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G.R. No. 16256 September 28, 1921

DIONISIA VALENCIA, ET AL., plaintiffs-appellants,
vs.
HONORIO ACALA, ET AL., defendants-appellees.
Aurelio Palileo for appellants.
Francisco Alfonso for appellees.
VILLAMOR, J.:
This is an action for the redemption of certain land, which is described in the complaint.
At the trial, the parties submitted to the court the following agreed statement of facts:
The parties agree that the land in question is the same lot that is the subject of litigation in civil cause No. 966 of this court; and that in the year 1891, the plaintiff herein, Dionisia Valencia, and her deceased
husband, Daniel Adepueng, conveyed to one Severino Agbagala and his wife Francisca Cadapan the land in question, as evidence by the document marked Exhibit A of the plaintiffs, which is found on folio
24 of civil cause No. 966 of this court.
Later on in the year 1899 Francisca Cadapan, wife of Severino Agbagala, conveyed this same property to Juan Cagayat and Josefa Galendis, as shown by the memorandum appearing at the bottom of the
document marked Exhibit A of the plaintiffs, attached to the record of the cause No. 966, folio 24.
That the possession of the land passed to Pedro Acala, who is one of the Acalas, the defendants in the present action. In the year 1912, the herein defendants Acala sold the land unconditionally to the herein
defendant Bagayanan for the sum of P70.
The pertinent part of the contract Exhibit A reads thus:
We, Daniel Adepueng and Dionisia Valencia, acknowledge being indebted to Severino Agbagala in the sum of P6.75, which we will pay with the fruits of the land the possession of which we now turn over to
him. We have mortgaged it for P6.75, it being covenanted that we may redeem it by paying the same price, without taking into account the fruits of the land and the interest on the money.
The memorandum mentioned in the agreement is as follows:
I, the undersigned, declare that the lot mentioned in the foregoing document (Exhibit A) was mortgaged by me to the spouses Juan Cagayat and Josefa Galendis for the same amount above-mentioned and
with the same condition. Paete, December 6, 1899. — Francisca Cadapan —
The judge a quo held that the contract in question was one of sale with the right of repurchase, and decided: (a) That the defendants must be absolved from the complaint; (b) that the contract (Exhibit A) and
those that were successively executed involving the lot in question are contracts of sale and not of mortgage or of loan with security; (c) that the action for the redemption and annulment of the sale of the lot
in question has prescribed; (d) that the defendant Apolinario Bagayanan is at present the lawful owner of the said lot; and (e) that the costs of the suit should be paid by the plaintiffs jointly and severally to the
defendants.
Upon examining the record before us, and bearing in mind the fact that, when the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its clauses
should prevail, we are of the opinion that the contract herein above copied is a contract of antichresis and not of sale with the right of repurchase.
In the case of De la Vega vs. Ballilos (34 Phil., 683), this court said:
When money is loaned and the debtor places the creditor in possession of a piece of real property as security for the sum loaned in order that he may hold it in usufruct, in consideration for the said loan, the
contract is not one of mortgage, notwithstanding the terms thereof, inasmuch as it is not of the nature of a public instrument, and even though it were, it does not appear to have been recorded in the property
registry. Neither can such a contract be classified as one of sale under pacto de retro, notwithstanding that it is set forth therein that the debtor cedes and conveys to the creditor the ownership and
possession of the said real property. Therefore, such a contract should be classified as one of antichresis, by means of which the creditor acquires the right to collect the fruits of the real property turned over
to him by his debtor, but with the obligation to apply them to the payment of whatever interest is due and the contracting parties may stipulate that the interest of the debt be paid by the fruits of the property
given in antichresis.
The legal nature of the contract in question having thus been determined, it is evident that the antichretic creditor and his successors in interest cannot acquire ownership by prescription of the realty given in
antichresis.
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That the defendants Acala could not sell unconditionally the same land to their codefendant Bagayanan, is proved by the agreed statement of facts according to which the possession of the predecessor in
interest of the Acala people was the same precarious possession of his assignor Juan Cagayat.
The judgment appealed from is reversed, and it is ordered that the defendants return the land in question to the plaintiffs upon payment by the latter of the sum of P6,75, the redemption price of the land,
without prejudice to whatever right his codefendants Acala the price he might have paid them for the land, without special finding as to costs. So ordered.
G.R. Nos. L-43673 and 43674 October 24, 1938
LICERIO LEGASPI and JULIAN SALCEDO, plaintiffs-appellants,
vs.
DAMASO CELESTIAL, defendant-appellee.
Ambrosio Santos and Calixto M. Legaspi for appellants.
Juan S. Rustia for appellee.

VILLA-REAL, J.:
The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the judgment rendered by the Court of First Instance of Cavite in civil cases Nos. 3025 and 3037 of said court, the dispositive part of which reads
as follows:
Wherefore, judgment is rendered by this court holding that both the so-called instrument of mortgage Exhibit A and the instrument Exhibit C-1 are really contracts of antichresis and, consequently, the plaintiffs should
render to the defendant an account of the 65 salt beds, which are the subject matter of the two cases, as soon this decision becomes final, taking into consideration the sums already paid by the defendant to the plaintiffs.
The writ of preliminary attachment issued in civil case No. 3037 is set aside, without costs in both cases. It is so ordered.
In support of their appeal, the appellants assign the following alleged errors as committed by the court a quo in its judgment in question, to wit:
1. The court erred in holding that both the instrument of mortgage Exhibit A and the instrument Exhibit C-1 are really contracts of antichresis.
2. The court likewise erred in ordering the plaintiffs to render to the defendant an account of the fruits produced by the 65 salt beds, which are the subject matter of both cases.
3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and cross-complaint filed by the defendant, with the costs to the latter.
On January 17, 1935, the plaintiffs brought an action against the defendant Damaso Celestial in the justice of the peace court of Kawit, Cavite, praying that judgment be rendered, ordering said defendant to pay to the
abovenamed plaintiffs the sum of P556.160, plus the corresponding legal interest thereon from the date of the filing of the complaint, until fully paid, and the costs.
The defendant, answering the complaint, admitted the essential facts alleged therein, stating that he was disposed to pay what he should appear still to be indebted and, by way of counterclaim and cross-complaint,
claimed that, the contract entered into between him and the plaintiffs being an antichresis, the latter were bound to render an account of the products of the five salt beds, the total production of which was from 300 to 350
cavans of salt at P1 a cavan.
After due trial of the case, the justice of the peace court of Kawit, Cavite, on February 5, 1935, rendered judgment in said case, the dispositive part of which reads as follows:
Premises considered, judgment hereby rendered ordering the defendant to pay the herein plaintiffs the sum of P556.60 with interest at the legal rate from January 17, 1935, and to pay the costs of suit. It is so ordered.
From the foregoing judgment, the defendant appealed to the Court of First Instance of Cavite.
On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025 of said Court of First Instance, praying that the same defendant Damaso Celestial be ordered to pay them the sum of P7,637, with the legal
interest thereon from the date of the filing of the complaint, until fully paid, and the costs of the suit, and that, upon his failure to do so, the mortgage constituted by said defendant in their favor to secure the payment of the
loan in question be ordered foreclosed.lâwphi1.nêt
The defendant, answering the complaint, admitted the material facts alleged therein as well as the conditions set forth in the documents Exhibit "A" attached thereto, stating that he had never refused to pay any balance
of the debt resulting after a rendition of accounts by the plaintiffs and a liquidation; and by way of counterclaim and cross-complaint, alleged that the sixty-five salt beds administered by the plaintiffs, by virtue of the
above-stated documents, yielded a net produced of a about 6,500 cavans of salt every six months at P1 a cavan; that the plaintiffs should render to the defendant an account of said products so that they may be applied
to the payment of his loan or debt; that the approximate total value of half of the number of cavans of salt reaped and availed of by the plaintiffs from the sixty-five salt beds administered by them during three years and
eleven months, that is, from February 23, 1931, to February 8, 1935, the date of the filing of the answer, was P13,000; that after deducting from said P13,000 the total amount of the defendant's debt to the plaintiffs under
the above-stated contracts, that is, P8,193.60, there would still remain a balance in favor of the defendant in the sum of P4,806.40, which he is entitled to collect from the plaintiffs. He prayed that judgment be rendered,
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ordering the plaintiffs to render an account of their administration and to pay jointly and severally the sum of P4,806.40, with the legal interest thereon, plus the damages that would result if the contract of mortgage
already perfected with Melchor de Lara should be frustrated and should he fail to find another to execute said contract of mortgage in the sum of P25,000.
The plaintiffs, replying to the special defense and cross-complaint, denied each and every one of the facts alleged therein, stating that the salt gathered from the 60 salt beds mentioned in the complaint was for the
exclusive use, benefit and enjoyment of the plaintiffs who, under the provisions of Exhibit A and the intention of the parties, were not obliged to submit to the defendant a liquidation of the salt produced and gathered, in
order that the same may be deducted from the principal.
On February 25, 1935, the parties to civil case No. 3025 submitted the following stipulation to the court, to wit:
Come now the parties to this case, assisted by their respective attorney, and respectfully submit the following stipulation:
1. That, aside from this case, the same plaintiffs had instituted against the same defendant in the justice of the peace court of Kawit, Cavite, civil case No. 165, for the recovery of the sum of P556.60 representing a loan
made by the plaintiffs on a portion of the same parcel of land which is the subject matter of the mortgage in this case before this Honorable Court of First Instance, as evidenced by another notarial document dated August
13, 1932. And in this stipulation, said case shall be understood to be consolidated with the present one.
2. That the defendants agrees and is disposed to make immediate delivery to the plaintiffs of the total amount of P8,193.60, without prejudice to his right to prosecute the case in connection with his contention of their
administration. In must render to him an account of their administration. In consideration hereof, the plaintiffs, in turn, agree and bind themselves now to secure the amount in question, or the receipt thereof, for the due
compliance with the judgment to be rendered by the court on said rendition of accounts, with sufficient property of their own worth not less than the 14th instant,; and likewise forthwith to respect, turn over and restore now,
as they hereby do so, to the defendant or his assignees, the conclusive possession, administration, benefit and use of the mortgaged property in question, particularly the sixty-five salt beds administered by said plaintiffs
to date.
Wherefore, both parties sign this stipulation and pray this honorable court to render its decision in accordance herewith, upon acting on the motion of the defendant, dated February 7, 1935.
Cavite, Cavite, February 9, 1935.
In view of the foregoing stipulation, the court a quo rendered contracts entered into between the plaintiffs Licerio Legaspi and Julian Salcedo, on the one hand, and Damaso Celestial, on the other hand, appearing in the
instruments Exhibits A and C-1 are of mortgage or antichresis.
The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the following stipulation:
That during the existence of this Contract, the Party of the SECOND PART (Licerio Legaspi and Julian Salcedo) or their representative shall administer and enjoy the benefits and fruits gathered and harvested thereon;
and that the Party of the FIRST PART (Damaso Celestial) shall give and turn over to the Party of the SECOND PART the administration and to possession of the said 5 salt beds during the term of this contract.
In the contract Exhibit A, the parties stipulated the following:
(a) The term of this mortgage is three (3) years to be counted from February 23, 1931, and should the party of the first part, after the expiration of this term, fail to pay to the party of the second part the amount of this
mortgage, this contract shall subsist in full force and effect and continue the debt or amount of the mortgage is fully paid.
(b) During the term of the mortgage, the party of the second part of the mortgagees shall administer or take charge of the work and harvest of the 60 salt beds and pay for the maintenance of the croppers and defray the
expenses for the improvement thereof; and the party of the first part shall turn over to the party of the second part the administration of the sixty salt beds mortgaged for the duration of the stipulation contract.
(c) The crop from the sixty salt beds shall be shared equally by the croppers and the party of the second part, after deducting the expenses paid by the party of the second part during each harvest period and throughout
the existence of this mortgage.
It should be noted that the contract Exhibit C-1 is entitled "Contract of Artichresis" while the contract Exhibit A is entitled "Contract of Mortgage". Both in the contract Exhibit C-1 and in the contract Exhibit A, the defendant
Damaso Calestial, as debtor, agrees to turn over to the plaintiffs, as creditors, the possession of the salt beds so that the latter, after paying the expenses for the production, administration and harvest of the salt with
one-half of the produce, may keep the other half of the use, benefit and enjoyment. It is not stipulated that the net produce of the salt beds shall first be applied to the payment of the interest, if any, and afterwards to that
of the principal of their credit. Both contracts merely provide that the creditors shall keep one-half of the products. Therefore, they are not contracts of antichresis, as defined by article 1881 of the Civil Code. In a contract
of mortgage, the mortgagor, as a general rule, retains the possession of the property mortgaged as security for the payment of the sum of money borrowed from the mortgagee, and pays the latter a certain per cent
thereof as interest on his principal by way of compensation for his sacrifice in depriving himself of the use of said money and the enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is not an
essential requisite of the contract of mortgage that the property mortgaged remain in the possession of the mortgagor (article 1857 of the Civil Code), the latter may deliver said property to the mortgagee, without thereby
altering the nature of the contract. It not being an essential requisite of said contract of mortgage that the principal of the mortgage credit bear interest, or that the interest, as compensation for the use of the principal and
enjoyment of its fruits, be in the form of a certain per cent thereof, such interest may be in the form of fruits of the property mortgage, without the contract's longing thereby its character of a mortgage contract. It is
stipulated in the contracts under consideration that, during the term thereof and while the total amount of the loan remains unpaid by the debtor, the salt beds constituted as security for the payment of said loan, shall be
administered by the creditors who shall destine one-half of the products thereof for the maintenance and support of the croppers and the improvements of the property, keeping the other half for themselves. It appears,
therefore, that the debtor, instead of paying a certain per cent of the principal of the loan as compensation for the sacrifice made by the creditors in depriving themselves of the use of their principal and the enjoyment of its
fruits, so as to give them to the debtor, has delivered to them the property constituted as a security for the payment of the loan, so that they may administer and use it, enjoying its fruits, by way of compensation for their
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said sacrifice in lending said debtor their money. Therefore, the contracts, which are the subject matter of this action, have all the essential requsites of a mortgage, enumerated in article 1857 of the Civil Code and,
consequently, are mortgage contracts.
With respects to the second assignment of alleged error, this court, having arrived at the conclusion that the contracts entered into between the plaintiffs and the defendant are contracts of mortgage and not of antichresis,
finds the same to be well founded.
This court likewise finds the third assignment of alleged error to be well founded.
From the foregoing considerations, this court is of the opinion and so holds, that when a contracts of loan with security does not stipulate the payment of interest but provides for the delivery to the creditor by the debtor of
the real property constituted as security for the payment thereof, in order that the creditor may administer the same and avail himself of its fruits, without stating that said fruits are to be applied to the payment of interest,
if any, and afterwards to that of the principal of the credit, the contract shall be considered to be one of mortgage and not of antichresis.
Wherefore, the appealed judgment is reversed, and the defendant's debt to the plaintiffs is declared paid and the deeds of security executed by both parties cancelled, dismissing the counterclaim and cross-complained
filed by said defendant and appellee Damaso Celestial, with costs to the latter. So ordered.

3. G.R. No. 46623 December 7, 1939

MARCIAL KASILAG, petitioner,
vs.
RAFAELA RODRIGUEZ, URBANO ROQUE, SEVERO MAPILISAN and IGNACIO DEL ROSARIO, respondents.
Luis M. Kasilag for petitioner.
Fortunato de Leon for respondents.

IMPERIAL, J.:
This is an appeal taken by the defendant-petitioner from the decision of the Court of Appeals which modified that rendered by the court of First Instance of Bataan in civil case No. 1504 of said court and held: that the
contract Exhibit "1" is entirely null and void and without effect; that the plaintiffs-respondents, then appellants, are the owners of the disputed land, with its improvements, in common ownership with their brother Gavino
Rodriguez, hence, they are entitled to the possession thereof; that the defendant-petitioner should yield possession of the land in their favor, with all the improvements thereon and free from any lien; that the
plaintiffs-respondents jointly and severally pay to the defendant-petitioner the sum of P1,000 with interest at 6 percent per annum from the date of the decision; and absolved the plaintiffs-respondents from the
cross-complaint relative to the value of the improvements claimed by the defendant-petitioner. The appealed decision also ordered the registrar of deeds of Bataan to cancel certificate of title No. 325, in the name of the
deceased Emiliana Ambrosio and to issue in lieu thereof another certificate of title in favor of the plaintiffs-respondents and their brother Gavino Rodriguez, as undivided owners in equal parts, free of all liens and
incumbrances except those expressly provided by law, without special pronouncement as to the costs.
The respondents, children and heirs of the deceased Emiliana Ambrosio, commenced the aforesaid civil case to the end that they recover from the petitioner the possession of the land and its improvements granted by
way of homestead to Emiliana Ambrosio under patent No. 16074 issued on January 11, 1931, with certificate of title No. 325 issued by the registrar of deeds of Bataan on June 27, 1931 in her favor, under section 122 of
Act No. 496, which land was surveyed and identified in the cadastre of the municipality of Limay, Province of Bataan, as lot No. 285; that the petitioner pay to them the sum of P650 being the approximate value of the
fruits which he received from the land; that the petitioner sign all the necessary documents to transfer the land and its possession to the respondents; that he petitioner be restrained, during the pendency of the case, from
conveying or encumbering the land and its improvements; that the registrar of deeds of Bataan cancel certificate of title No. 325 and issue in lieu thereof another in favor of the respondents, and that the petitioner pay the
costs of suit.
The petitioner denied in his answer all the material allegations of the complaint and by way of special defense alleged that he was in possession of the land and that he was receiving the fruits thereof by virtue of a
mortgage contract, entered into between him and the deceased Emiliana Ambrosio on May 16, 1932, which was duly ratified by a notary public; and in counterclaim asked that the respondents pay him the sum of P1,000
with 12 per cent interest per annum which the deceased owed him and that, should the respondents be declared to have a better right to the possession of the land, that they be sentenced to pay him the sum of P5,000
as value of all the improvements which he introduced upon the land.lawphil.net
On May 16, 1932 Emiliana Ambrosio, in life, and the petitioner executed the following public deed:
"This agreement, made and entered into this 16th day of May, 1932, by and between Emiliana Ambrosio, Filipino, of legal age, widow and resident of Limay, Bataan, P.L., hereinafter called the party of the first part, and
Marcial Kasilag, Filipino, of legal age, married to Asuncion Roces, and resident at 312 Perdigon Street, Manila, P.L., hereinafter called party of the second part.
WITNESSETH: That the parties hereto hereby covenant and agree to and with each other as follows:
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ARTICLE I. That the party of the first part is the absolute registered owner of a parcel of land in the barrio of Alngan, municipality of Limay, Province of Bataan, her title thereto being evidenced by homestead certificate of
title No. 325 issued by the Bureau of Lands on June 11, 1931, said land being lot No. 285 of the Limay Cadastre, General Land Registration Office Cadastral Record No. 1054, bounded and described as follows:
Beginning at point marked 1 on plan E-57394, N. 84º 32' W. 614.82 m. from B.B.M. No. 3, thence N. 66º 35' E. 307.15 m. to point "2"; S. 5º 07' W. to point "5"; S.6º 10' E. 104.26 m. to point "4"; S. 82º 17' W. to point "5";
S. 28º 53' W. 72.26 m. to point "6"; N. 71º 09' W. to point "7"; N. 1º 42' E. 173.72 m. to point 1, point of beginning, "Containing an area of 6.7540 hectares. "Points 1,2,6 and 7, B.L.; points 3,4 and 5, stakes; points 4, 5 and
6 on bank of Alangan River. "Bounded on the North, by property claimed by Maria Ambrosio; on the East, by Road; on the South, by Alangan River and property claimed by Maxima de la Cruz; and on the West, by
property claimed by Jose del Rosario. "Bearing true. Declination 0º 51' E. "Surveyed under authority of sections 12-22, Act No. 2874 and in accordance with existing regulations of the Bureau of Lands, by Mamerto
Jacinto, public land surveyor, on July 8, 1927 and approved on February 25, 1931.
ARTICLE II. That the improvements on the above described land consist of the following:
Four (4) mango trees, fruit bearing: one hundred ten (110) hills of bamboo trees; one (1) tamarind and six (6) boñga trees.
ARTICLE III. That the assessed value of the land is P940 and the assessed value of the improvements is P860, as evidenced by tax declaration No. 3531 of the municipality of Limay, Bataan.
ARTICLE IV. That for and in consideration of the sum of one thousand pesos (P1,000) Philippine currency, paid by the party of second part to the party of the first part, receipt whereof is hereby acknowledged, the party
of the first part hereby encumbers and hypothecates, by way of mortgage, only the improvements described in Articles II and III hereof, of which improvements the party of the first part is the absolute owner.
ARTICLE V. That the condition of said mortgage is such that if the party of the first part shall well and truly pay, or cause to paid to the party of the second part, his heirs, assigns, or executors, on or before the 16th day of
November, 1936, or four and one-half (4½) years after date of the execution of this instrument, the aforesaid sum of one thousand pesos (P1,000) with interest at 12 per cent per annum, then said mortgage shall be and
become null and void; otherwise the same shall be and shall remain in full force and effect, and subject to foreclosure in the manner and form provided by law for the amount due thereunder, with costs and also attorney's
fees in the event of such foreclosure.lawphil.net
ARTICLE VI. That the party of the first part shall pay all taxes and assessments which are or may become due on the above described land and improvements during the term of this agreement.
ARTICLE VII. That within thirty (30) days after date of execution of this agreement, the party of the first part shall file a motion before the Court of First Instance at Balanga, Bataan, P. I., requesting cancellation of
Homestead Certificate of Title No. 325 referred to in Article I hereof and the issuance, in lieu thereof, of a certificate of title under the provisions of Land Registration Act No. 496, as amended by Act 3901.
ARTICLE III. It if further agreed that if upon the expiration of the period of time (4½) years stipulated in this mortgage, the mortgagor should fail to redeem this mortgage, she would execute a deed of absolute sale of the
property herein described for the same amount as this mortgage, including all unpaid interests at the rate of 12 per cent per annum, in favor of the mortgagee.
ARTICLE IX. That in the event the contemplated motion under Article VII hereof is not approved by the Court, the foregoing contract of sale shall automatically become null and void, and the mortgage stipulated under
Article IV and V shall remain in full force and effect.
In testimony whereof, the parties hereto have hereunto set their hands the day and year first herein before written.
(Sgd.) MARCIAL KASILAG
(Sgd.) EMILIANA AMBROSIO
Signed in the presence of:
(Sgd.) ILLEGIBLE
(Sgd.) GAVINO RODRIGUEZ.

PHILIPPINE ISLANDS } ss.

BALANGA, BATAAN } ss.
Before me this day personally appeared Emiliana Ambrosio without cedula by reason of her sex, to me known and known to me to be the person who signed the foregoing instrument, and acknowledged to me that she
executed the same as her free and voluntary act and deed.
I hereby certify that this instrument consists of three (3) pages including this page of the acknowledgment and that each page thereof is signed by the parties to the instrument and the witnesses in their presence and in
the presence of each other, and that the land treated in this instrument consists of only one parcel.
In witness whereof I have hereunto set my hand and affixed my notarial seal, this 16th day of May, 1932.
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(Sgd.) NICOLAS NAVARRO

Notary Public
My commission expires December 31, 1933.

Doc. No. 178

Page 36 of my register
Book No. IV
One year after the execution of the aforequoted deed, that is, in 1933, it came to pass that Emiliana Ambrosio was unable to pay the stipulated interests as well as the tax on the land and its improvements. For this reason,
she and the petitioner entered into another verbal contract whereby she conveyed to the latter the possession of the land on condition that the latter would not collect the interest on the loan, would attend to the payment
of the land tax, would benefit by the fruits of the land, and would introduce improvements thereon. By virtue of this verbal contract, the petitioner entered upon the possession of the land, gathered the products thereof, did
not collect the interest on the loan, introduced improvements upon the land valued at P5,000, according to him and on May 22, 1934 the tax declaration was transferred in his name and on March 6, 1936 the assessed
value of the land was increased from P1,020 to P2,180.
After an analysis of the conditions of Exhibit "1" the Court of Appeals came to the conclusion and so held that the contract entered into by and between the parties, set out in the said public deed, was one of absolute
purchase and sale of the land and its improvements. And upon this ruling it held null and void and without legal effect the entire Exhibit 1 as well as the subsequent verbal contract entered into between the parties,
ordering, however, the respondents to pay to the petitioner, jointly and severally, the loan of P1,000 with legal interest at 6 per cent per annum from the date of the decision. In this first assignment of error the petitioner
contends that the Court of Appeals violated the law in holding that Exhibit 1 is an absolute deed of sale of the land and its improvements and that it is void and without any legal effect.
The cardinal rule in the interpretation of contracts is to the effect that the intention of the contracting parties should always prevail because their will has the force of law between them. Article 1281 of the Civil Code
consecrates this rule and provides, that if the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal sense of its stipulations shall be followed; and if the words appear to be
contrary to the evident intention of the contracting parties, the intention shall prevail. The contract set out in Exhibit 1 should be interpreted in accordance with these rules. As the terms thereof are clear and leave no room
for doubt, it should be interpreted according to the literal meaning of its clauses. The words used by the contracting parties in Exhibit 1 clearly show that they intended to enter into the principal contract of loan in the
amount of P1,000, with interest at 12 per cent per annum, and into the accessory contract of mortgage of the improvements on the land acquired as homestead, the parties having moreover, agreed upon the pacts and
conditions stated in the deed. In other words, the parties entered into a contract of mortgage of the improvements on the land acquired as homestead, to secure the payment of the indebtedness for P1,000 and the
stipulated interest thereon. In clause V the parties stipulated that Emiliana Ambrosio was to pay, within four and a half years, or until November 16, 1936, the debt with interest thereon, in which event the mortgage would
not have any effect; in clause VI the parties agreed that the tax on the land and its improvements, during the existence of the mortgage, should be paid by the owner of the land; in clause VII it was covenanted that within
thirty days from the date of the contract, the owner of the land would file a motion in the Court of First Instance of Bataan asking that certificate of title No. 325 be cancelled and that in lieu thereof another be issued under
the provisions of the Land Registration Act No. 496, as amended by Act No. 3901; in clause VIII the parties agreed that should Emiliana Ambrosio fail to redeem the mortgage within the stipulated period of four years and
a half, she would execute an absolute deed of sale of the land in favor of the mortgagee, the petitioner, for the same amount of the loan of P1,000 including unpaid interest; and in clause IX it was stipulated that in case
the motion to be presented under clause VII should be disapproved by the Court of First Instance of Bataan, the contract of sale would automatically become void and the mortgage would subsist in all its force.
Another fundamental rule in the interpretation of contracts, not less important than those indicated, is to the effect that the terms, clauses and conditions contrary to law, morals and public order should be separated from
the valid and legal contract and when such separation can be made because they are independent of the valid contract which expresses the will of the contracting parties. Manresa, commenting on article 1255 of the Civil
Code and stating the rule of separation just mentioned, gives his views as follows:
On the supposition that the various pacts, clauses or conditions are valid, no difficulty is presented; but should they be void, the question is as to what extent they may produce the nullity of the principal obligation. Under
the view that such features of the obligation are added to it and do not go to its essence, a criterion based upon the stability of juridical relations should tend to consider the nullity as confined to the clause or pact suffering
therefrom, except in case where the latter, by an established connection or by manifest intention of the parties, is inseparable from the principal obligation, and is a condition, juridically speaking, of that the nullity of which
it would also occasion. (Manresa, Commentaries on the Civil Code, Volume 8, p. 575.)
The same view prevails in the Anglo-American law, as condensed in the following words:
Where an agreement founded on a legal consideration contains several promises, or a promise to do several things, and a part only of the things to be done are illegal, the promises which can be separated, or the
promise, so far as it can be separated, from the illegality, may be valid. The rule is that a lawful promise made for a lawful consideration is not invalid merely because an unlawful promise was made at the same time and
for the same consideration, and this rule applies, although the invalidity is due to violation of a statutory provision, unless the statute expressly or by necessary implication declares the entire contract void. . . . (13 C. J.,
par. 470, p. 512; New York Cent. etc. R. Co. v. Gray, 239 U.S., 583; 60 Law ed., 451; U.S. v. Mora, 97 U.S., 413, 24 Law. ed., 1017; U.S. v. Hodson, 10 Wall, 395; 19 Law ed. 937; Gelpcke v. Dubuque, 1 Wall. 175, 17
Law ed., 520; U.S. v. Bradly, 10 Pet. 343, 9 Law. ed., 448; Borland v. Prindle, 144 Fed 713; Western Union Tel. Co. v. Kansas Pac. R. Co., 4 Fed., 284; Northern Pac. R. Co. v. U.S., 15 Ct. Cl., 428.)
Addressing ourselves now to the contract entered into by the parties, set out in Exhibit 1, we stated that the principal contract is that of loan and the accessory that of mortgage of the improvements upon the land acquired
as a homestead. There is no question that the first of these contract is valid as it is not against the law. The second, or the mortgage of the improvements, is expressly authorized by section 116 of Act No. 2874, as
amended by section 23 of Act No. 3517, reading:
 7

SEC. 116. Except in favor of the Government or any of its branches, units or institutions, or legally constituted banking corporations, lands acquired under the free patent or homestead provisions shall not be subject to
encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt
contracted prior to the expiration of said period; but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations.
It will be recalled that by clause VIII of Exhibit 1 the parties agreed that should Emiliana Ambrosio fail to redeem the mortgage within the stipulated period of four and a half years, by paying the loan together with interest,
she would execute in favor of the petitioner an absolute deed of sale of the land for P1,000, including the interest stipulated and owing. The stipulation was verbally modified by the same parties after the expiration of one
year, in the sense that the petitioner would take possession of the land and would benefit by the fruits thereof on condition that he would condone the payment of interest upon the loan and he would attend to the payment
of the land tax. These pacts made by the parties independently were calculated to alter the mortgage a contract clearly entered into, converting the latter into a contract of antichresis. (Article 1881 of the Civil Code.) The
contract of antichresis, being a real encumbrance burdening the land, is illegal and void because it is legal and valid.
The foregoing considerations bring us to the conclusion that the first assignment of error is well-founded and that error was committed in holding that the contract entered into between the parties was one of absolute sale
of the land and its improvements and that Exhibit 1 is null and void. In the second assignment of error the petitioner contends that the Court of Appeals erred in holding that he is guilty of violating the Public Land Act
because he entered into the contract, Exhibit 1. The assigned error is vague and not specific. If it attempts to show that the said document is valid in its entirety, it is not well-founded because we have already said that
certain pacts thereof are illegal because they are prohibited by section 116 of Act No. 2874, as amended.
In the third assignment of error the petitioner insists that his testimony, as to the verbal agreement entered into between him and Emiliana Ambrosio, should have been accepted by the Court of Appeals; and in the fourth
and last assignment of error the same petitioner contends that the Court of Appeals erred in holding that he acted in bad faith in taking possession of the land and in taking advantage of the fruits thereof, resulting in the
denial of his right to be reimbursed for the value of the improvements introduced by him.
We have seen that subsequent to the execution of the contract, Exhibit 1, the parties entered into another verbal contract whereby the petitioner was authorized to take possession of the land, to receive the fruits thereof
and to introduce improvements thereon, provided that he would renounce the payment of stipulated interest and he would assume payment of the land tax. The possession by the petitioner and his receipt of the fruits of
the land, considered as integral elements of the contract of antichresis, are illegal and void agreements because, as already stated, the contract of antichresis is a lien and such is expressly prohibited by section 116 of
Act No. 2874, as amended. The Court of Appeals held that the petitioner acted in bad faith in taking possession of the land because he knew that the contract he made with Emiliana Ambrosio was an absolute deed of
sale and, further, that the latter could not sell the land because it is prohibited by section 116. The Civil Code does not expressly define what is meant by bad faith, but section 433 provides that "Every person who is
unaware of any flaw in his title, or in the manner of its acquisition, by which it is invalidated, shall be deemed a possessor in good faith"; and provides further, that "Possessors aware of such flaw are deemed possessors
in bad faith". Article 1950 of the same Code, covered by Chapter II relative to prescription of ownership and other real rights, provides, in turn, that "Good faith on the part of the possessor consists in his belief that the
person from whom he received the thing was the owner of the same, and could transmit the title thereto." We do not have before us a case of prescription of ownership, hence, the last article is not squarely in point. In
resume, it may be stated that a person is deemed a possessor in bad faith when he knows that there is a flaw in his title or in the manner of its acquisition, by which it is invalidated.
Borrowing the language of Article 433, the question to be answered is whether the petitioner should be deemed a possessor in good faith because he was unaware of any flaw in his title or in the manner of its acquisition
by which it is invalidated. It will be noted that ignorance of the flaw is the keynote of the rule. From the facts found established by the Court of Appeals we can neither deduce nor presume that the petitioner was aware of
a flaw in his title or in the manner of its acquisition, aside from the prohibition contained in section 116. This being the case, the question is whether good faith may be premised upon ignorance of the laws. Manresa,
commenting on article 434 in connection with the preceding article, sustains the affirmative. He says:
"We do not believe that in real life there are not many cases of good faith founded upon an error of law. When the acquisition appears in a public document, the capacity of the parties has already been passed upon by
competent authority, and even established by appeals taken from final judgments and administrative remedies against the qualification of registrars, and the possibility of error is remote under such circumstances; but,
unfortunately, private documents and even verbal agreements far exceed public documents in number, and while no one should be ignorant of the law, the truth is that even we who are called upon to know and apply it
fall into error not infrequently. However, a clear, manifest, and truly unexcusable ignorance is one thing, to which undoubtedly refers article 2, and another and different thing is possible and excusable error arising from
complex legal principles and from the interpretation of conflicting doctrines.
But even ignorance of the law may be based upon an error of fact, or better still, ignorance of a fact is possible as to the capacity to transmit and as to the intervention of certain persons, compliance with certain formalities
and appreciation of certain acts, and an error of law is possible in the interpretation of doubtful doctrines. (Manresa, Commentaries on the Spanish Civil Code. Volume IV, pp. 100, 101 and 102.)
According to this author, gross and inexcusable ignorance of law may not be the basis of good faith, but possible, excusable ignorance may be such basis. It is a fact that the petitioner is not conversant with the laws
because he is not a lawyer. In accepting the mortgage of the improvements he proceeded on the well-grounded belief that he was not violating the prohibition regarding the alienation of the land. In taking possession
thereof and in consenting to receive its fruits, he did not know, as clearly as a jurist does, that the possession and enjoyment of the fruits are attributes of the contract of antichresis and that the latter, as a lien, was
prohibited by section 116. These considerations again bring us to the conclusion that, as to the petitioner, his ignorance of the provisions of section 116 is excusable and may, therefore, be the basis of his good faith. We
do not give much importance to the change of the tax declaration, which consisted in making the petitioner appear as the owner of the land, because such an act may only be considered as a sequel to the change of
possession and enjoyment of the fruits by the petitioner, to about which we have stated that the petitioner's ignorance of the law is possible and excusable. We, therefore, hold that the petitioner acted in good faith in
taking possession of the land and enjoying its fruits.
The petitioner being a possessor in good faith within the meaning of article 433 of the Civil Code and having introduced the improvements upon the land as such, the provisions of article 361 of the same Code are
applicable; wherefore, the respondents are entitled to have the improvements and plants upon indemnifying the petitioner the value thereof which we fix at P3,000, as appraised by the trial court; or the respondents may
elect to compel the petitioner to have the land by paying its market value to be fixed by the court of origin.
 8

The respondents also prayed in their complaint that the petitioner be compelled to pay them the sum of P650, being the approximate value of the fruits obtained by the petitioner from the land. The Court of Appeals
affirmed the judgment of the trial court denying the claim or indemnity for damages, being of the same opinion as the trial court that the respondents may elect to compel the petitioner to have the land. The Court of
Appeals affirmed the judgment of the trial court that the respondents have not established such damages. Under the verbal contract between the petitioner and the deceased Emiliana Ambrosio, during the latter's lifetime,
the former would take possession of the land and would receive the fruits of the mortgaged improvements on condition that he would no longer collect the stipulated interest and that he would attend to the payment of the
land tax. This agreement, at bottom, is tantamount to the stipulation that the petitioner should apply the value of the fruits of the land to the payment of stipulated interest on the loan of P1,000 which is, in turn, another of
the elements characterizing the contract of antichresis under article 1881 of the Civil Code. It was not possible for the parties to stipulate further that the value of the fruits be also applied to the payment of the capital,
because the truth was that nothing remained after paying the interest at 12% per annum. This interest, at the rate fixed, amounted to P120 per annum, whereas the market value of the fruits obtainable from the land
hardly reached said amount in view of the fact that the assessed value of said improvements was, according to the decision, P860. To this should be added the fact that, under the verbal agreement, from the value of the
fruits had to be taken a certain amount to pay the annual land tax. We mention these data here to show that the petitioner is also not bound to render an accounting of the value of the fruits of the mortgaged improvements
for the reason stated that said value hardly covers the interest earned by the secured indebtednes.
For all the foregoing considerations, the appealed decision is reversed, and we hereby adjudge: (1) that the contract of mortgage of the improvements, set out in Exhibit 1, is valid and binding; (2) that the contract of
antichresis agreed upon verbally by the parties is a real incumbrance which burdens the land and, as such, is a null and without effect; (3) that the petitioner is a possessor in good faith; (4) that the respondents may elect
to have the improvements introduced by the petitioner by paying the latter the value thereof, P3,000, or to compel the petitioner to buy and have the land where the improvements or plants are found, by paying them its
market value to be filed by the court of origin, upon hearing the parties; (5) that the respondents have a right to the possession of the land and to enjoy the mortgaged improvements; and (6) that the respondents may
redeem the mortgage of the improvements by paying to the petitioner within three months the amount of P1,000, without interest, as that stipulated is set off by the value of the fruits of the mortgaged improvements which
petitioner received, and in default thereof the petitioner may ask for the public sale of said improvements for the purpose of applying the proceeds thereof to the payment of his said credit. Without special pronouncement
as to the costs in all instances. So ordered.
Diaz, J., concur.

4. G.R. No. 171132 August 15, 2012

MANUEL D. YNGSON, JR. (in his capacity as the Liquidator of ARCAM & COMPANY, INC.), Petitioner,
vs.
PHILIPPINE NATIONAL BANK, Respondent.
DECISION
VILLARAMA, JR., J.:
On appeal are the Resolutions dated April 14, 20051 and January 24, 20062 of the Court of Appeals (CA) in CA-G.R. SP No. 88735. The CA dismissed petitioner's petition for review of the January
4, 2005 Resolution3 and February 9, 2000 Order4 of the Securities and Exchange Commission (SEC) for failure of petitioner to attach to the petition copies of material portions of the records and
other relevant or pertinent documents.
The facts follow:
 9

ARCAM & Company, Inc. (ARCAM) is engaged in the operation of a sugar mill in Pampanga. 5 Between 1991 and 1993, ARCAM applied for and was granted a loan by respondent Philippine
National Bank (PNB).6 To secure the loan, ARCAM executed a Real Estate Mortgage over a 350,004-square meter parcel of land covered by TCT No. 340592-R and a Chattel Mortgage over
various personal properties consisting of machinery, generators, field transportation and heavy equipment.
ARCAM, however, defaulted on its obligations to PNB. Thus, on November 25, 1993, pursuant to the provisions of the Real Estate Mortgage and Chattel Mortgage, PNB initiated extrajudicial
foreclosure proceedings in the Office of the Clerk of Court/Ex Officio Sheriff of the Regional Trial
Court (RTC) of Guagua, Pampanga.7 The public auction was scheduled on December 29, 1993 for the mortgaged real properties and December 8, 1993 for the mortgaged personal properties.
On December 7, 1993, ARCAM filed before the SEC a Petition for Suspension of Payments, Appointment of a Management or Rehabilitation Committee, and Approval of Rehabilitation Plan, with
application for issuance of a temporary restraining order (TRO) and writ of preliminary injunction. The SEC issued a TRO and subsequently a writ of preliminary injunction, enjoining PNB and the
Sheriff of the RTC of Guagua, Pampanga from proceeding with the foreclosure sale of the mortgaged properties. 8 An interim management committee was also created.
On February 9, 2000, the SEC ruled that ARCAM can no longer be rehabilitated. The SEC noted that the petition for suspension of payment was filed in December 1993 and six years had passed
but the potential white knight" investor had not infused the much needed capital to bail out ARCAM from its financial difficulties.9 Thus, the SEC decreed that ARCAM be dissolved and placed
under liquidation.10 The SEC Hearing Panel also granted PNB’s motion to dissolve the preliminary injunction and appointed Atty. Manuel D. Yngson, Jr. & Associates as Liquidator for
ARCAM.11 With this development, PNB revived the foreclosure case and requested the RTC Clerk of Court to re-schedule the sale at public auction of the mortgaged properties.
Contending that foreclosure during liquidation was improper, petitioner filed with the SEC a Motion for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction to enjoin
the foreclosure sale of ARCAM’s assets. The SEC en banc issued a TRO effective for seventy-two (72) hours, but said TRO lapsed without any writ of preliminary injunction being issued by the
SEC. Consequently, on July 28, 2000, PNB resumed the proceedings for the extrajudicial foreclosure sale of the mortgaged properties.12 PNB emerged as the highest winning bidder in the
auction sale, and certificates of sale were issued in its favor.
On November 16, 2000, petitioner filed with the SEC a motion to nullify the auction sale.13 Petitioner posited that all actions against companies which are under liquidation, like ARCAM, are
suspended because liquidation is a continuation of the petition for suspension proceedings. Petitioner argued that the prohibition against foreclosure subsisted during liquidation because payment
of all of ARCAM’s obligations was proscribed except those authorized by the Commission. Moreover, petitioner asserted that the mortgaged assets should be included in the liquidation and the
proceeds shared with the unsecured creditors.
In its Opposition, PNB asserted that neither Presidential Decree (P.D.) No. 902-A nor the SEC rules prohibits secured creditors from foreclosing on their mortgages to satisfy the mortgagor’s debt
after the termination of the rehabilitation proceedings and during liquidation proceedings. 14
On January 4, 2005, the SEC issued a Resolution15 denying petitioner’s motion to nullify the auction sale. It held that PNB was not legally barred from foreclosing on the mortgages. Aggrieved,
petitioner filed on February 28, 2005, a petition for review in the CA questioning the January 4, 2005 Resolution of the SEC. 16
By Resolution dated April 14, 2005, the CA dismissed the petition on the ground that petitioner failed to attach material portions of the record and other documents relevant to the petition as
required in Rule 46, Section 3 of the 1997 Rules of Civil Procedure, as amended. The CA likewise denied ARCAM’s motion for reconsideration in its Resolution dated January 24, 2006.
Hence this petition under Rule 45 arguing that:
4.1. THE SEC ERRED IN FAILING TO APPLY THE RULES OF CONCURRENCE AND PREFERENCE OF CREDITS UNDER THE CIVIL CODE AND JURISPRUDENCE
WHEN PD 902-A PROVIDES THAT THE SAME BE APPLIED IN INSTANCES WHEREBY AN ENTITY IS ORDERED DISSOLVED AND PLACED UNDER LIQUIDATION ON
ACCOUNT OF FAILURE TO REHABILITATE DUE TO INSOLVENCY.17
4.2. IT WAS GROSSLY ERRONEOUS FOR THE SEC TO HAVE ALLOWED PNB TO FORECLOSE THE MORTGAGE WITHOUT FIRST ALLOWING THE ARCAM
LIQUIDATOR TO
MAKE A DETERMINATION OF THE LIENS OVER THE ARCAM REAL PROPERTIES, SINCE THE LIQUIDATOR HAD INITIALLY DETERMINED THAT ASIDE FROM PNB,
SOME ARCAM WORKERS MAY ALSO HAVE A LEGAL LIEN OVER THE SAID PROPERTY AS REGARDS THEIR CLAIMS FOR UNPAID WAGES. THESE LIENS OVER
THE SAME MOVABLE OR REAL PROPERTY ARE TO BE SATISFIED PRO-RATA WITH THE CONTRACTUAL LIENS PURSUANT TO 2247 AND 2249 OF THE CIVIL CODE,
IN RELATION TO 2241 TO 2242 RESPECTIVELY. ALSO, THERE MAY BE SOME TAX ASSESSMENTS THAT THE LIQUIDATOR DOES NOT KNOW ABOUT, AND IF
THERE WERE, THESE COULD COMPRISE TAX LIENS, WHICH UNDER ARTICLE 2243 OF THE CIVIL CODE ARE CLEARLY GIVEN PRIORITY OVER OTHER
 10

PREFERRED CLAIMS SINCE SUCH ARE TO BE SATISFIED FIRST, OVER OTHER LIENS PROVIDED UNDER ARTICLES 2241 AND 2242 OF THE CIVIL CODE, SUCH AS
MORTGAGE LIENS.18
4.3. THE SEC LABORED UNDER THE MISTAKEN IMPRESSION THAT AFTER AN ENTITY IS DISSOLVED AND PLACED UNDER LIQUIDATION DUE TO INSOLVENCY,
SECURED CREDITORS ARE AUTOMATICALLY ALLOWED TO FORECLOSE OR EXECUTE OR OTHERWISE MAKE GOOD ON THEIR CREDITS AGAINST THE
DEBTOR.19
4.4. JURISPRUDENCE ON THE MATTER ALSO NEGATES THE SEC’S HOLDING THAT THE FORECLOSURE BY PNB WAS LEGAL. EVEN ASSUMING FOR THE SAKE
OF ARGUMENT THAT PNB IS THE SOLE AND ONLY LIEN HOLDER, IT STILL CANNOT FORECLOSE UNLESS THE LIQUIDATOR AGREES TO SUCH OR THAT THE SEC
GAVE PNB PRIOR PERMISSION TO INSTITUTE THE SEPARATE FORECLOSURE PROCEEDINGS.20
4.5. RESPONDENT PNB SHOULD BE MADE TO PAY DAMAGES FOR THE REASON THAT THE FORECLOSURE PROCEEDINGS WERE ATTENDED WITH BAD FAITH.21
The issues to be resolved are: (1) whether the CA correctly dismissed the petition for failure to attach material documents referred to in the petition; and (2) whether PNB, as a secured creditor,
can foreclose on the mortgaged properties of a corporation under liquidation without the knowledge and prior approval of the liquidator or the SEC.
On the procedural issue, the Court finds that the CA erred in dismissing the petition for review before it on the ground of failure to attach material portions of the record and other documents
relevant to the petition. A perusal of the petition for review filed with the CA, and as admitted by PNB,22 reveals that certified true copies of the assailed January 4, 2005 SEC Resolution and the
February 9, 2000 SEC Order appointing petitioner Atty. Manuel D. Yngson, Jr. as liquidator were annexed therein.
We find the foregoing attached documents sufficient for the appellate court to decide the case at bar considering that the SEC resolution contains statements of the factual antecedents material to
the case. The Resolution also contains the SEC’s findings on the legality of PNB’s foreclosure of the mortgages. The SEC held that when the rehabilitation proceeding was terminated and the
suspensive effect of the order staying the enforcement of claims was lifted, PNB could already assert its preference over unsecured creditors, and the secured asset and the proceeds need not be
included in the liquidation and shared with the unsecured creditors. 23 Before the CA, petitioner raised only the same legal questions as there was no controversy involving factual matters.
Petitioner claimed that the SEC erred in not applying the rules on concurrence and preference of credits, and in denying its motion to nullify the auction sale of the secured properties. 24 Therefore,
the assailed SEC Resolution is the only material portion of the record that should be annexed with the petition for the CA to decide on the correctness of the SEC’s interpretation of the law and
jurisprudence on the matter before it.
Having so ruled, this Court would normally order the remand of the case to the CA for resolution of the substantive issues. However, we find it more appropriate to decide the merits of the case in
the interest of speedy justice considering that the parties have adequately argued all points and issues raised. It is the policy of the Court to strive to settle an entire controversy in a single
proceeding, and to leave no root or branch to bear the seeds of future litigation. 25 The ends of speedy justice would not be served by a remand of this case to the CA especially since any ruling of
the CA on the matter could end up being appealed to this Court.
Did the SEC then err in ruling that PNB was not barred from foreclosing on the mortgages? We answer in the negative.
In the case of Consuelo Metal Corporation v. Planters Development Bank,26 which involved factual antecedents similar to the present case, the court has already settled the above question and
upheld the right of the secured creditor to foreclose the mortgages in its favor during the liquidation of a debtor corporation. In that case, Consuelo Metal Corporation (CMC) filed with the SEC a
petition to be declared in a state of suspension of payment, for rehabilitation, and for the appointment of a rehabilitation receiver or management committee under Section 5(d) of P.D. No. 902-A.
On April 2, 1996, the SEC, finding the petition sufficient in form and substance, declared that "all actions for claims against CMC pending before any court, tribunal, office, board, body and/or
commission are deemed suspended immediately until further orders" from the SEC. Then on November 29, 2000, upon the management committee’s recommendation, the SEC issued an
Omnibus Order directing the dissolution and liquidation of CMC. Thereafter, respondent Planters Development Bank (Planters Bank), one of CMC’s creditors, commenced the extrajudicial
foreclosure of CMC’s real estate mortgage. Planters Bank extrajudicially foreclosed on the real estate mortgage as CMC failed to secure a TRO. CMC questioned the validity of the foreclosure
because it was done without the knowledge and approval of the liquidator. The Court ruled in favor of the respondent bank, as follows:
In Rizal Commercial Banking Corporation v. Intermediate Appellate Court, we held that if rehabilitation is no longer feasible and the assets of the corporation are finally liquidated,
secured creditors shall enjoy preference over unsecured creditors, subject only to the provisions of the Civil Code on concurrence and preference of credits. Creditors of secured
obligations may pursue their security interest or lien, or they may choose to abandon the preference and prove their credits as ordinary claims.
Moreover, Section 2248 of the Civil Code provides:
 11

"Those credits which enjoy preference in relation to specific real property or real rights, exclude all others to the extent of the value of the immovable or real
right to which the preference refers."
In this case, Planters Bank, as a secured creditor, enjoys preference over a specific mortgaged property and has a right to foreclose the mortgage under Section 2248 of the Civil
Code. The creditor-mortgagee has the right to foreclose the mortgage over a specific real property whether or not the debtor-mortgagor is under insolvency or liquidation
proceedings. The right to foreclose such mortgage is merely suspended upon the appointment of a management committee or rehabilitation receiver or upon the issuance of a
stay order by the trial court. However, the creditor-mortgagee may exercise his right to foreclose the mortgage upon the termination of the rehabilitation proceedings or upon the
lifting of the stay order.27 (Emphasis supplied)
It is worth mentioning that under Republic Act No. 10142, otherwise known as the Financial Rehabilitation and Insolvency Act (FRIA) of 2010, the right of a secured creditor to enforce his lien
during liquidation proceedings is retained. Section 114 of said law thus provides:
SEC. 114. Rights of Secured Creditors. – The Liquidation Order shall not affect the right of a secured creditor to enforce his lien in accordance with the applicable contract or law.
A secured creditor may:
(a) waive his rights under the security or lien, prove his claim in the liquidation proceedings and share in the distribution of the assets of the debtor; or
(b) maintain his rights under his security or lien;
If the secured creditor maintains his rights under the security or lien:
(1) the value of the property may be fixed in a manner agreed upon by the creditor and the liquidator.1âwphi1 When the value of the property is less than the claim it secures, the
liquidator may convey the property to the secured creditor and the latter will be admitted in the liquidation proceedings as a creditor for the balance; if its value exceeds the claim
secured, the liquidator may convey the property to the creditor and waive the debtor’s right of redemption upon receiving the excess from the creditor;
(2) the liquidator may sell the property and satisfy the secured creditor’s entire claim from the proceeds of the sale; or
(3) the secured creditor may enforce the lien or foreclose on the property pursuant to applicable laws. (Emphasis supplied)
In this case, PNB elected to maintain its rights under the security or lien; hence, its right to foreclose the mortgaged properties should be respected, in line with our pronouncement in Consuelo
Metal Corporation.
As to petitioner's argument on the right of first preference as regards unpaid wages, the Court has elucidated in the case of Development Bank of the Philippines v. NLRC28 that a distinction
should be made between a preference of credit and a lien. 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 of the Labor Code, 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. Consequently, the right of first preference for unpaid wages may not be invoked in this case to nullify
the foreclosure sales conducted pursuant to PNB 's right as a secured creditor to enforce its lien on specific properties of its debtor, ARCAM.
WHEREFORE, the petition for review on certiorari is DENIED.
With costs against the petitioner.
SO ORDERED.

5. G.R. No. L-19482 March 31, 1965

 12

ZOSIMO D. UY, plaintiff-appellant, vs.JOSE R. ZAMORA, defendant, THE ALLIED FINANCE, INC., intervenor-appellee.
This is an appeal from the Court of First Instance of Manila. It originated from a complaint filed in the Municipal Court of Manila by Zosimo D. Uy against Jose R. Zamora for the recovery of a sum
of money.
It appears that, at the instance of plaintiff Uy, the Municipal Court ordered the attachment of a motor vehicle belonging to defendant Zamora. The writ of attachment was levied on the vehicle on
August 11, 1960. Subsequently, the Municipal Court rendered judgment for the plaintiff Uy and ordered defendant Zamora to pay the sum of P1,740, plus interest at the rate of 12 per cent per
annum, attorney's fees in the amount of P435 and the costs of the suit. From this judgment, the defendant Zamora appealed to the Court of First Instance of Manila.
While the case was thus pending appeal, the Allied Finance, Inc. sought and was allowed to intervene. According to the intervenor, the motor vehicle, which was attached by the Sheriff, had
previously been mortgaged to it by defendant Zamora to secure the payment of a loan of P3,060 and that at the time of the filing of the complaint in intervention on December 19, 1960 there
remained a balance of P2,451.93 in its favor. Intervenor, therefore, prayed that defendant Zamora be ordered to pay P2,451.93 as principal, P250 as attorney's fees and the cost.
Meanwhile, on January 12, 1961, plaintiff Uy and defendant Zamora, who had earlier been declared in default, submitted to the court a compromise agreement wherein Zamora admitted being
indebted to Uy in the sum of P1,740 plus P760, representing sheriff, guard and attorney's fees, bond premiums and expenses of litigation or in the total sum of P2,500. Since the motor vehicle had
already been sold on order of the Court for P2,500 to prevent depreciation, defendant Zamora agreed to have plaintiff Uy's credit paid out of the proceeds of the sale.
The court found defendant Zamora to be liable to plaintiff Uy in the amount of P2,500, and to the intervenor in the amount of P2,451.93, plus interest at 12 per cent per annum and attorney's fees
for P200. But since there was not enough money with which to pay both claims, the question was: Which of the two credits is preferred?
Plaintiff Uy claims preference on the basis of a lien arising from the attachment of the motor vehicle on August 11, 1960. On the other hand, the intervenor bases its claim to preference on a Deed
of Chattel Mortgage covering the same motor vehicle. This deed was executed on January 14, 1960 and acknowledged before a notary public on June 20, 1960. As the lower court noted, it is not
shown whether the mortgage was recorded in the Chattel Mortgage Register and noted in the records of the Motor Vehicles Office, although both plaintiff Uy and the intervenor affirm in their briefs
that the mortgage was registered on August 24, 1960.
In resolving the issue, the lower court held that intervenor's claim could not be considered specially preferred credit under Article 2241(4) of the Civil Code because an unregistered chattel
mortgage is void. However, the court held that the same could be considered a credit appearing in a public instrument under Article 2244 (14) so that it could be considered preferred over
plaintiff's attachment lien because of priority of its date.1äwphï1.ñët
Plaintiff moved for a reconsideration but the same was denied. Hence this appeal, plaintiff contending that —
1. The intervenor's chattel mortgage is void for lack of registration, citing Article 2140 of the Civil Code;
2. Since it was void, it could not affect plaintiff's attachment lien;
3. The intervenor's credit could not be considered a credit appearing in a public instrument under Article 2244 (14) because the credit was not yet due at the time of the levy of attachment;
4. Even if it is considered a credit in a public instrument, still plaintiff's lien by attachment is superior to the intervenor's credit because plaintiff's lien is specially preferred.
Considering the fact that the intervenor Allied Finance, Inc. registered its mortgage only on August 24, 1960, or subsequent to the date of the writ of attachment obtained by plaintiff Uy on August
11, 1960, the credit of the intervenor cannot prevail over that of the plaintiff.
The lower court upheld intervenor's credit on the ground that, being embodied in a public instrument of an earlier date (June 20, 1960), it should take precedence over plaintiff's lien by attachment
(August 11, 1960), pursuant to Article 2244 of the Civil Code. This is untenable, for the reason that, as already stated, the credit of the intervenor cannot be considered as preferred until the same
has been recorded in the Motor Vehicles Office. Thus, inBorlough v. Fortune Enterprises, Inc., 53 O.G. 4070, it was held that a mortgage of motor vehicles, in order to affect third persons, should
not only be registered in the Chattel Mortgage Registry, but the same should also be recorded in the Motor Vehicles Office (now the Land Transportation Commission), as required in Section 5 (e)
of the then Revised Motor Vehicles Law. There is no doubt that with respect to defendant Zamora and the intervenor Allied Finance, Inc., plaintiff Uy is a third person. We, therefore, hold that
plaintiff's credit should first be paid.
WHEREFORE, the decision of the lower court is reversed, without pronouncement as to costs.
 13

6. G.R. No. L-38427 March 12, 1975

CENTRAL BANK OF THE PHILIPPINES as Liquidator of the FIDELITY SAVINGS BANK, petitioner,
vs.
HONORABLE JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII, Court of First Instance of Manila, Spouses AUGUSTO and ADELAIDA PADILLA and Spouses MARCELA
and JOB ELIZES,respondents.
F.E. Evangelista and Agapito S. Fajardo for petitioner.
Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.

AQUINO, J.:ñé+.£ªwph!1
This case involves the question of whether a final judgment for the payment of a time deposit in a savings bank which judgment was obtained after the bank was declared insolvent, is a preferred
claim against the bank. The question arises under the following facts:
On February 18,1969 the Monetary Board found the Fidelity Savings Bank to be insolvent. The Board directed the Superintendent of Banks to take charge of its assets, forbade it to do business
and instructed the Central Bank Legal Counsel to take legal actions (Resolution No. 350).
On December 9, 1969 the Board involved to seek the court's assistant and supervision in the liquidation of the ban The resolution implemented only on January 25, 1972, when his Central Bank of
the Philippines filed the corresponding petition for assistance and supervision in the Court of First Instance of Manila (Civil Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and Marcela P. Elizes filed a complaint
in the Court of First Instance of Manila against the Fidelity Savings Bank for the recovery of the sum of P50, 584 as the balance of their time deposits (Civil Case No. 82520 assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated interest.
In another case, assigned to Branch XXX of the Court of First Instance of Manila, the spouses Augusta A. Padilla and Adelaida Padilla secured on April 14, 1972 a judgment against the Fidelity
Savings Bank for the sums of P80,000 as the balance of their time deposits, plus interests, P70,000 as moral and exemplary damages and P9,600 as attorney's fees (Civil Case No. 84200 where
the action was filed on September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII having cognizance of the liquidation proceeding), upon motions of the Elizes and Padilla spouses and over the
opposition of the Central Bank, directed the latter as liquidator, to pay their time deposits as preferred judgments, evidenced by final judgments, within the meaning of article 2244(14)(b) of the
Civil Code, if there are enough funds in the liquidator's custody in excess of the credits more preferred under section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends that the final judgments secured by the Elizes and Padilla spouses do not enjoy any preference because (a)
they were rendered after the Fidelity Savings Bank was declared insolvent and (b) under the charter of the Central Bank and the General Banking Law, no final judgment can be validly obtained
against an insolvent bank.
Republic Act No. 265 provides:têñ.£îhqwâ£
SEC. 29. Proceeding upon insolvency.—Whenever upon examination by the Superintendent or his examiners or agents into the condition of any banking institution, it shall be disclosed that the
condition of the same is one of insolvency, or that its continuance in business would involve probable loss to its depositors or creditors, it shall be the duty of the Superintendent forthwith, in writing
to inform the Monetary Board of the facts, and the Board, upon finding the statements of the Superintendent to be true, shall forthwith forbid the institution to do business in the Philippines and
shall take charge of its assets and proceeds according to law.
 14

The Monetary Board shall thereupon determine within thirty days whether the institution may be reorganized or otherwise placed in such a condition so that it may be permitted to resume business
with safety to its creditors and shall prescribe the conditions under which such resumption of business shall take place. In such case the expenses and fees in the administration of the institution
shall be determined by the Board and shall be paid to the Central Bank out of the assets of such banking institution.
At any time within ten days after the Monetary Board has taken charge of the assets of any banking institution, such institution may apply to the Court of First Instance for an order requiring the
Monetary Board to show cause why it should not be enjoined from continuing such charge of its assets, and the court may direct the Board to refrain from further proceedings and to surrender
charge of its assets.
If the Monetary Board shall determine that the banking institution cannot resume business with safety to its creditors, it shall, by the Office of the Solicitor General, file a petition in the Court of First
Instance reciting the proceedings which have been taken and praying the assistance and supervision of the court in the liquidation of the affairs of the same. The Superintendent shall thereafter,
upon order of the Monetary Board and under the supervision of the court and with all convenient speed, convert the assets of the banking institution to money.
SEC. 30. Distribution of assets.—In case of liquidation of a banking institution, after payment of the costs of the proceedings, including reasonable expenses and fees of the Central Bank to be
allowed by the court, the Central Bank shall pay the debts of such institution, under the order of the court, in accordance with their legal priority.
The General Banking Act, Republic Act No. 337, provides:têñ.£îhqwâ£
SEC. 85. Any director or officer of any banking institution who receives or permits or causes to be received in said bank any deposit, or who pays out or permits or causes to be paid out any funds
of said bank, or who transfers or permits or causes to be transferred any securities or property of said bank, after said bank becomes insolvent, shall be punished by fine of not less than one
thousand nor more than ten thousand pesos and by imprisonment for not less than two nor more than ten years.
The Civil Code provides:têñ.£îhqwâ£
ART. 2237. Insolvency shall be governed by special laws insofar as they are not inconsistent with this Code. (n)
ART. 2244. With reference to other property, real and personal, of the debtor, the following claims or credits shall be preferred in the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a public instrument; or (b) in a final judgment, if they have been the subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments and of the judgments, respectively. (1924a)
ART. 2251. Those credits which do not enjoy any preference with respect to specific property, and those which enjoy preference, as to the amount not paid, shall be satisfied according to the
following rules:
(1) In the order established in article 2244;
(2) Common credits referred to in article 2245 shall be paid pro rata regardless of dates. (1929a)
The trial court or, to be exact, the liquidation court noted that there is no provision in the charter of the Central Bank in the General Banking Law (Republic Acts Nos. 265 and 337, respectively)
which suspends or abates civil actions against an insolvent bank pending in courts other than the liquidation court. It reasoned out that, because such actions are not suspended, judgments
against insolvent banks could be considered as preferred credits under article 2244(14)(b) of the Civil Code. It further noted that, in contrast with the Central Act, section 18 of the Insolvency Law
provides that upon the issuance by the court of an order declaring a person insolvent "all civil proceedings against the said insolvent shall be stayed."
The liquidation court directed the Central Bank to honor the writs of execution issued by Branches I and XXX for the enforcement of the judgments obtained by the Elizes and Padilla spouses. It
suggested that, after satisfaction of the judgment the Central Bank, as liquidator, should include said judgments in the list of preferred credits contained in the "Project of Distribution" "with the
notation "already paid" "
On the other hand, the Central Bank argues that after the Monetary Board has declared that a bank is insolvent and has ordered it to cease operations, the Board becomes the trustee of its assets
"for the equal benefit of all the creditors, including the depositors". The Central Bank cites the ruling that "the assets of an insolvent banking institution are held in trust for the equal benefit of all
creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76 Mont. 248,
245 Pac. 947).
 15

The stand of the Central Bank is that all depositors and creditors of the insolvent bank should file their actions with the liquidation court. In support of that view it cites the provision that the
Insolvency Law does not apply to banks (last sentence, sec. 52 of Act No. 1956).
It also invokes the provision penalizing a director officer of a bank who disburses, or allows disbursement, of the funds of the bank after it becomes insolvent (Sec. 85, General Banking Act,
Republic Act No. 337). It cites the ruling that "a creditor of an insolvent state bank in the hands of a liquidator who recovered a judgment against it is not entitled to a preference for (by) the mere
fact that he is a judgment creditor" (Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of money in banks and similar institutions are not true deposits. They are considered simple loans and, as such, are not preferred
credits (Art. 1980, Civil Code; In re Liquidation of Mercantile Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association,
65 Phil. 375; Fletcher American National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit
Co., 65 Phil. 443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when a bank is found to be insolvent, the Monetary Board shall forbid it to do business and shall take charge of its
assets. The Board in its Resolution No. 350 dated February 18,1969 banned the Fidelity Savings Bank from doing business. It took charge of the bank's assets. Evidently, one purpose in
prohibiting the insolvent bank from doing business is to prevent some depositors from having an undue or fraudulent preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent, suits by some depositors could be maintained and judgments would be rendered for the payment of their
deposits and then such judgments would be considered preferred credits under article 2244 (14) (b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that article 2244(14)(b) does not apply to judgments for the payment of the deposits in an insolvent savings bank
which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To recognize such judgments as entitled to priority would mean that depositors in insolvent banks, after learning
that the bank is insolvent as shown by the fact that it can no longer pay withdrawals or that it has closed its doors or has been enjoined by the Monetary Board from doing business, would rush to
the courts to secure judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character. Some of the judgments would be default judgments. Depositors armed with such judgments would pester the
liquidation court with claims for preference on the basis of article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable situation could not have been contemplated by the
framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls closed its doors to business on
July 9, 1923. On November 7,1924 the bank (then already under liquidation) issued to William Rohr a certificate stating that he was entitled to claim from the bank $1,191.72 and that he was
entitled to dividends thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming the
order sustaining the demurrer, the Supreme Court of Montana said:têñ.£îhqwâ£
The general principle of equity that the assets of an insolvent are to he distributed ratably among general creditors applies with full force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is not entitled to any preference or priority over other general creditors.
The assets of a bank in process of liquidation are held in trust for the equal benefit of all creditors, and one cannot be permitted to obtain an advantage or preference over another by an
attachment, execution or otherwise. A disputed claim of a creditor may be adjudicated, but those whose claims are recognized and admitted may not successfully maintain action thereon. So to
permit would defeat the very purpose of the liquidation of a bank whether being voluntarily accomplished or through the intervention of a receiver.
xxx xxx xxx
The available assets of such a bank are held in trust, and so conserved that each depositor or other creditor shall receive payment or dividend according to the amount of his debt, and that none of
equal class shall receive any advantage or preference over another.
And with respect to a national bank under voluntary liquidation, the court noted in the Rohr case that the assets of such a bank "become a trust fund, to be administered for the benefit of all
creditors pro rata and, while the bank retains its corporate existence, and may be sued, the effect of a judgment obtained against it by a creditor is only to fix the amount of debt. He can acquire no
lien which will give him any preference or advantage over other general creditors. (245 Pac. 249). *
 16

Considering that the deposits in question, in their inception, were not preferred credits, it does not seem logical and just that they should be raised to the category of preferred credits simply
because the depositors, taking advantage of the long interval between the declaration of insolvency and the filing of the petition for judicial assistance and supervision, were able to secure
judgments for the payment of their time deposits.
The judicial declaration that the said deposits were payable to the depositors, as indisputably they were due, could not have given the Elizes and Padilla spouses a priority over the other
depositors whose deposits were likewise indisputably due and owing from the insolvent bank but who did not want to incur litigation expenses in securing a judgment for the payment of the
deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since February 19, 1969, was forbidden to do business (and that ban would include the payment of time deposits)
implies that suits for the payment of such deposits were prohibited. What was directly prohibited should not be encompassed indirectly. (See Maurello vs. Broadway Bank & Trust Co. of Paterson
176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the Bank Liquidation Rules and Regulations, it indicated in step III the procedure for processing the claims against
the insolvent bank. In Step IV, the court directed the Central Bank, as liquidator, to submit a Project of Distribution which should include "a list of the preferred credits to be paid in full in the order of
priorities established in Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article 2244 was not mentioned). There is no cogent reason why the Elizes and Padilla spouses
should not adhere to the procedure outlined in the said rules and regulations.WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974 are reversed and set aside. No
costs.
SO ORDERED.
Makalintal, C.J., Fernando, Barredo, and Fernandez, JJ., concur.1äwphï1.ñët
Antonio, J., took no part.
Footnotestêñ.£îhqwâ£
* "It must be borne in mind that the predominant policy of the insolvent system is intended to secure an equality among creditors, and to prohibit all preferences except such as are expressly
permitted. When, therefore, doubtful or ambiguous provisions of the enactments making up the system are to be construed, that interpretation which best comforts with and gives effect to the
ultimate and controlling purpose of the statute must be adopted and applied, rather than one which totally, or even partially, defeat or thwart that design. And this is but another way of saying that
preferences which do not clearly and unequivocally appear to be authorized ought not to be created by mere construction, since the tendency of all preferences is to frustrate, to some extent,
equality among creditors, and thus to disturb the very policy which lies at the root of all the insolvent laws." (Roberts vs. Edie 85 Md 181, 36 Atl. 820, 822).
"When control of a bank for liquidation purposes is taken by the superintendent of banks, the question of preference creates in reality a controversy between the depositor claiming a preference
and the other depositors who are general creditors, inasmuch as the assets in which all are to participate are diminished to the extent of whatever preferences are allowed. The creation of
preferences, generally speaking, should therefore be discouraged except in cases where the right thereto is clearly established. As said in Cavin v. Gleason, 105 N.Y. 256, at page 262, 11 N.E.
504,506:
"The equitable doctrine that, as between creditors, equality is equity, admits, so far as we know, of no exception founded on the greater supposed sacredness of one debt, or that it arose out of a
violation of duty, or that its loss involves greater apparent hardship in one case than another, unless it appears, in addition, that there is some specific recognized equity founded on some
agreement, or the relation of the debt to the assigned property, which entitles the claimant, according to equitable principles, to preferential payment". (Ramisch vs. Fulton, 41 Ohio App. 443,180
N.E. 735).
"Ordinary deposit becomes bank's money and creates debtor-creditor relation, precluding preference as against hank's receive (Annex v. Union Savings Bank & Trust Co. of Davenport, 220 Iowa
712, 263 N.W. 495).
"Where judgment was rendered against bank after bank was in custody of liquidator, judgment creditor was not entitled to preference of liquidator, judgment" (Thomas H. Briggs & Sons, Inc. vs.
Allen, 207 N. C. 10, 175 S. E. 838).
 17

7. G.R. No. 86227 January 19, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION and MALAYANG SAMAHAN NG MGA MANGAGAWA SA ATLAS TEXTILE DEVELOPMENT CORPORATION, respondents.
The Chief Legal Counsel, Development Bank of the Philippines for petitioner.

VITUG, J.:
This "petition for review on certiorari" ( in reality a petition for certiorari), filed by the Development Bank of the Philippines ("DBP"), seeks the reversal of the decision of the National Labor Relations
Commission ("NLRC"), affirming that of the Labor Arbiter, which holds the petitioner, along with Atlas Textile Development Corporation ("ATLAS"), liable to the private respondents for wage
differentials, "illegal" salary deductions, separation pay, and similar money claims.
The private respondents were employees of ATLAS, a textile firm, which hypothecated its certain assets to DBP. After ATLAS defaulted in its obligations, DBP foreclosed on the mortgage in
March 1985. The latter acquired the mortgaged assets by virtue of the foreclosure sale.
The private respondents filed their aforementioned claim, on 30 October 1985, against both ATLAS and DBP. The Labor Arbiter ruled for the private respondents. On appeal by DBP, the decision
was sustained by the NLRC.
Hence, the instant petition.
The petitioner contends that it is error on the part of the public respondent to consider the workers' preference under Article 110 of the Labor Code over that of DBP's mortgage lien.
The issue has been put to fore in a number of cases brought to and decided by this Court.
In Republic vs. Peralta, 150 SCRA 37, the Court, through Mr. Justice Feliciano, ruled:
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 does 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
 18

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 Insolvent, but not to other assets owned by the Insolvent. And even in respect of such tobacco and tobacco products produced by 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 110 of the Labor Code was later amended by Republic Act
No. 6715 which became effective on 21 march 1989. And so modified, the provision thenceforth provided:
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 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.
The effects of the amendatory law were put to issue and passed upon in subsequent cases. In Development Bank of the Philippines vs. National Labor Relations Commission, 183 SCRA 328, the
Court, through, Mme. Justice Melencio-Herrera, elucidated:
The amendment expands worker preference to cover not only unpaid wages but also other monetary claims to which even claims of the Government must be deemed subordinate.
xxx xxx xxx
Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does this mean then that liquidation proceedings have been done away with?
We opine in the negative upon the following considerations:
1. Because of its impact on the entire system of credit,
Article 110 of the labor Code cannot be viewed in isolation but must be read in relation to the Civil Code scheme on classification and preference of credits.
xxx xxx xxx
2. In the same way that the Civil Code provisions on classification of credits and the Insolvency Law have been brought into harmony, so also must the kindered provisions of the Labor Law be
made to harmonize with those laws.
3. In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvent's 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 Baretto vs. Villanueva, No. L-14938,
December 29, 1962, 6 SCRA 928). The rationale therefore has been expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November 1989), . . .
4. A distinction should be made between a preference of credit and a lien. 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.
xxx xxx xxx
6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean "absolute preference," the same should be given only prospective effect in line with the cardinal rule
that laws have no retroactive effect, unless the contrary is provided (Article 4, Civil Code). Thereby, any infringement on the constitutional guarantee on non-impairment of the obligation of
contracts (Section 10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the amendatory law, RA No. 6715. To give Article 110
retroactive effect would be to wipe out the mortgage in DBP's favor and expose it to a risk which is sought to protect itself against by requiring a collateral in the form of real property.
In fine, the right of preference given to workers under Article 110 of the Labor Code cannot exist in any effective way prior to the time of its presentation in distribution proceedings. It 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 of the payment of his debts and other lawful obligations. Thereby, an orderly determination of preference of creditors' claims is assured
 19

(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 proceeding 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.
The ruling was reiterated in Development Bank of the Philippines vs. National Labor Relations Commission, 186 SCRA 841, as well as cases thereafter, and just recently in Development Bank of
the Philippines vs. NLRC, 218 SCRA 183.
The case at bench concerns monetary claims of workers that are not involved in judicial proceedings in rem in adjudication of claims of creditors vis-a-vis the assets of the debtor, nor have such
claims accrued after the effectivity of Republic Act 6715. The petition thus raises issues heretofore squarely resolved in our aforequoted decisions. To recapitulate.
(1) Article 110 of the Labor Code, as amended, must be viewed and read in conjunction with the provisions of the Civil Code on concurrence and preferences of credits;
(2) The aforesaid provisions of the Civil Code, including Article 110 of the Labor Code, require judicial proceedingsin rem in adjudication of creditors' claims against the debtor's assets to become
operative;
(3) Republic Act No. 6715 has the effect of expanding the "worker preference" to cover not only unpaid wages but also other monetary claims of laborers, to which even claims of the Government
must be deemed subordinate; and
(4) The amendatory provisions of Republic Act 6715, which took effect on 21 march 1989, should only be given prospective application.
WHEREFORE, the petition is GRANTED. The assailed decision of public respondent, National Labor Relations Commission and that of the Labor Arbiter, insofar as the latter holds the petitioner
liable for monetary claims of private respondents, are hereby REVERSED and SET ASIDE.
SO ORDERED.

8. G.R. No. 78261-62 March 8, 1989

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
HON. LABOR ARBITER ARIEL C. SANTOS, PHILIPPINE ASSOCIATION OF FREE LABOR UNIONS (PAFLU-RMC CHAPTER) and its members, MICHAEL PENALOSA, ET AL.,
SAMAHANG DIWANG MANGGAGAWA SA RMC-FFW CHAPTER, and its members, JAIME ARADA, ET AL., respondents.
The Chief Legal Counsel for petitioner DBP.
Pablo B. Castillon for private respondents.
Reynaldo B. Aralar & Associates for the Arada respondents.
Sisenando R. Villaluz, Jr. for individual respondents.

GUTIERREZ, JR., J.:

This petition calls for the interpretation of Article 110 of the Labor Code which gives the workers preferences as regards wages in case of liquidation or bankruptcy of an employer's business.
Petitioner Development Bank of the Philippines (DBP) maintains the Article 110 does not apply where there has been an extra-judicial foreclosure proceeding while the respondents claim
otherwise. Labor Arbiter Ariel C. Santos sustained the private respondent's position. Petitioner DBP has now elevated the case to us by way of this petition for certiorari.
 20

On November 29,1984, in NLRC-NCR Case No. 2517-84 entitled "Philippine Association of Free Labor Unions (PAFLU-RMC Chapter) and its Members v. Riverside Mills Corporation, et al.",
Labor Arbiter Manuel Caday awarded separation pay, wage and/or living allowance increases and 13th month pay to the individual complainants who comprise some of the respondents in this
case.
On March 18, 1985, Labor Arbiter Teodorico Dogelio likewise awarded separation pay, vacation and sick leave pay and unpaid increases in the basic wage and allowances to the other private
respondents herein in NLRC Case No. NCR-7-2577-84 entitled "Michael Penalosa, Jose Garcia and Apolinar Ray, et al., v. Riverside Mills Corporation, et al., and Samahang Diwang
Manggagawa sa RMC-FFW Chapter, et al., v. Riverside Mills Corporation (RMC)." On March 29, 1985, after the judgment had become final and executory, Dogelio issued a writ of execution
directing NLRC Deputy Sheriff Juanita Atienza to collect the total sum of Eighty Five Million Nine Hundred Sixty One thousand Fifty-Eight & 70/100 Pesos (P85,961,058.70). The Deputy Sheriff,
however, failed to collect the amount so he levied upon personal and real properties of RMC.
On April 25, 1985, a notice of levy on execution of certain real properties was annotated on the certificate of title filed with the Register of Deeds of Pasig, Metro Manila, where all the said
properties are situated.
Meanwhile in the other development which led to this case, petitioner DBP obtained a writ of possession on June 7, 1985 from the Regional Trial Court (RTC) of Pasig of all the properties of RMC
after having extra-judicially foreclosed the same at public auction earlier in 1983. DBP subsequently leased the said properties to Egret Trading and Manufacturing Corporation, Rosario Textile
Mills and General Textile Mills.
The writ of possession prevented the scheduled auction sale of the RMC properties which were levied upon by the private respondents. As a result, on June 19, 1985, the latter filed an incidental
petition with the NLRC to declare their preference over the levied properties. The petition entitled "PAFLU-RMC Chapter and its members, Michael Penalosa, et al., and the Samahang Diwang
Manggagawa sa RMC-FFW Chapter and its members v. RMC and DBP, et al." was docketed as NLRC Case No. NCR-7-2577-84. Petitioner DBP filed its position paper and memorandum in
answer to the petition.
On October 31, 1985, Dogelio issued an order recognizing and declaring the respondents' first preference as regards wages and other benefits due them over and above all earlier encumbrances
on the aforesaid properties/assets of said company, particulary those being asserted by respondent Development Bank of the Philippines.' (p. 84, Rollo)
The petitioner appealed the order of Dogelio to the NLRC. The latter in turn, set aside the order and remanded the case to public respondent Labor Arbiter Santos for further proceedings.
Meanwhile, another set of complainants (who are also named as respondents herein) filed, on April 7, 1986, a complaint for separation pay, underpayment, damages, etc., entitled 'Jaime Arada,
et al. v. RMC, DBP, Egret Trading and Manufacturing Corp., docketed as NLRC Case No. NCR-4-1278-86." This case was subsequently consolidated with the case pending before respondent
Santos. Accordingly, the latter conducted several hearings where the parties, particulary DBP, General Textile Mills, Inc., and Rosario Textile Mills, Inc., were given the opportunity to argue their
respective theories of the case. Eventually, all the parties agreed that the case shall be submitted for decision after their filing of positions papers and/or memorandums.
On March 31, 1987, public respondent Santos rendered the questioned decision, the dispositive portion of which reads:
WHEREFORE, it is hereby declared that all the complainants in the above- entitled cases, as former employees of respondent Riverside Mills Corporation, enjoy first preference as regards
separation pay, unpaid wages and other benefits due them over and above all earlier encumbrances on all of the assets/properties of RMC specifically those being asserted by respondent DBP.
As a consequence of the above declaration, the decision dated March 18, 1983 of the then Hon. Arbiter Teodorico Dogelio should be immediately enforced against DBP who is hereby directed to
pay all the monetary claims of complainants who were former employees of respondent RMC.
Anent the Arada case, DBP is hereby directed to pay all the amounts as indicated opposite the names of complainants listed from page I to page 5 of Annex "A" of complainants' complaint
provided that their names are not among those listed in the Penalosa case.
It is hereby also declared that former employees whose names are not listed in the complainants' position papers but can prove that they were former employees of RMC prior to its bankruptcy,
should also be paid the same monetary benefits being granted to herein complainants.
Finally, DBP is hereby ordered to deposit with the National Labor Relations Commission the proceeds of the sale of the assets of RMC between DBP on one hand and General Textile Mills, Inc.
and/ or Rosario Textile Mills, Inc., on the other hand and that future payment being made by the latter to the former should be deposited with the National Labor Relations Commission for proper
disposition. (pp. 174-175, Rollo)
Hence, this petition.
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Petitioner DBP maintains that the public respondent misinterpreted Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor
Code in that the said respondent upheld the existence of the worker's preference over and above earlier encumbrances on the properties of RMC despite the absence of any bankruptcy or
liquidation proceeding instituted against the latter. The petitioner argues that there must be a judicial declaration, or at the very least, a cognizance by an appropriate court or administrative agency
of bankruptcy or inability of the employer to meet its obligations.
On the other hand, the respondents contend that under both Article 110 and its implementing rule, the claims of the laborers for unpaid wages and other monetary benefits due them for services
rendered prior to bankruptcy enjoy first preference in the satisfaction of credits against a bankrupt company; that the word "bankruptcy" in the Labor Code is used in its generic sense, meaning
that condition of inability to pay one's debt; and that Article 110 of the Labor Code is not confined to the situation contemplated in Articles 2236-2245 of the Civil Code where all the preferred
creditors must necessarily be convened and the import of their claims ascertained.
We apply the rule expressed in Republic v. Peralta (150 SCRA 37 [1988] ), where we stated:
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, prefer red or non-preferred, may be
adjudicated in a binding manner. (Barreto v. Villanueva, 1 SCRA 288 [ 1961] ). (pp. 44-45)
In the above quoted case, there was a voluntary insolvency proceeding instituted by the employer. The respondents, however, contend that since in the case at bar there is only an extra-judicial
proceeding, Article 110 is still the only law applicable without regard to the provisions of the Civil Code.
We do not agree with this contention.
Article 110 of the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules and Regulations Implementing the Labor Code provide:
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. Unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer.
Article 10. Payment of wages in case of bankruptcy. Unpaid wages earned by the employee 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 the assets of the employer.
It is quite clear from the provisions 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. Following the rule in Republic v. Peralta, supra, to hold
that Article 110 is also applicable in extra-judicial 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
proceeding. Therefore, as stated earlier, Article 110 must not be viewed in isolation and must always be reckoned with the provisions of the Civil Code.
There was no issue of judicial vis-a-vis extra-judicial proceedings in the Republic v. Peralta interpretation of Article 110 but the necessity of a judicial adjudication was pointed out when we
explained the impact of Article 110 on the concurrence and preference of credits provided in the Civil Code.
We stated:
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 cannot be assumed simpliciter that the legislative authority, by using Article 110 of the words 'first preference'
and any provisions 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 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.
Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of credits may be applied was explained by this Court in the
case of Philippine Savings Bank v. Lantin (124 SCRA 476 [1983] ). We said:
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The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement of a decedent's 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.
Insolvency proceedings and settlement of a decedent's 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 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 claim 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 Barreto case ... .
The claims of all creditors whether preferred or non-preferred, the identification of the preferred ones and the totality of the employer's asset should be brought into the picture, There can then be
an authoritative, fair, and binding adjudication instead of the piece meal settlement which would result from the questioned decision in this case.
We, therefore, hold that Labor Arbiter Ariel C. Santos committed grave abuse of discretion in ruling that the private respondents may enforce their first preference in the satisfaction of their claims
over those of the petitioner in the absence of a declaration of bankruptcy or judicial liquidation of RMC. There is, of course, nothing in this decision which prevents the respondents from instituting
involuntary insolvency or any other appropriate proceeding against their employer RMC where respondents' claims can be asserted with respect to their employer's assets.
WHEREFORE, the petition is hereby GRANTED. The questioned decision of the public respondent is ANNULLED and SET ASIDE. The Temporary Restraining Order we issued on May 20, 1987
enjoining the enforcement of the questioned decision is made PERMANENT. No costs.
SO ORDERED.