norte, Sipalay, Negros Occidental, and at
Antipolo, Rizal, including the improvements thereon.
As of November 20, 1980, the loans extended by PNB
amounted to P4 Billion, exclusive of interest and
charges.1
On July 13, 1981, Marinduque Mining executed in
favor of PNB and the Development Bank of the
Philippines (DBP) a second Mortgage Trust
Agreement. In said agreement, Marinduque Mining

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 25


3RD EXAM COVERAGE - CASES
mortgaged to PNB and DBP all its real properties
located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, Rizal, including the
improvements thereon. The mortgage also covered all
of Marinduque Mining's chattels, as well as assets of
whatever kind, nature and description which
Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and
Chattel Mortgage dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans totaling P2
Billion from DBP, exclusive of interest and charges.2
On April 27, 1984, Marinduque Mining executed in
favor of PNB and DBP an Amendment to Mortgage
Trust Agreement by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all other real and
personal properties and other real rights subsequently
acquired by Marinduque Mining.3
For failure of Marinduque Mining to settle its loan
obligations, PNB and DBP instituted sometime on July
and August 1984 extrajudicial foreclosure proceedings
over the mortgaged properties.
The events following the foreclosure are narrated by
DBP in its petition, as follows:
In the ensuing public auction sale conducted
on August 31, 1984, PNB and DBP emerged and were
declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights
together with the improvements thereon as well as
machineries [sic] and equipments [sic] of MMIC
located at Nonoc Nickel Refinery Plant at Surigao del
Norte for a bid price of P14,238,048,150.00 [and]
[o]ver the foreclosed chattels of MMIC located at
Nonoc Refinery Plant at Surigao del Norte, PNB and
DBP as highest bidders, bidded for P170,577,610.00
(Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For
the foreclosed real properties together with all the
buildings, major machineries & equipment and other
improvements of MMIC located at Antipolo, Rizal,
likewise held on August 31, 1984, were sold to PNB
and DBP as highest bidders in the sum of
P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).
At the auction sale conducted on September 7, 1984[,]
over the foreclosed real properties, buildings, &
machineries/equipment of MMIC located at Sipalay,
Negros Occidental were sold to PNB and DBP, as
highest bidders, in the amount of P2,383,534,000.00
and P543,040.000.00 respectively (Exhs. "8" to "8-BB",
"9" to "90-GGGGGG"-PNB/DBP).

Finally, at the public auction sale conducted on


September 18, 1984 on the foreclosed personal
properties of MMIC, the same were sold to PNB and
DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).
PNB and DBP thereafter thru a Deed of Transfer dated
August 31, 1984, purposely, in order to ensure the
continued operation of the Nickel refinery plant and to
prevent the deterioration of the assets foreclosed,
assigned and transferred to Nonoc Mining and
Industrial Corporation all their rights, interest and
participation over the foreclosed properties of MMIC
located at Nonoc Island, Surigao del Norte for an initial
consideration of P14,361,000,000.00 (Exh. "13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6,
1984, PNB and DBP assigned and transferred in favor
of Maricalum Mining Corp. all its rights, interest and
participation over the foreclosed properties of MMIC at
Sipalay, Negros Occidental for an initial consideration
of P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to
Proclamation No. 50 as amended, again assigned,
transferred and conveyed to the National Government
thru [sic] the Asset Privatization Trust (APT) all its
existing rights and interest over the assets of MMIC,
earlier assigned to Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation and Island
Cement Corporation (Exh. "15" & "15-A" PNB/DBP). 4
In the meantime, between July 16, 1982 to October 4,
1983, Marinduque Mining purchased and caused to be
delivered
construction
materials
and
other
merchandise from Remington Industrial Sales
Corporation (Remington) worth P921,755.95. The
purchases remained unpaid as of August 1, 1984
when Remington filed a complaint for a sum of money
and damages against Marinduque Mining for the value
of the unpaid construction materials and other
merchandise purchased by Marinduque Mining, as
well as interest, attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint
was amended to include PNB and DBP as codefendants in view of the foreclosure by the latter of
the real and chattel mortgages on the real and
personal
properties,
chattels,
mining
claims,
machinery, equipment and other assets of Marinduque
Mining.5
On September 13, 1984, Remington filed a second
amended complaint to include as additional defendant,
the Nonoc Mining and Industrial Corporation (Nonoc

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 26


3RD EXAM COVERAGE - CASES
Mining). Nonoc Mining is the assignee of all real and
personal properties, chattels, machinery, equipment
and all other assets of Marinduque Mining at its Nonoc
Nickel Factory in Surigao del Norte.6
On March 26, 1986, Remington filed a third amended
complaint including the Maricalum Mining Corporation
(Maricalum Mining) and Island Cement Corporation
(Island Cement) as co-defendants. Remington
asserted that Marinduque Mining, PNB, DBP, Nonoc
Mining, Maricalum Mining and Island Cement must be
treated in law as one and the same entity by
disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement
which are newly created entities are practically owned
wholly by defendants PNB and DBP, and managed by
their officers, aside from the fact that the aforesaid codefendants NMIC, Maricalum and Island Cement were
organized in such a hurry and in such suspicious
circumstances by co-defendants PNB and DBP after
the supposed extrajudicial foreclosure of MMIC's
assets as to make their supposed projects assets,
machineries and equipment which were originally
owned by co-defendant MMIC beyond the reach of
creditors of the latter.
2. The personnel, key officers and rank-and-file
workers and employees of co-defendants NMIC,
Maricalum and Island Cement creations of codefendants PNB and DBP were the personnel of codefendant MMIC such that . . . practically there has
only been a change of name for all legal purpose and
intents
3. The places of business not to mention the mining
claims and project premises of co-defendants NMIC,
Maricalum and Island Cement likewise used to be the
places of business, mining claims and project
premises of co-defendant MMIC as to make the
aforesaid co-defendants NMIC, Maricalum and Island
Cement mere adjuncts and subsidiaries of codefendants PNB and DBP, and subject to their control
and management.
On top of everything, co-defendants PNB, DBP NMIC,
Maricalum and Island Cement being all corporations
created by the government in the pursuit of business
ventures should not be allowed to ignore, x x x or
obliterate with impunity nay illegally, the financial
obligations of x x x MMIC whose operations codefendants PNB and DBP had highly financed before
the alleged extrajudicial foreclosure of defendant
MMIC's assets, machineries and equipment to the
extent that major policies of co-defendant MMIC were

being decided upon by co-defendants PNB and DBP


as major financiers who were represented in its board
of directors forming part of the majority thereof which
through
the
alleged
extrajudicial
foreclosure
culminated in a complete take-over by co-defendants
PNB and DBP bringing about the organization of their
co-defendants NMIC, Maricalum and Island Cement to
which were transferred all the assets, machineries and
pieces of equipment of co-defendant MMIC used in its
nickel mining project in Surigao del Norte, copper
mining operation in Sipalay, Negros Occidental and
cement factory in Antipolo, Rizal to the prejudice of
creditors of co-defendant MMIC such as plaintiff
Remington Industrial Sales Corporation whose
stockholders, officers and rank-and-file workers in the
legitimate pursuit of its business activities, invested
considerable time, sweat and private money to supply,
among others, co-defendant MMIC with some of its
vital needs for its operation, which co-defendant MMIC
during the time of the transactions material to this case
became x x x co-defendants PNB and DBP's
instrumentality, business conduit, alter ego, agency
(sic), subsidiary or auxiliary corporation, by virtue of
which it becomes doubly necessary to disregard the
corporation fiction that co-defendants PNB, DBP,
MMIC, NMIC, Maricalum and Island Cement, six (6)
distinct and separate entities, when in fact and in law,
they should be treated as one and the same at least as
far as plaintiff's transactions with co-defendant MMIC
are concerned, so as not to defeat public convenience,
justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a
fact which all defendants were as (sic) still are aware
of during all the time material to the transactions
subject of this case.7
On April 3, 1989, Remington filed a motion for leave to
file a fourth amended complaint impleading the Asset
Privatization Trust (APT) as co-defendant. Said fourth
amended complaint was admitted by the lower court in
its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC)
rendered a decision in favor of Remington, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor
of the plaintiff, ordering the defendants Marinduque
Mining & Industrial Corporation, Philippine National
Bank, Development Bank of the Philippines, Nonoc
Mining and Industrial Corporation, Maricalum Mining
Corporation, Island Cement Corporation and Asset
Privatization Trust to pay, jointly and severally, the sum
of P920,755.95, representing the principal obligation,
including the stipulated interest as of June 22, 1984,

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 27


3RD EXAM COVERAGE - CASES
plus ten percent (10%) surcharge per annum by way of
penalty, until the amount is fully paid; the sum
equivalent to 10% of the amount due as and for
attorney's fees; and to pay the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum
Mining, Island Cement and APT, the Court of Appeals,
in its Decision dated October 6, 1995, affirmed the
decision of the RTC. Petitioner filed a Motion for
Reconsideration, which was denied in the Resolution
dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington
has no cause of action against it or PNB, nor against
their transferees, Nonoc Mining, Island Cement,
Maricalum Mining, and the APT.
On the other hand, private respondent Remington
submits that the transfer of the properties was made in
fraud of creditors. The presence of fraud, according to
Remington, warrants the piercing of the corporate veil
such that Marinduque Mining and its transferees could
be considered as one and the same corporation. The
transferees, therefore, are also liable for the value of
Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax
Appeals,9 cited by the Court of Appeals in its
decision,10 this Court declared:
It is an elementary and fundamental principle of
corporation law that a corporation is an entity separate
and distinct from its stockholders and from other
corporations to which it may be connected. However,
when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an
association of persons or in case of two corporations,
merge them into one". (Koppel [Phils.], Inc., vs. Yatco,
71 Phil. 496, citing 1 Fletcher Encyclopedia of
Corporation, Permanent Ed., pp. 135-136; U.S. vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247,
255 per Sanborn, J.). x x x.
In accordance with the foregoing rule, this Court has
disregarded the separate personality of the corporation
where the corporate entity was used to escape liability
to third parties.11 In this case, however, we do not find
any fraud on the part of Marinduque Mining and its
transferees to warrant the piercing of the corporate
veil.
It bears stressing that PNB and DBP are mandated to
foreclose on the mortgage when the past due account
had incurred arrearages of more than 20% of the total

outstanding obligation. Section 1 of Presidential


Decree No. 385 (The Law on Mandatory Foreclosure)
provides:
It shall be mandatory for government financial
institutions, after the lapse of sixty (60) days from the
issuance of this decree, to foreclose the collateral
and/or securities for any loan, credit accommodation,
and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest
and other charges, amount to at least twenty percent
(20%) of the total outstanding obligations, including
interest and other charges, as appearing in the books
of account and/or related records of the financial
institution concerned. This shall be without prejudice to
the exercise by the government financial institution of
such rights and/or remedies available to them under
their respective contracts with their debtors, including
the
right
to
foreclose
on
loans,
credits,
accommodations and/or guarantees on which the
arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the
duty under said law, to foreclose upon the subject
properties. The banks had no choice but to obey the
statutory command.
The import of this mandate was lost on the Court of
Appeals, which reasoned that under Article 19 of the
Civil Code, "Every person must, in the exercise of his
rights and in the performance of his duties, act with
justice, give everyone his due, and observe honesty
and good faith." The appellate court, however, did not
point to any fact evidencing bad faith on the part of the
Marinduque Mining and its transferees. Indeed, it
skirted the issue entirely by holding that the question of
actual fraudulent intent on the part of the interlocking
directors of DBP and Marinduque Mining was
irrelevant because:
As aptly stated by the appellee in its brief, "x x x where
the corporations have directors and officers in
common, there may be circumstances under which
their interest as officers in one company may disqualify
them in equity from representing both corporations in
transactions between the two. Thus, where one
corporation was 'insolvent and indebted to another, it
has been held that the directors of the creditor
corporation were disqualified, by reason of selfinterest, from acting as directors of the debtor
corporation in the authorization of a mortgage or deed
of trust to the former to secure such indebtedness x x
x" (page 105 of the Appellee's Brief). In the same
manner that "x x x when the corporation is insolvent,
its directors who are its creditors can not secure to

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 28


3RD EXAM COVERAGE - CASES
themselves any advantage or preference over other
creditors. They can not thus take advantage of their
fiduciary relation and deal directly with themselves, to
the injury of others in equal right. If they do, equity will
set aside the transaction at the suit of creditors of the
corporation or their representatives, without reference
to the question of any actual fraudulent intent on the
part of the directors, for the right of the creditors does
not depend upon fraud in fact, but upon the violation of
the fiduciary relation to the directors." x x x (page 106
of the Appellee's Brief)
We also concede that "x x x directors of insolvent
corporation, who are creditors of the company, can not
secure to themselves any preference or advantage
over other creditors in the payment of their claims. It is
not good morals or good law. The governing body of
officers thereof are charged with the duty of conducting
its affairs strictly in the interest of its existing creditors,
and it would be a breach of such trust for them to
undertake to give any one of its members any
advantage over any other creditors in securing the
payment of his debts in preference to all others. When
validity of these mortgages, to secure debts upon
which the directors were indorsers, was questioned by
other creditors of the corporation, they should have
been classed as instruments rendered void by the
legal principle which prevents directors of an insolvent
corporation from giving themselves a preference over
outside creditors. x x x" (page 106-107 of the
Appellee's Brief.)12
The Court of Appeals made reference to two principles
in corporation law. The first pertains to transactions
between corporations with interlocking directors
resulting in the prejudice to one of the corporations.
This rule does not apply in this case, however, since
the corporation allegedly prejudiced (Remington) is a
third party, not one of the corporations with interlocking
directors (Marinduque Mining and DBP).
The second principle invoked by respondent court
involves "directors x x x who are creditors" which is
also inapplicable herein. Here, the creditor of
Marinduque Mining is DBP, not the directors of
Marinduque Mining.
Neither do we discern any bad faith on the part of DBP
by its creation of Nonoc Mining, Maricalum and Island
Cement. As Remington itself concedes, DBP is not
authorized by its charter to engage in the mining
business.13The creation of the three corporations was
necessary to manage and operate the assets acquired
in the foreclosure sale lest they deteriorate from nonuse and lose their value. In the absence of any entity

willing to purchase these assets from the bank, what


else would it do with these properties in the meantime?
Sound business practice required that they be utilized
for the purposes for which they were intended.
Remington also asserted in its third amended
complaint that the use of Nonoc Mining, Maricalum
and Island Cement of the premises of Marinduque
Mining and the hiring of the latter's officers and
personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining
were not among those acquired by DBP in the
foreclosure sale, convenience and practicality dictated
that the corporations so created occupy the premises
where these assets were found instead of relocating
them. No doubt, many of these assets are heavy
equipment and it may have been impossible to move
them. The same reasons of convenience and
practicality, not to mention efficiency, justified the hiring
by Nonoc Mining, Maricalum and Island Cement of
Marinduque Mining's personnel to manage and
operate the properties and to maintain the continuity of
the mining operations.
To reiterate, the doctrine of piercing the veil of
corporate fiction applies only when such corporate
fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. 14 To disregard
the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly
established. It cannot be presumed. 15 In this case, the
Court finds that Remington failed to discharge its
burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the
piercing of the corporate veil.
The Court of Appeals also held that there exists in
Remington's favor a "lien" on the unpaid purchases of
Marinduque Mining, and as transferee of these
purchases, DBP should be held liable for the value
thereof.
In the absence of liquidation proceedings, however,
the claim of Remington cannot be enforced against
DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to specific movable
property of the debtor, the following claims or liens
shall be preferred:
xxx

xxx

xxx

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 29


3RD EXAM COVERAGE - CASES
(3) Claims for the unpaid price of movables sold, on
said movables, so long as they are in the possession
of the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price is
still unpaid, the lien may be enforced on the price; this
right is not lost by the immobilization of the thing by
destination, provided it has not lost its form, substance
and identity, neither is the right lost by the sale of the
thing together with other property for a lump sum,
when the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so long as the
things pledged are in the hands of the creditor, or
those guaranteed by a chattel mortgage, upon the
things pledged or mortgaged, up to the value thereof;
xxx

xxx

xxx

In Barretto vs. Villanueva,16 the Court had occasion to


construe Article 2242, governing claims or liens over
specific immovable property. The facts that gave rise to
the case were summarized by this Court in its
resolution as follows:
x x x Rosario Cruzado sold all her right, title, and
interest and that of her children in the house and lot
herein involved to Pura L. Villanueva for P19,000.00.
The purchaser paid P1,500 in advance, and executed
a promissory note for the balance of P17,500.00.
However, the buyer could only pay P5,500 on account
of the note, for which reason the vendor obtained
judgment for the unpaid balance. In the meantime, the
buyer Villanueva was able to secure a clean certificate
of title (No. 32626), and mortgaged the property to
appellant Magdalena C. Barretto, married to Jose C.
Baretto, to secure a loan of P30,000.03, said mortgage
having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in
favor of Barretto. The latter foreclosed the mortgage in
her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14
August 1958, Cruzado filed a motion for recognition for
her "vendor's lien" in the amount of P12,000.00, plus
legal interest, invoking Articles 2242, 2243, and 2249
of the new Civil Code. After hearing, the court below
ordered the "lien" annotated on the back of Certificate
of Title No. 32526, with the proviso that in case of sale
under the foreclosure decree the vendor's lien and the
mortgage credit of appellant Barretto should be
paid pro rata from the proceeds. Our original decision
affirmed this order of the Court of First Instance of
Manila.

In its decision upholding the order of the lower court,


the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the
claims, mortgages and liens that constitute an
encumbrance on specific immovable property, and
among them are:
"(2) For the unpaid price of real property sold, upon the
immovable sold"; and
"(5) Mortgage credits recorded in the Registry of
Property."
Article 2249 of the same Code provides that "if there
are two or more credits with respect to the same
specific real property or real rights, they shall be
satisfied pro-rata, after the payment of the taxes and
assessments upon the immovable property or real
rights."
Application of the above-quoted provisions to the case
at bar would mean that the herein appellee Rosario
Cruzado as an unpaid vendor of the property in
question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
xxx

xxx

xxx

As to the point made that the articles of the Civil Code


on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we
are to interpret this portion of the Code as intended
only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits
would be left without any rules to govern them, and it
would render purposeless the special laws on
insolvency.17
Upon motion by appellants, however, the Court
reconsidered its decision. Justice J.B.L. Reyes,
speaking for the Court, explained the reasons for the
reversal:
A. The previous decision failed to take fully into
account the radical changes introduced by the Civil
Code of the Philippines into the system of priorities
among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors
entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order
of priorities established by Article 1927, whereby one

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 30


3RD EXAM COVERAGE - CASES
class of creditors could exclude the creditors
order until the claims of the former were fully
out of the proceeds of the sale of the real
subject of the preference, and could even
proceeds if necessary.

of lower
satisfied
property
exhaust

Under the system of the Civil Code of the Philippines,


however, only taxes enjoy a similar absolute
preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no priority
among themselves, but must be paid pro rata, i.e., in
proportion to the amount of the respective credits.
Thus, Article 2249 provides:
"If there are two or more credits with respect to the
same specific real property or real rights, they shall be
satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real
rights."
But in order to make this prorating fully effective, the
preferred creditors enumerated in Nos. 2 to 14 of
Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the
import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242
demands that there must be first some proceeding
where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the
Rules of Court, or other liquidation proceedings of
similar import.
This explains the rule of Article 2243 of the new Civil
Code that

preferences under Article 2242, unless the claimant


were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise
enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that
the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect, and
must be reversed. [Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings
Bank vs. Hon. Lantin, Jr., etc., et al.,18 and in two
cases both entitled Development Bank of the
Philippines vs. NLRC.19
Although Barretto involved
specific
immovable
property, the ruling therein should apply equally in this
case where specific movable property is involved. As
the extrajudicial foreclosure instituted by PNB and
DBP is not the liquidation proceeding contemplated by
the Civil Code, Remington cannot claim its pro rata
share from DBP.
WHEREFORE, the petition is GRANTED. The decision
of the Court of Appeals dated October 6, 1995 and its
Resolution promulgated on August 29, 1996 is
REVERSED and SET ASIDE. The original complaint
filed in the Regional Trial Court in CV Case No. 8425858 is hereby DISMISSED.
SO ORDERED.
DBP v. NLRC

"The claims or credits enumerated in the two


preceding articles shall be considered as mortgages or
pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency x x x
(Italics supplied).

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION

And the rule is further clarified in the Report of the


Code Commission, as follows
"The question as to whether the Civil Code and the
Insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be enforced in
accordance with the Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's
third-party claim to the proceeds of a foreclosure sale
(as in the case now before us) is not the proceeding
contemplated by law for the enforcement of

G.R. No. 108031 March 1, 1995


DEVELOPMENT
BANK
OF
THE
PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and
LEONOR A ANG, respondents.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 31


3RD EXAM COVERAGE - CASES
BELLOSILLO, J.:
Is declaration of bankruptcy or judicial liquidation
required before the worker's preference may be
invoked under Art. 110 of the Labor Code?
On 21 March 1977 private respondent Leonor A. Ang
started employment as Executive Secretary with
Tropical Philippines Wood Industries, Inc. (TPWII), a
corporation engaged in the manufacture and sale of
veneer, plywood and sawdust panel boards. In 1982
she was promoted to the position of Personnel Officer.
In September 1983 petitioner Development Bank of
the Philippines, as mortgagee of TPWII, foreclosed its
plant facilities and equipment. Nevertheless TPWII
continued its business operations interrupted only by
brief shutdowns for the purpose of servicing its plant
facilities and equipment. In January 1986 petitioner
took possession of the foreclosed properties. From
then on the company ceased its operations. As a
consequence private respondent was on 15 April 1986
verbally terminated from the service.
On 14 December 1987 aggrieved by the termination of
her employment, private respondent filed with the
Labor Arbiter a complaint for separation pay, 13th
month pay, vacation and sick leave pay, salaries and
allowances against TPWII, its General Manager, and
petitioner.
After hearing the Labor Arbiter found TPWII primarily
liable to private respondent but only for her separation
pay and vacation and sick leave pay because her
claims for unpaid wages and 13th month pay were
later paid after the complaint was filed. 1 The General
Manager was absolved of any liability. But with respect
to petitioner, it was held subsidiarily liable in the event
the company failed to satisfy the judgment. The Labor
Arbiter rationalized that the right of an employee to be
paid benefits due him from the properties of his
employer is superior to the right of the latter's
mortgage, citing this Court's resolution in PNB v. Delta
Motor Workers Union. 2
On 16 November 1992 public respondent National
Labor Relations Commission affirmed the ruling of the
Labor Arbiter. 3
The issue now before us is whether public respondent
committed grave abuse of discretion in holding that Art.
110 of the Labor Code, as amended, which refers to
worker preference in case of bankruptcy or liquidation
of an employer's business is applicable to the present
case notwithstanding the absence of any formal

declaration of bankruptcy or judicial liquidation of


TPWII.
Petitioner argues that the decision of public
respondent runs counter to the consistent rulings of
this Court in a long line of cases emphasizing that the
application of Art. 110 of the Labor Code is contingent
upon the institution of bankruptcy or judicial liquidation
proceedings against the employer.
We hold that public respondent gravely abused its
discretion in affirming the decision of the Labor Arbiter.
Art. 110 should not be treated apart from other laws
but applied in conjunction with the pertinent provisions
of the Civil Code and the Insolvency Law to the extent
that piece-meal distribution of the assets of the debtor
is avoided. Art. 110, then prevailing, provides:
Art. 110. Worker preference in case of bankruptcy.
In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first
preference as regards wages due them for services
rendered during the period prior to the bankruptcy or
liquidation,
any
provision
to
the
contrary
notwithstanding. Unpaid wages shall be paid in full
before other creditors may establish any claim to a
share in the assets of the employer.
Complementing Art. 110, Sec. 10, Rule VIII, Book III, of
the Revised Rules and Regulations Implementing the
Labor Code provides:
Sec. 10. Payment of wages in case of bankruptcy.
Unpaid wages earned by the employees before the
declaration of bankruptcy or judicial liquidation of the
employer's business shall be given first preference and
shall be paid in full before other creditors may
establish any claim to a share in the assets of the
employer.
We interpreted this provision in Development Bank of
the Philippines v. Santos 4 to mean that
. . . a declaration of bankruptcy or a judicial liquidation
must be present before the worker's preference may
be enforced. Thus, Article 110 of the Labor Code and
its implementing rule cannot be invoked by the
respondents in this case absent a formal declaration of
bankruptcy or a liquidation order . . . . (Emphasis
supplied).
The rationale is that to hold Art. 110 to be applicable
also to extrajudicial proceedings would be putting the
worker in a better position than the State which could
only assert its own prior preference in case of a judicial

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 32


3RD EXAM COVERAGE - CASES
proceeding. 5 Art. 110, which was amended by R.A.
6715 effective 21 March 1989, now reads:
Art. 110. Worker preference in case of bankruptcy.
In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first
preference as regards their unpaid wages and other
monetary claims, any provision of law to the contrary
notwithstanding. Such unpaid wages and monetary
claims shall be paid in full before the claims of the
Government and other creditors may be paid.
Obviously, the amendment expanded the concept of
"worker preference" to cover not only unpaid wages
but also other monetary claims to which even claims of
the Government must be deemed subordinate. The
Rules and Regulations Implementing R.A. 6715,
approved 24 May 1989, also amended the
corresponding implementing rule, and now reads:
Sec. 10. Payment of wages and other monetary claims
in case of bankruptcy. In case of bankruptcy or
liquidation of the employer's business, the unpaid
wages and other monetary claims of the employees
shall be given first preference and shall be paid in full
before the claims of government and other creditors
may be paid.
Although the terms "declaration" (of bankruptcy) or
"judicial" (liquidation) have been notably eliminated,
still inDevelopment Bank of the Philippines
v. NLRC, 6 this Court did not alter its original position
that the right to preference given to workers under Art.
110 cannot exist in any effective way prior to the time
of its presentation in distribution proceedings. In effect,
we
reiterated
our
previous
interpretation
in Development
Bank
of
the
Philippines
v. Santos where we said:
It (worker preference) will find application when, in
proceedings such as insolvency, such unpaid wages
shall be paid in full before the "claims of the
Government and other creditors" may be paid. But, for
an orderly settlement of a debtor's assets, all creditors
must be convened, their claims ascertained and
inventoried,
and
thereafter
the
preferences
determined. In the course of judicial proceedings which
have for their object the subjection of the property of
the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of
preference of creditors' claims is assured (Philippine
Savings Bank vs. Lantin, No. L-33929, September 2,
1983, 124 SCRA 476); the adjudication made will be
binding on all parties-in-interest since those
proceedings are proceedings in rem; and the legal

scheme of classification, concurrence and preference


of credits in the Civil Code, the Insolvency Law, and
the Labor Code is preserved in harmony. 7
In ruling, as we did, in Development Bank of the
Philippines v. Santos, we took into account the
following pronouncements:
In the event of insolvency, a principal objective should
be to effect an equitable distribution of the insolvents
property among his creditors. To accomplish this there
must first be some proceeding where notice to all of
the insolvent's creditors may be given and where the
claims of preferred creditors may be bindingly
adjudicated. (De Barreto v. Villanueva, No.
L-14938, December 29, 1962, 6 SCRA 928). The
rationale therefore has been expressed in the recent
case of DBP v. Secretary of Labor (G.R. No. 79351, 28
November 1989), which we quote:
A preference of credit bestows upon the preferred
creditor an advantage of having his credit satisfied first
ahead of other claims which may be established
against the debtor. Logically, it becomes material only
when the properties and assets of the debtors are
insufficient to pay his debts in full; for if the debtor is
amply able to pay his various creditors in full, how can
the necessity exist to determine which of his creditors
shall be paid first or whether they shall be paid out of
the proceeds of the sale (of) the debtor's specific
property. Indubitably, the preferential right of credit
attains significance only after the properties of the
debtor have been inventoried and liquidated, and the
claims held by his various creditors have been
established (Kuenzle & Sheriff (Ltd.) v. Villanueva, 41
Phil. 611 [1916]; Barretto v. Villanueva, G.R. No.
14938, 29 December 1962, 6 SCRA 928; Philippine
Savings Bank v. Lantin, G.R. No. 33929, 2 September
1983, 124 SCRA 476).
In the present case, there is as yet no declaration of
bankruptcy nor judicial liquidation of TPWII. Hence, it
would be premature to enforce the worker's
preference.
The additional ratiocination of public respondent that
"under Article 110 of the Labor Code complainant
enjoys a preference of credit over the properties of
TPWII being held in possession by DBP," is a dismal
misconception of the nature of preference of credit, a
subject matter which we have already discussed in
clear and simple terms and even distinguished from a
lien in Development Bank of the Philippines
v. NLRC 8

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 33


3RD EXAM COVERAGE - CASES
. . . A preference applies only to claims which do not
attach to specific properties. A lien creates a charge on
a particular property. The right of first preference as
regards unpaid wages recognized by Article 110 does
not constitute a lien on the property of the insolvent
debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a
method adopted to determine and specify the order in
which credits should be paid in the final distribution of
the proceeds of the insolvent's assets. It is a right to a
first preference in the discharge of the funds of the
judgment debtor . . . In the words of Republic
v. Peralta, supra: Article 110 of the Labor Code does
not purport to create a lien in favor of workers or
employees for unpaid wages either upon all of the
properties or upon any particular property owned by
their employer. Claims for unpaid wages do not
therefore fall at all within the category of specially
preferred claims established under Articles 2241 and
2242 of the Civil Code, except to the extent that such
claims for unpaid wages are already covered by Article
2241, number 6: "claims for laborers: wages, on the
goods manufactured or the work done;" or by Article
2242, number 3, "claims of laborers and other workers
engaged in the construction reconstruction or repair of
buildings, canals and other works, upon said buildings,
canals and other works . . . . To the extent that claims
for unpaid wages fall outside the scope of Article 2241,
number 6, and 22421 number 3, they would come
within the ambit of the category of ordinary preferred
credits under Article 2244.
The DBP anchors its claim on a mortgage credit. A
mortgage directly and immediately subjects the
property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation
for whose security it was constituted (Article 2176, Civil
Code). It creates a real right which is enforceable
against the whole world. It is a lien on an identified
immovable property, which a preference is not. A
recorded mortgage credit is a special preferred credit
under Article 2242 (5) of the Civil Code on
classification of credits. The preference given by Article
1l0, when not falling within Article 2241 (6) and Article
2242 (3), of the Civil Code and not attached to any
specific property, is all ordinary preferred credit
although its impact is to move it from second priority to
first priority in the order of preference established by
Article 2244 of the Civil Code.
The present controversy could have been easily
settled by public respondent had it referred to ample
jurisprudence
which
already
provides
the
solution. Stare decisions et non quiet movere. Once a
case is decided by this Court as the final arbiter of any

justifiable controversy one way, then another case


involving exactly the same point at issue should be
decided in the same manner. Public respondent had
no choice on the matter. It could not have ruled any
other way. This Court having spoken in a string of
cases against public respondent, its duty is simply to
obey judicial precedents. 9 Any further disregard, if not
defiance, of our rulings will be considered a ground to
hold public respondent in contempt.
WHEREFORE, the petition is GRANTED. The decision
of public respondent National Labor Relations
Commission affirming the decision of the Labor Arbiter
insofar as it held petitioner Development Bank of the
Philippines liable for the monetary claims of private
respondent Leonor A. Ang is SET ASIDE. The
temporary restraining order we issued on 8 February
1993 10 enjoining the execution of the decision of
public respondent against petitioner is made
PERMANENT.
SO ORDERED.

REPUBLIC v. PERALTA
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-56568

May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by


the Bureau of Customs and the Bureau of Internal
Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE
OF THE COURT OF FIRST INSTANCE OF MANILA,
BRANCH XVII, QUALITY TABACCO
CORPORATION, FRANCISCO, FEDERACION
OBRERO DE LA INDUSTRIA TABAQUERA Y
OTROS TRABAJADORES DE FILIPINAS (FOITAF)
USTC EMPLOYEES ASSOCIATION WORKERS
UNION-PTGWO, respondents.
Oscar A. Pascua for assignee F. Candelaria.
Teofilo C. Villarico for respondent Federation.

CREDIT TRANSACTIONS (Atty. Jazzie Sarona) 34


3RD EXAM COVERAGE - CASES
Pedro A. Lopez for respondent USTC.

FELICIANO, J.:
The Republic of the Philippines seeks the review on
certiorari of the Order dated 17 November 1980 of the
Court of First Instance of Manila in its Civil Case No.
108395 entitled "In the Matter of Voluntary Insolvency
of Quality Tobacco Corporation, Quality Tobacco
Corporation, Petitioner," and of the Order dated 19
January 1981 of the same court denying the motion for
reconsideration of the earlier Order filed by the Bureau
of Internal Revenue and the Bureau of Customs for the
Republic.
In the voluntary insolvency proceedings commenced in
May 1977 by private respondent Quality Tobacco
Corporation (the "Insolvent"), the following claims of
creditors were filed:
(i) P2,806,729.92, by the USTC Association of
Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an
additional sum of P280,672.99 as attorney's fees had
been awarded by the National Labor Relations
Commission in NLRC Case No. RB-IV-9775-77. 1
(ii) P53,805.05 by the Federacion de la Industria
Tabaquera y Otros Trabajadores de Filipinas
("FOITAF), as separation pay for their members, an
amount similarly awarded by the NLRC in the same
NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue
for tobacco inspection fees covering the period 1
October 1967 to 28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for
customs duties and taxes payable on various
importations by the Insolvent. These obligations
appear to be secured by surety bonds. 2 Some of
these imported items are apparently still in customs
custody so far as the record before this Court goes.
In its questioned Order of 17 November 1980, the trial
court held that the above-enumerated claims of USTC
and FOITAF (hereafter collectively referred to as the
"Unions") for separation pay of their respective
members embodied in final awards of the National
Labor Relations Commission were to be preferred over
the claims of the Bureau of Customs and the Bureau of
Internal Revenue. The trial court, in so ruling, relied

primarily upon Article 110 of the Labor Code which


reads thus:
Article 110. Worker preference in case of bankruptcy
In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first
preference as regards wages due them for services
rendered during the period prior to the bankruptcy or
liquidation, any provision of law to the contrary
notwithstanding. Union paid wages shall be paid in full
before other creditors may establish any claim to a
share in the assets of the employer.
The Solicitor General, in seeking the reversal of the
questioned Orders, argues that Article 110 of the Labor
Code is not applicable as it speaks of "wages," a term
which he asserts does not include the separation
pay claimed by the Unions. "Separation pay," the
Solicitor General contends,
is given to a laborer for a separation from employment
computed on the basis of the number of years the
laborer was employed by the employer; it is a form of
penalty or damage against the employer in favor of the
employee for the latter's dismissal or separation from
service. 3
Article 97 (f) of the Labor Code defines "wages" in the
following terms:
Wage' paid to any employee shall mean the
remuneration or earnings, however designated,
capable of being expressed in terms of money,
whether fixed or ascertained on a time, task, piece, or
commission basis, or other method of calculating the
same, which is payable by an employer to an
employee under a written or unwritten contract of
employment for work done or to be done, or for
services rendered or to be rendered, and includes the
fair and reasonable value, as determined by the
Secretary of Labor, of board, lodging, or other facilities
customarily furnished by the employer to the
employee. 'Fair and reasonable value' shall not include
any profit to the employer or to any person affiliated
with the employer.(emphasis supplied)
We are unable to subscribe to the view urged by the
Solicitor General. We note, in this connection, that
inPhilippine Commercial and Industrial Bank (PCIB)
us. National Mines and Allied Workers Union, 4 the
Solicitor General took a different view and there urged
that the term "wages" under Article 110 of the Labor
Code may be regarded as embracing within its scope
severance pay or termination or separation pay. In
PCIB, this Court agreed with the position advanced by

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3RD EXAM COVERAGE - CASES
the Solicitor General. 5 We see no reason for
overturning this particular position. We continue to
believe that, for the specific purposes of Article 110
and in the context of insolvency termination or
separation pay is reasonably regarded as forming part
of the remuneration or other money benefits accruing
to employees or workers by reason of their having
previously rendered services to their employer; as
such, they fall within the scope of "remuneration or
earnings for services rendered or to be rendered
." Liability for separation pay might indeed have the
effect of a penalty, so far as the employer is
concerned. So far as concerns the employees,
however, separation pay is additional remuneration to
which they become entitled because, having
previously rendered services, they are separated from
the employer's service. The relationship between
separation pay and services rendered is underscored
by the fact that separation pay is measured by the
amount (i.e., length) of the services rendered. This
construction is sustained both by the specific terms of
Article 110 and by the major purposes and basic policy
embodied in the Labor Code. 6 It is also the
construction that is suggested by Article 4 of the Labor
Code which directs that doubts assuming that any
substantial rather than merely frivolous doubts remainin the interpretation of the provisions of the labor Code
and its implementing rules and regulations shall be
"resolved in favor of labor."
The resolution of the issue of priority among the
several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a
reading of Article 110 of the labor Code alone.
Article 110 of the Labor Code, in determining the reach
of its terms, cannot be viewed in isolation. Rather,
Article 110 must be read in relation to the provisions of
the Civil Code concerning the classification,
concurrence and preference of credits, which
provisions find particular application in insolvency
proceedings where the claims of all creditors, preferred
or non-preferred, may be adjudicated in a binding
manner. 7 It is thus important to begin by outlining the
scheme constituted by the provisions of the Civil Code
on this subject.
Those provisions may be seen to classify credits
against a particular insolvent into three general
categories, namely:
(a) special preferred credits listed in Articles 2241 and
2242,
(b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.


Turning first to special preferred credits under Articles
2241 and 2242, it should be noted at once that these
credits constitute liens or encumbrances on the
specific movable or immovable property to which they
relate. Article 2243 makes clear that these credits
"shall be considered as mortgages or pledges of real
or personal property, or liens within the purview of
legal provisions governing insolvency." It should be
emphasized in this connection that "duties, taxes and
fees due [on specific movable property of the
insolvent] to the State or any subdivision thereof"
(Article 2241 [1]) and "taxes due upon the [insolvent's]
land or building (2242 [1])"stand first in preference in
respect of the particular movable or immovable
property to which the tax liens have attached. Article
2243 is quite explicit: "[T]axes mentioned in number 1,
Article 2241 and number 1, Article 2242 shall first be
satisfied. " The claims listed in numbers 2 to 13 in
Article 2241 and in numbers 2 to 10 in Articles 2242,
all come after taxes in order of precedence; such
claims enjoy their privileged character as liens and
may be paid only to the extent that taxes have been
paid from the proceeds of the specific property
involved (or from any other sources) and only in
respect of the remaining balance of such proceeds.
What is more, these other (non-tax) credits, although
constituting liens attaching to particular property,
are not preferred one over another inter se. Provided
tax liens shall have been satisfied, non-tax liens or
special preferred credits which subsist in respect of
specific movable or immovable property are to be
treated on an equal basis and to be satisfied
concurrently and proportionately. 8 Put succintly,
Articles 2241 and 2242 jointly with Articles 2246 to
2249 establish a two-tier order of preference. The first
tier includes only taxes, duties and fees due on
specific movable or immovable property. All other
special preferred credits stand on the same second
tier to be satisfied, pari passu and pro rata, out of any
residual value of the specific property to which such
other credits relate.
Credits which are specially preferred because they
constitute liens (tax or non-tax) in turn, take
precedence over ordinary preferred credits so far as
concerns the property to which the liens have
attached. The specially preferred credits must be
discharged first out of the proceeds of the property to
which they relate, before ordinary preferred creditors
may lay claim to any part of such proceeds. 9
If the value of the specific property involved is greater
than the sum total of the tax liens and other specially

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3RD EXAM COVERAGE - CASES
preferred credits, the residual value will form part of
the "free property" of the insolvent i.e., property not
impressed with liens by operation of Articles 2241 and
2242. If, on the other hand, the value of the specific
movable or immovable is less than the aggregate of
the tax liens and other specially preferred credits, the
unsatisfied balance of the tax liens and other such
credits are to the treated as ordinary credits under
Article 2244 and to be paid in the order of preference
there set up. 10
In contrast with Articles 2241 and 2242, Article 2244
creates no liens on determinate property which follow
such property. What Article 2244 creates are simply
rights in favor of certain creditors to have the cash and
other assets of the insolvent applied in a certain
sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an
order of priority established by Article 2244. In this
sequence, certain taxes and assessments also figure
but these do not have the same kind of overriding
preference that Articles 2241 No. 1 and 2242 No. I
create for taxes which constituted liens on the
taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national
government, excluding those which result in tax liens
under Articles 2241 No. 1 and 2242 No. 1
but including the balance thereof not satisfied out of
the movable or immovable property to which such liens
attached, are ninth in priority;
(b) taxes and assessments due any province,
excluding those impressed as tax liens under Articles
2241 No. 1 and 2242 No. 1, but including the balance
thereof not satisfied out of the movable or immovable
property to which such liens attached, are tenth in
priority; and

A. Claim of the Bureau of Customs for Unpaid


Customs Duties and TaxesUnder Section 1204 of the Tariff and Customs Code,
12 the liability of an importer
for duties, taxes and fees and other charges attaching
on importation constitute a personal debt due from the
importer to the government which can be discharged
only by payment in full of all duties, taxes, fees and
other charges legally accruing It also constitutes a lien
upon the articles imported which may be enforced
while such articles are in the custody or subject to the
control of the government. (emphasis supplied)
Clearly, the claim of the Bureau of Customs for unpaid
customs duties and taxes enjoys the status of a
specially preferred credit under Article 2241, No. 1, of
the Civil Code. only in respect of the articles
importation of which by the Insolvent resulted in the
assessment of the unpaid taxes and duties, and which
are still in the custody or subject to the control of the
Bureau of Customs. The goods imported on one
occasion are not subject to a lien for customs duties
and taxes assessed upon other importations though
also effected by the Insolvent. Customs duties and
taxes which remain unsatisfied after levy upon the
imported articles on which such duties and taxes are
due, would have to be paid out of the Insolvent's "free
property" in accordance with the order of preference
embodied in Article 2244 of the Civil Code. Such
unsatisfied customs duties and taxes would fall within
Article 2244, No. 9, of the Civil Code and hence would
be ninth in priority.
B. Claims of the Bureau of Internal Revenue for
Tabacco Inspection Fees

(c) taxes and assessments due any city or


municipality, excluding those impressed as tax liens
under Articles 2241 No. I and 2242 No. 2
but including the balance thereof not satisfied out of
the movable or immovable property to which such liens
attached, are eleventh in priority.

Under Section 315 of the National Internal Revenue


Code ("old Tax Code"), 13 later reenacted in Identical
terms as Section 301 of the Tax Code of 1977, 14 an
unpaid "internal revenue tax," together with related
interest, penalties and costs, constitutes a lien in favor
of the Government from the time an assessment
therefor is made and until paid, "upon all property and
rights to property belonging to the taxpayer."

It is within the framework of the foregoing rules of the


Civil Code that the question of the relative priority of
the claims of the Bureau of Customs and the Bureau of
Internal Revenue, on the one hand, and of the claims
of the Unions for separation pay of their members, on
the other hand, is to be resolved. A related vital issue
is what impact Article 110 of the labor Code has had
on those provisions of the Civil Code.

Tobacco inspection fees are specifically mentioned as


one of the miscellaneous taxes imposed under the
National Internal Revenue Code, specifically Title VIII,
Chapter IX of the old Tax Code and little VIII, Chapter
VII of the Tax Code of 1977. 15 Tobacco inspection
fees are collected both for purposes of regulation and
control and for purposes of revenue generation: half of
the said fees accrues to the Tobacco Inspection Fund

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3RD EXAM COVERAGE - CASES
created by Section 12 of Act No. 2613, as amended by
Act No. 3179, while the other half accrues to the
Cultural Center of the Philippines. Tobacco inspection
fees, in other words, are imposed both as a regulatory
measure and as a revenue-raising measure.
In Commissioner of Internal Revenue us. Guerrero, et
al 16 this Court held, through Mr. Chief Justice
Concepcion, that the term "tax" is used in Section 315
of the old Tax Code:
not in the limited sense [of burdens imposed upon
persons and/or properties, by way of contributions to
the support of the Government, in consideration
of general benefits derived from its operation], but, in
a broad sense,
encompassing
all
government
revenues collectible by the Commissioner of Internal
Revenue under said Code, whether involving taxes, in
the strict technical sense thereof, or not. x x x As used
in Title IX of said Code, the term 'tax' includes 'any
national internal revenue tax, fee or charge imposed
by the Code. 17
It follows that the claim of the Bureau of Internal
Revenue for unpaid tobacco inspection fees
constitutes a claim for unpaid internal revenue
taxes 18 which gives rise to a tax lien upon all the
properties and assets, movable and immovable, of the
Insolvent as taxpayer. Clearly, under Articles 2241 No.
1, 2242 No. 1, and 2246-2249 of the Civil Code, this
tax claim must be given preference over any other
claim of any other creditor, in respect of any and all
properties of the Insolvent. 19
C. Claims of the Unions for Separation Pay of Their
Members
Article 110 of the Labor Code does not purport to
create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon
any particular property owned by their employer.
Claims for unpaid wages do not therefore fall at all
within the category of specially preferred claims
established under Articles 2241 and 2242 of the Civil
Code, except to the extent that such claims for unpaid
wages are already covered by Article 2241, number 6.
"claims for laborers' wages, on the goods
manufactured or the work done;" or by Article 2242,
number 3: "claims of laborers and other workers
engaged in the construction, reconstruction or repair of
buildings, canals and other works, upon said buildings,
canals or other works." To the extent that claims for
unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come within
the ambit of the category of ordinary preferred credits
under Article 2244.

Applying Article 2241, number 6 to the instant case,


the claims of the Unions for separation pay of their
members constitute liens attaching to the processed
leaf tobacco, cigars and cigarettes and other products
produced or manufactured by the Insolvent, but not to
other assets owned by the Insolvent. And even in
respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions
may be given effect only after the Bureau of Internal
Revenue's claim for unpaid tobacco inspection fees
shall have been satisfied out of the products so
manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or
encumbrance upon a building or other real property of
the Insolvent in favor of workmen who constructed or
repaired such building or other real property. Article
2242, number 3, does not however appear relevant in
the instant case, since the members of the Unions to
whom separation pay is due rendered services to the
Insolvent not (so far as the record of this case would
show) in the construction or repair of buildings or other
real property, but rather, in the regular course of the
manufacturing operations of the Insolvent. The Unions'
claims do not therefore constitute a lien or
encumbrance upon any immovable property owned by
the Insolvent, but rather, as already indicated, upon the
Insolvent's existing inventory (if any of processed
tobacco and tobacco products.
We come to the question of what impact Article 110 of
the Labor Code has had upon the complete scheme of
classification, concurrence and preference of credits in
insolvency set out in the Civil Code. We believe and so
hold that Article 110 of the Labor Code did not sweep
away the overriding preference accorded under the
scheme of the Civil Code to tax claims of the
government or any subdivision thereof which constitute
a lien upon properties of the Insolvent. It is frequently
said that taxes are the very lifeblood of government.
The effective collection of taxes is a task of highest
importance for the sovereign. It is critical indeed for its
own survival. It follows that language of a much higher
degree of specificity than that exhibited in Article 110 of
the Labor Code is necessary to set aside the intent
and purpose of the legislator that shines through the
precisely crafted provisions of the Civil Code. It cannot
be assumed simpliciter that the legislative authority, by
using in Article 110 the words "first preference" and
"any provision of law to the contrary notwithstanding"
intended to disrupt the elaborate and symmetrical
structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume
the sovereign itself within the term "other creditors" in
stating that "unpaid wages shall be paid in full

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3RD EXAM COVERAGE - CASES
before other creditors may establish any claim to a
share in the assets of employer." Insistent
considerations of public policy prevent us from giving
to "other creditors" a linguistically unlimited scope that
would embrace the universe of creditors save only
unpaid employees.
We, however, do not believe that Article 110 has had
no impact at all upon the provisions of the Civil Code.
Bearing in mind the overriding precedence given to
taxes, duties and fees by the Civil Code and the fact
that the Labor Code does not impress any lien on the
property of an employer, the use of the phrase "first
preference" in Article 110 indicates that what Article
110 intended to modify is the order of preference found
in Article 2244, which order relates, as we have seen,
to property of the Insolvent that is not burdened with
the liens or encumbrances created or recognized by
Articles 2241 and 2242. We have noted that Article
2244, number 2, establishes second priority for claims
for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the
commencement of the proceedings in insolvency."
Article 110 of the Labor Code establishes "first
preference" for services rendered "during the period
prior to the bankruptcy or liquidation, " a period
not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect
may be given to the provisions of Article 110 without
grievously distorting the framework established in the
Civil Code by holding, as we so hold, that Article 110 of
the Labor Code has modified Article 2244 of the Civil
Code in two respects: (a) firstly, by removing the one
year limitation found in Article 2244, number 2; and (b)
secondly, by moving up claims for unpaid wages of
laborers or workers of the Insolvent from second
priority to first priority in the order of preference
established I by Article 2244.
Accordingly, and by way of recapitulating the
application of Civil Code and Labor Code provisions to
the facts herein, the trial court should inventory the
properties of the Insolvent so as to determine
specifically: (a) whether the assets of the Insolvent
before the trial court includes stocks of processed or
manufactured tobacco products; and (b) whether the
Bureau of Customs still has in its custody or control
articles imported by the Insolvent and subject to the

lien of the government for unpaid customs duties and


taxes.
In respect of (a), if the Insolvent has inventories of
processed or manufactured tobacco products, such
inventories must be subjected firstly to the claim of the
Bureau of Internal Revenue for unpaid tobacco
inspection fees. The remaining value of such
inventories after satisfaction of such fees (or should
such inspection fees be satisfied out of other
properties of the Insolvent) will be subject to a lien in
favor of the Unions by virtue of Article 2241, number 6.
In case, upon the other hand, the Insolvent no longer
has any inventory of processed or manufactured
product, then the claim of the Unions for separation
pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil
Code. as modified by Article 110 of the Labor Code.
Turning to (b), should the Bureau of Customs no
longer have any importations by the Insolvent still
within customs custody or control, or should the
importations still held by the Bureau of Customs be or
have become insufficient in value for the purpose,
customs duties and taxes remaining unpaid would
have only ninth priority by virtue of Article 2244,
number 9. In respect therefore of the Insolvent's "free
property, " the claims of the Unions will enjoy first
priority under Article 2244 as modified and will be paid
ahead of the claims of the Bureau of Customs for any
customs duties and taxes still remaining unsatisfied.
It is understood that the claims of the Unions referred
to above do not include the 10% claim for attorney's
fees. Attorney's fees incurred by the Unions do not
stand on the same footing as the Unions' claims for
separation pay of their members.
WHEREFORE, the petition for review is granted and
the Orders dated 17 November 1980 and 19 January
1981 of the trial court are modified accordingly. This
case is hereby remanded to the trial court for further
proceedings in insolvency compatible with the rulings
set forth above. No pronouncement as to costs.
SO ORDERED.

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