PCI LEASING AND FINANCE, INC., G.R. No.

176381

Petitioner,

Present:

CARPIO, J., Chairperson,

- versus - NACHURA,

PERALTA,

ABAD, and

MENDOZA, JJ.

TROJAN METAL INDUSTRIES

INCORPORATED, WALFRIDO

DIZON, ELIZABETH DIZON, Promulgated:

and JOHN DOE,

Respondents. December 15, 2010

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CARPIO, J.:

The Case
This is a petition for review1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the 5 October
2006 Decision2 and the 23 January 2007 Resolution3 of the Court of Appeals in CA-
G.R. CV No. 75855. The 5 October 2006 Decision set aside the 23 July 2002
Decision4 of the Regional Trial Court (Branch 79) of Quezon City in Civil Case
No. Q-99-37559, which granted petitioners complaint for recovery of sum of money
and personal property with prayer for the issuance of a writ of replevin. The 23
January 2007 Resolution denied petitioners motion for reconsideration.

The Facts

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner
PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan,
PCILF offered to buy various equipment TMI owned, namely: a Verson double action
hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-
clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a
YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe
machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI
agreed. PCILF and TMI immediately executed deeds of sale5 evidencing TMIs sale to
PCILF of the various equipment in consideration of the total amount
of P 2,865,070.00.

PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997, whereby the
latter leased from the former the various equipment it previously owned. Pursuant to
the lease agreement, TMI issued postdated checks representing 24 monthly
installments. The monthly rental for the Verson double action hydraulic press with
cushion was in the amount of P62,328.00; for the Hinohara powerpress 75-tons
capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-
tons capacity, the YMGP powerpress 30-tons capacity, and the
YMGP powerpress 15-tons capacity, the monthly rental was in the amount
of P49,259.00; and for the lathe machine, the vertical milling machine, and the radial
drill, the monthly rental was in the amount of P22,205.00.

The lease agreement required TMI to give PCILF a guaranty deposit

of P1,030,350.00,7 which would serve as security for the timely performance of TMIs
obligations under the lease agreement, to be automatically forfeited should TMI return
the leased equipment before the expiration of the lease agreement.

Further, spouses Walfrido and Elizabeth Dizon, as TMIs President and Vice-
President, respectively executed in favor of PCILF a Continuing Guaranty of Lease
Obligations.8 Under the continuing guaranty, the Dizon spouses agreed to
immediately pay whatever obligations would be due PCILF in case TMI failed to
meet its obligations under the lease agreement.

To obtain additional loan from another financing company,9 TMI used the leased
equipment as temporary collateral.10PCILF considered the second mortgage a
violation of the lease agreement. At this time, TMIs partial payments had
reached P1,717,091.00.11 On 8 December 1998, PCILF sent TMI a demand letter12 for
the payment of the latters outstanding obligation. PCILFs demand remained
unheeded.

On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City
a complaint13 against TMI, spouses Dizon, and John Doe (collectively referred to as
respondents hereon) for recovery of sum of money and personal property with prayer
for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.

On 7 September 1999, the RTC issued the writ of replevin14 PCILF prayed for,
directing the sheriff to take custody of the leased equipment. Not long after, PCILF
sold the leased equipment to a third party and collected the proceeds amounting
to P1,025,000.00.15

In their answer,16 respondents claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCILF and TMI. Respondents
explained that in a simulated financial lease, property of the debtor would be sold to
the creditor to be repaid through rentals; at the end of the lease period, the property
sold would revert back to the debtor. Respondents prayed that they be allowed to
reform the lease agreement to show the true agreement between the parties, which was
a loan secured by a chattel mortgage.

The Ruling of the RTC

In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint.
The RTC ruled that the lease agreement must be presumed valid as the law between
the parties even if some of its provisions constituted unjust enrichment on the part of
PCILF. The dispositive portion of its Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI

Leasing and Finance, Inc. and against defendants Trojan
Metal, Walfrido Dizon, and Elizabeth Dizon, as follows:

1. Ordering the plaintiff to be entitled to the possession of herein

machineries.

2. Ordering the defendants to pay the remaining rental obligation in

the amount of Php 888,434.48 plus legal interest from the date of
filing of the complaint;

3. Ordering defendant to pay an attorneys fees in the amount

of Php 50,000.00;

4. Ordering the defendant to pay the cost of suit.

SO ORDERED.17

Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling
that PCILF was entitled to the possession of TMIs equipment and that respondents
still owed PCILF the balance of P888,423.48.
 The Ruling of the Court of Appeals

The Court of Appeals ruled that the sale with lease agreement was in fact a loan
secured by chattel mortgage. The Court of Appeals held that since PCILF sold the
equipment to a third party for P1,025,000.00 and TMI paid PCILF a guaranty deposit
of P1,030,000.00, PCILF had in its hands the sum of P2,055,250.00, as against TMIs
remaining obligation of P888,423.48, or an excess of P1,166,826.52, which should be
returned to TMI in accordance with Section 14 of the Chattel Mortgage Law.

Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of
the RTC. The Court of Appeals entered a new one dismissing PCILFs complaint and
directing PCILF to pay TMI, by way of refund, the amount of P1,166,826.52.
The decretal part of its Decision reads:

WHEREFORE, premises considered, the July 23, 2002 Decision of the

Regional Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-
37559, is hereby REVERSED and SET ASIDE, and a new one entered
DISMISSING the complaint and DIRECTING the plaintiff-appellee PCI
Leasing and Finance, Inc. to PAY, by way of REFUND, to the defendant-
appellant Trojan Metal Industries, Inc., the net amount of Php 1,166,826.52.

SO ORDERED.18

The Issues

The issues for resolution are (1) whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by chattel mortgage; and (2)
whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.
 The Courts Ruling

The petition lacks merit.

PCILF contends that the transaction between the parties was a sale and leaseback
financing arrangement where the client sells movable property to a financing
company, which then leases the same back to the client. PCILF insists the transaction
is not financial leasing, which contemplates extension of credit to assist a buyer in
acquiring movable property which the buyer can use and eventually own. PCILF
claims that the sale and leaseback financing arrangement is not contrary to law,
morals, good customs, public order, or public policy. PCILF stresses that the guaranty
deposit should be forfeited in its favor, as provided in the lease agreement. PCILF
points out that this case does not involve mere failure to pay rentals, it deals with a
flagrant violation of the lease agreement.

Respondents counter that from the very beginning, transfer to PCILF of ownership
over the subject equipment was never the intention of the parties. Respondents claim
that under the lease agreement, the guaranty deposit would be forfeited if TMI
returned the leased equipment to PCILF before the expiration of the lease agreement;
thus, since TMI never returned the leased equipment voluntarily, but through a writ
of replevin ordered by the RTC, the guaranty deposit should not be forfeited.

Since the lease agreement in this case was executed on 8 April 1997, Republic Act
No. 5980 (RA 5980), otherwise known as the Financing Company Act, governs as to
what constitutes financial leasing. Section 1, paragraph (j) of the New Rules and
Regulations to Implement RA 598019 defines financial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending credit

through a non-cancelable contract under which the lessor purchases or acquires
at the instance of the lessee heavy equipment, motor vehicles, industrial
machinery, appliances, business and office machines, and other movable
property in consideration of the periodic payment by the lessee of a fixed
 amount of money sufficient to amortize at least 70% of the purchase price or
acquisition cost, including any incidental expenses and a margin of profit, over
the lease period. The contract shall extend over an obligatory period during
which the lessee has the right to hold and use the leased property and shall bear
the cost of repairs, maintenance, insurance, and preservation thereof, but with
no obligation or option on the part of the lessee to purchase the leased property
at the end of the lease contract.

The above definition of financial leasing gained statutory recognition with the
enactment of Republic Act No. 8556 (RA 8556), otherwise known as the Financing
Company Act of 1998.20 Section 3(d) of RA 8556 defines financial leasing as:

a mode of extending credit through a non-cancelable lease contract under

which the lessor purchases or acquires, at the instance of the lessee, machinery,
equipment, motor vehicles, appliances, business and office machines, and other
movable or immovable property in consideration of the periodic payment by
the lessee of a fixed amount of money sufficient to amortize at least seventy
(70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two
(2) years during which the lessee has the right to hold and use the leased
property with the right to expense the lease rentals paid to the lessor and bears
the cost of repairs, maintenance, insurance and preservation thereof, but with
no obligation or option on his part to purchase the leased property from the
owner-lessor at the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance

company purchases on behalf of a cash-strapped lessee the equipment the latter wants
to buy but, due to financial limitations, is incapable of doing so. The finance company
then leases the equipment to the lessee in exchange for the latters periodic payment of
a fixed amount of rental.

In this case, however, TMI already owned the subject equipment before it transacted
with PCILF. Therefore, the transaction between the parties in this case cannot be
deemed to be in the nature of a financial leasing as defined by law.
The facts in the instant case are analogous to those in Cebu Contractors Consortium
Co. v. Court of Appeals.21 There, Cebu Contractors Consortium Co. (CCCC)
approached Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC
agreed to extend financial assistance to CCCC but, instead of a loan with collateral,
MLFC induced CCCC to adopt a sale and leaseback scheme. Under the scheme,
several of CCCCs equipment were made to appear as sold to MLFC and then leased
back to CCCC, which in turn paid lease rentals to MLFC. The rentals were treated as
installment payments to repurchase the equipment.

The Court held in Cebu Contractors Consortium Co. v. Court of Appeals22 that the
transaction between CCCC and MLFC was not one of financial leasing as defined by
law, but simply a loan secured by a chattel mortgage over CCCCs equipment. The
Court went on to explain that where the client already owned the equipment but
needed additional working capital and the finance company purchased such
equipment with the intention of leasing it back to him, the lease agreement was
simulated to disguise the true transaction that was a loan with security. In that
instance, continued the Court, the intention of the parties was not to enable the client
to acquire and use the equipment, but to extend to him a loan.

Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower came to

Investors Finance Corporation (IFC) to secure a loan with his heavy equipment and
machinery as collateral. The parties executed documents where IFC was made to
appear as the owner of the equipment and the borrower as the lessee. As consideration
for the lease, the borrower-lessee was to pay monthly amortizations over a period of
36 months. The parties executed a lease agreement covering various equipment
described in the lease schedules attached to the lease agreement. As security, the
borrower-lessee also executed a continuing guaranty.

The Court in Investors Finance Corporation v. Court of Appeals24 held that the
transaction between the parties was not a true financial leasing because the intention
of the parties was not to enable the borrower-lessee to acquire and use the heavy
equipment and machinery, which already belonged to him, but to extend to him a loan
to use as capital for his construction and logging businesses. The Court held that the
lease agreement was simulated to disguise the true transaction between the parties,
which was a simple loan secured by heavy equipment and machinery owned by the
borrower-lessee. The Court differentiated between a true financial leasing and a loan
with mortgage in the guise of a lease. The Court said that financial leasing
contemplates the extension of credit to assist a buyer in acquiring movable property
which he can use and eventually own. If the movable property already belonged to the
borrower-lessee, the transaction between the parties, according to the Court, was a
loan with mortgage in the guise of a lease.

In the present case, since the transaction between PCILF and TMI involved equipment
already owned by TMI, it cannot be considered as one of financial leasing, as defined
by law, but simply a loan secured by the various equipment owned by TMI.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a
contract, their true intention is not expressed in the instrument purporting to
embody the agreement, by reason of mistake, fraud, inequitable conduct, or
accident, one of the parties may ask for the reformation of the instrument to the
end that such true intention may be expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true intention,
the former may ask for the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years.25 The right of action
for reformation accrued from the date of execution of the lease agreement on 8 April
1997. TMI timely exercised its right of action when it filed an answer26 on 14
February 2000 asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead of
a simulated financial leasing. Thus, upon TMIs default, PCILF was entitled to seize
the mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILFs sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of
its right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the parties was
simply a loan secured by a chattel mortgage. However, in reckoning the amount of the
principal obligation, the Court of Appeals should have taken into account the proceeds
of the sale to PCILF less the guaranty deposit paid by TMI. After deducting payments
made by TMI to PCILF, the balance plus applicable interest should then be applied
against the aggregate cash already in PCILFs hands.

Records show that PCILF paid TMI P2,865,070.0027 as consideration for acquiring
the mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit
of P1,030,350.00.28 Thus, the amount of the principal loan was P1,834,720.00,
which was the net amount actually received by TMI (proceeds of the sale of the
equipment to PCILF minus the guaranty deposit). Against the principal loan
of P1,834,720.00 plus the applicable interest should be deducted loan payments,
totaling P1,717,091.00.29 Since PCILF sold the mortgaged equipment to a third party
for P1,025,000.00,30the proceeds of the said sale should be applied to offset the
remaining balance on the principal loan plus applicable interest.

However, the exact date of the sale of the mortgaged equipment, which is needed to
compute the interest on the remaining balance of the principal loan, cannot be gleaned
from the facts on record. We thus remand the case to the RTC for the computation of
the total amount due from the date of demand on 8 December 1998 until the date of
sale of the mortgaged equipment to a third party, which amount due shall be offset
against the proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining balance of
the loan is the legal rate of 12% per annum, computed from the date PCILF sent a
demand letter to TMI on 8 December 1998. No interest can be charged prior to this
date because TMI was not yet in default prior to 8 December 1998. The interest due
shall also earn legal interest from the time it is judicially demanded, pursuant to
Article 2212 of the Civil Code, which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although
the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary of

existing rules on the computation of legal interest laid down by the Court
in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:

1. When an obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that which
may have been stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion
of the court at the rate of 6% per annum. No interest, however, shall be adjudged
on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time
the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when
such certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date the judgment of the court
is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. (Emphasis supplied)

Applying the rules in the computation of interest, the remaining balance of the
principal loan subject of the chattel mortgage must earn the legal interest of 12% per
annum, which interest, as long as unpaid, also earns legal interest of 12% per annum,
computed from the filing of the complaint on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals,32 we derive the following formula for the RTCs guidance:

TOTAL AMOUNT DUE = [principal partial payments made] + [interest +

interest on interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8
December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7

May 1999 x 12% x no. of years until date of sale to a third party

From the computed total amount should be deducted P1,025,000.00 representing the
proceeds of the sale already in PCILFs hands. The difference represents overpayment
by TMI, which the law requires PCILF to refund to TMI.

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:

Section 14. Sale of property at public auction; officers return; fees; disposition
of proceeds. x x x The proceeds of such sale shall be applied to the payment,
first, of the costs and expenses of keeping and sale, and then to the payment of
the demand or obligation secured by such mortgage, and the residue shall be
paid to persons holding subsequent mortgages in their order, and the balance,
after paying the mortgages, shall be paid to the mortgagor or person holding
under him on demand.
Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the
balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing
jurisprudence33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds.

TMIs right to the refund accrued from the time PCILF received the proceeds of the
sale of the mortgaged equipment. However, since TMI never made a counterclaim or
demand for refund due on the resulting overpayment after offsetting the proceeds of
the sale against the remaining balance on the principal loan plus applicable interest, no
interest applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence,34 the excess amount PCILF must refund to TMI is subject to interest at
12% per annum from finality of this Decision until fully paid.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the

5 October 2006 Decision and the 23 January 2007 Resolution of the Court of Appeals
in CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of
refund, the excess amount to be computed by the Regional Trial Court based on the
formula specified above, with interest at 12% per annum from finality of this Decision
until fully paid.

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XX
G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate
Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later
specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of
Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981
of the said appellate court, denying petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing
and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and
assigned several receivables with the former under a Receivable Purchase Agreement. To secure
the collection of the receivables assigned, private respondent executed a Chattel Mortgage over
certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering
Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the
properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed
to gain entry into private respondent's premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the
Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the
lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's filing of a
motion for reconsideration. After several incidents, the lower court finally issued on February 11,
1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to
break open the premises of private respondent to enforce said writ. The lower court reaffirmed its
stand upon private respondent's filing of a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private
respondent and removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized
by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of
replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the ground by means of bolts and the only way to
remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why
all that the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The
appellate court rejected petitioner's argument that private respondent is estopped from claiming that
the machine is real property by constituting a chattel mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner
has brought the case to this Court for review by writ of certiorari. It is contended by private
respondent, however, that the instant petition was rendered moot and academic by petitioner's act of
returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was
promulgated.

The contention of private respondent is without merit. When petitioner returned the subject motor
drive, it made itself unequivocably clear that said action was without prejudice to a motion for
reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative. 1 Considering that petitioner has reserved its right to question the
propriety of the Court of Appeals' decision, the contention of private respondent that this petition has
been mooted by such return may not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the machinery in
suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage constituted thereon is null and void, as contended
by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court,
speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal

property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they should not now be allowed to
make an inconsistent stand by claiming otherwise. Moreover, the subject house
stood on a rented lot to which defendants-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the property,
it does so when combined with other factors to sustain the interpretation that the
parties, particularly the mortgagors, intended to treat the house as personality.
Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung
Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the
validity of the chattel mortgage, it is the defendants-appellants themselves, as
debtors-mortgagors, who are attacking the validity of the chattel mortgage in this
case. The doctrine of estoppel therefore applies to the herein defendants-appellants,
having treated the subject house as personality.

Examining the records of the instant case, We find no logical justification to exclude the rule out, as
the appellate court did, the present case from the application of the abovequoted pronouncement. If
a house of strong materials, like what was involved in the above Tumalad case, may be considered
as personal property for purposes of executing a chattel mortgage thereon as long as the parties to
the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals
lays stress on the fact that the house involved therein was built on a land that did not belong to the
owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and We should not lay down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined by
the parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that
the parties to a contract may by agreement treat as personal property that which by nature would be
real property, as long as no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented
nor agreed that the machinery in suit be considered as personal property but was merely required
and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank
form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner
and not denied by the respondent, the status of the subject machinery as movable or immovable
was never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for
rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by
petitioner and again not refuted by respondent, the latter has indubitably benefited from said
contract. Equity dictates that one should not benefit at the expense of another. Private respondent
could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom,

From what has been said above, the error of the appellate court in ruling that the questioned
machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery
and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable
to the case at bar, the nature of the machinery and equipment involved therein as real properties
never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage.
Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the
more controlling jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed
and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private
respondent.

SO ORDERED.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
G.R. No. 34385 September 21, 1931

ALEJANDRA TORRES, ET AL., plaintiff-appellees,

vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the deceased Jose B.
Henson, defendant-appellant.

x---------------------------------------------------------x

G.R. No. 34386 September 21, 1931

SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,

vs.
FRANCISCO LIMJAP, Special Administration of the estate of the deceased Jose B.
Henson, defendant-appellant.

Duran, Lim and Tuason for appellant.

Guevara, Francisco and Recto for appellees.

JOHNSON, J.:

These two actions were commenced in the Court of First Instance of Manila on April 16, 1930, for
the purpose of securing from the defendant the possession of two drug stores located in the City of
Manila, covered by two chattel mortgages executed by the deceased Jose B. Henson in favor of the
plaintiffs.

In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime, executed in their favor a
chattel mortgage (Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia
Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan
was for P20,000.

In the second case the plaintiffs alleged that they were the heirs of the late Don Florentino Torres;
and that Jose B. Henson, in his lifetime, executed in favor of Don Florentino Torres a chattel
mortgage (also Exhibit A) on his three drug stores known as Henson's Pharmacy, Farmacia Henson
and Botica Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and for
which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by agreement of
the parties.

In both cases the plaintiffs alleged that the defendant violated the terms of the mortgage and that, in
consequence thereof they became entitled to the possession of the chattels and to foreclose their
mortgages thereon. Upon the petition of the plaintiffs and after the filing of the necessary bonds, the
court issued in each case an order directing the sheriff of the City of Manila to take immediate
possession of said drug stores.

The defendant filed practically the same answer to both complaints. He denied generally and
specifically the plaintiffs' allegations, and set up the following special defenses:

(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are
null and void for lack of sufficient particularity in the description of the property mortgaged; and
(2) That the chattels which the plaintiffs sought to recover were not the same property described in
the mortgage.

The defendant also filed a counterclaim for damages in the sum of P20,000 in the first case and
P100,000 in the second case.

Upon the issue thus raised by the pleadings, the two causes were tried together by agreement of the
parties. After hearing the evidence adduced during the trial and on July 17, 1930, the Honorable
Mariano Albert, judge, in a very carefully prepared opinion, arrived at the conclusion (a) that the
defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of
the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the
plaintiffs, as mortgagees, were entitled to the possession of the drug stores Farmacia Henson at
Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment
was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said
drug stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs. The
dispositive part of the decision reads as follows:

En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas sus partes los
ordenes de fechas 16 y 17 de abril de presente ano, dictadas en las causas Nos. 37096 y
37097, respectivamente, y declara definitiva la entrega hecha a los demandantes por el
Sheriff de Manila de las boticas en cuestion. Se condena en costas al demandado en ambas
causas.

From the judgment the defendant appealed, and now makes the following assignments of error:

I. The lower court erred in failing to make a finding on the question of the sufficiency of the
description of the chattels mortgaged and in failing to hold that the chattel mortgages were
null and void for lack of particularity in the description of the chattels mortgaged.

II. The lower court erred in refusing to allow the defendant to introduce evidence tending to
show that the stock of merchandise found in the two drug stores was not in existence or
owned by the mortgagor at the time of the execution of the mortgages in question.

III. The lower court erred in holding that the administrator of the deceased is now estopped
from contesting the validity of the mortgages in question.

IV. The lower court erred in failing to make a finding on the counterclaims of the defendant.

With reference to the first assignment of error, we deem it unnecessary to discuss the question
therein raised, inasmuch as according to our view on the question of estoppel, as we shall
hereinafter set forth in our discussion of the third assignment of error, the defendant is estopped
from questioning the validity of these chattel mortgages.

In his second assignment of error the appellant attacks the validity of the stipulation in said
mortgages authorizing the mortgagor to sell the goods covered thereby and to replace them with
other goods thereafter acquired. He insists that a stipulation authorizing the disposal and substitution
of the chattels mortgaged does not operate to extend the mortgage to after-acquired property, and
that such stipulation is in contravention of the express provision of the last paragraph of section 7
Act No. 1508, which reads as follows:
 A chattel mortgage shall be deemed to cover only the property described therein and not like
or substituted property thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.

In order to give a correct construction to the above-quoted provision of our Chattel Mortgage Law
(Act No. 1508), the spirit and intent of the law must first be ascertained. When said Act was placed
on our statute books by the United States Philippine Commission on July 2, 1906, the primary aim of
that law-making body was undoubtedly to promote business and trade in these Islands and to give
impetus to the economic development of the country. Bearing this in mind, it could not have been the
intention of the Philippine Commission to apply the provision of section 7 above quoted to stores
open to the public for retail business, where the goods are constantly sold and substituted with new
stock, such as drug stores, grocery stores, dry-goods stores, etc. If said provision were intended to
apply to this class of business, it would be practically impossible to constitute a mortgage on such
stores without closing them, contrary to the very spirit about a handicap to trade and business, would
restrain the circulation of capital, and would defeat the purpose for which the law was enacted, to
wit, the promotion of business and the economic development of the country.

In the interpretation and construction of a statute the intent of the law-maker should always be
ascertained and given effect, and courts will not follow the letter of a statute when it leads away from
the true intent and purpose of the Legislature and to conclusions inconsistent with the spirit of the
Act. On this subject, Sutherland, the foremost authority on statutory construction, says:

The Intent of Statute is the Law. — If a statute is valid it is to have effect according to the
purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and
the primary rule of construction is to ascertain and give effect to that intent. The intention of
the legislature in enacting a law is the law itself, and must be enforced when ascertained,
although it may not be consistent with the strict letter of the statute. Courts will not follow the
letter of a statute when it leads away from the true intent and purpose of the legislature and
to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives
life to a legislative enactment. In construing statutes the proper course is to start out and
follow the true intent of the legislature and to adopt that sense which harmonizes best with
the content and promotes in the fullest manner the apparent policy and objects of the
legislature. (Vol. II Sutherland, Statutory Construction, pp. 693-695.)

A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and
binding —

. . . where the after-acquired property is in renewal of, or in substitution for, goods on hand
when the mortgage was executed, or is purchased with the proceeds of the sale of such
goods, etc. (11 C.J., p. 436.)

Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating
to after-acquired and substituted chattels. His views are based on the decisions of the supreme
courts of several states of the Union. He says: "A mortgage may, by express stipulations, be drawn
to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to
include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage
must expressly provide that such future acquisitions shall be held as included in the mortgage. ...
Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store
provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor
shall be included in and covered by the mortgage," the mortgage covers all after-acquired property
of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the
mortgagee the same as the property in possession of the mortgagor at the time the mortgage was
executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.)

In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of
section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature
of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question,
extending their effect to after-acquired property, is valid and binding; and (c) that the lower court
committed no error in not permitting the defendant-appellant to introduce evidence tending to show
that the goods seized by the sheriff were in the nature of after-acquired property.

With reference to the third assignment of error, we agree with the lower court that, from the facts of
record, the defendant-appellant is estopped from contenting the validity of the mortgages in
question. This feature of the case has been very ably and fully discussed by the lower court in its
decision, and said discussion is made, by reference, a part of this opinion.

As to the fourth assignment of error regarding the counterclaims of the defendant-appellant, it may
be said that in view of the conclusions reached by the lower court, which are sustained by this court,
the lower court committed no error in not making any express finding as to said counterclaims. As a
matter of form, however, the counter-claims should have been dismissed, but as the trial court
decided both cases in favor of the plaintiffs and confirmed and ratified the orders directing the sheriff
to take possession of the chattels on behalf of the plaintiffs, there was, in effect, a dismissal of the
defendant's counterclaims.

For all of the foregoing, we are of the opinion and so hold that the judgment appealed from is in
accordance with the facts and the law, and the same should be and is hereby affirmed, with costs.
So ordered.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
 [G.R. No. 103576. August 22, 1996]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA

PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.

DECISION
VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that

purports to likewise extend its coverage to obligations yet to be contracted or
incurred? This question is the core issue in the instant petition for review
on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner
"Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for
and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way of
security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect -

"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof,
then this mortgage shall be null and void. x x x.

"In case the MORTGAGOR executes subsequent promissory note or notes either as a
renewal of the former note, as an extension thereof, or as a new loan, or is given any
other kind of accommodations such as overdrafts, letters of credit, acceptances and
bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage
shall also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage
shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR
to the MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this mortgage."
[1]

In due time, the loan of P3,000,000.00 was paid by petitioner

corporation. Subsequently, in 1981, it obtained from respondent bank
additional financial accommodations totalling P2,700,000.00. These
[2]

borrowings were on due date also fully paid.

On 10 and 11 January 1984, the bank yet again extended to petitioner
corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each. Due to financial constraints, the loan
was not settled at maturity. Respondent bank thereupon applied for an
[3]

extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the

Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an
action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-
12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by the
stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals which, on 14
[4]

August 1991, affirmed, "in all respects," the decision of the court a quo. The
motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied
on 04 March 1992 by this Court for having been insufficient in form and
substance. Private respondent filed a motion to dismiss the petition while
petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment thereon. [5]

Except in criminal cases where the penalty of reclusion perpetua or death

is imposed which the Court so reviews as a matter of course, an appeal from
[6]

judgments of lower courts is not a matter of right but of sound judicial

discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that
can unnecessarily clog the docket and needlessly consume the time of the
Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective for,
after all, the dispensation of justice is the core reason for the existence of
courts. In this instance, once again, the Court is constrained to relax the rules
in order to give way to and uphold the paramount and overriding interest of
justice.
Contracts of security are either personal or real. In contracts of personal
security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the personal commitment of
another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by
an encumbrance of property - in pledge, the placing of movable property in
the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting
to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit - upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, but that [7]

should the obligation be duly paid, then the contract is automatically

extinguished proceeding from the accessory character of the agreement. As
[8]

the law so puts it, once the obligation is complied with, then the contract of
security becomes, ipso facto, null and void. [9]

While a pledge, real estate mortgage, or antichresis may exceptionally

secure after-incurred obligations so long as these future debts are accurately
described, a chattel mortgage, however, can only cover obligations existing
[10]

at the time the mortgage is constituted. Although a promise expressed in a

chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however,
does not come into existence or arise until after a chattel mortgage agreement
covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower
[11]

to execute the agreement so as to cover the after-incurred obligation can

constitute an act of default on the part of the borrower of the financing
agreement whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law itself. One
of the requisites, under Section 5 thereof, is an affidavit of good faith. While it
is not doubted that if such an affidavit is not appended to the agreement, the
chattel mortgage would still be valid between the parties (not against third
persons acting in good faith ), the fact, however, that the statute has provided
[12]

that the parties to the contract must execute an oath that -

"x x x (the) mortgage is made for the purpose of securing the obligation specified in
the conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud." [13]

makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian
Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court said -
[14]

"x x x A mortgage that contains a stipulation in regard to future advances in the credit
will take effect only from the date the same are made and not from the date of the
mortgage." [15]

The significance of the ruling to the instant problem would be that since the
1978 chattel mortgage had ceased to exist coincidentally with the full payment
of the P3,000,000.00 loan, there no longer was any chattel mortgage that
[16]

could cover the new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case
should be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." This prayer is not reflected in its complaint
[17]

which has merely asked for the amount of P3,000,000.00 by way of moral
damages. In LBC Express, Inc. vs. Court of Appeals, we have said:
[18] [19]

"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent
bank as an artificial person."
[20]

While Chua Pac is included in the case, the complaint, however, clearly states
that he has merely been so named as a party in representation of petitioner
corporation.
Petitioner corporation's counsel could be commended for his zeal in
pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:

"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is
one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate jurisdiction." (Italics
[21]

supplied.)

The statement is not called for. The Court invites counsel's attention to the
admonition in Guerrero vs. Villamor; thus: [22]

"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the
respect due to the courts of justice and judicial officers and x x x (to) insist on similar
conduct by others.' This respectful attitude towards the court is to be observed, `not
for the sake of the temporary incumbent of the judicial office, but for the maintenance
of its supreme importance.' And it is `through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect due to the
courts and judicial officers x x x.'"
[23]

The virtues of humility and of respect and concern for others must still live on
even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal recourse
by private respondent as may still be warranted as an unsecured creditor. No
costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
 [G.R. No. 110048. November 19, 1999]

SERVICEWIDE SPECIALISTS, INC. petitioner, vs. COURT OF APPEALS,

HILDA TEE, & ALBERTO M. VILLAFRANCA, respondents.

DECISION
PURISIMA, J.:

This is a petition for review on certiorari under Rule 45 of the Decision of the
Court of Appeals[1] in CA-G.R. CV No. 19571, affirming the judgment of the Regional
Trial Court of Manila, Branch XX, dismissing Civil Case No. 84-25763 for replevin
and damages.
The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan automobile,
with Motor No. 2E-08927, Serial No. A112A-5297, Model No. 1976.
The appellate court culled the facts that matter as follows:[2]

"On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a Colt Galant
xxx from Fortune Motors (Phils.) Corporation.On the same date, she executed a
promissory note for the amount of P56,028.00, inclusive of interest at 12% per
annum, payable within a period of 48 months starting August, 1976 at a monthly
installment of P1,167.25 due and demandable on the 17th day of each month (Exhibit
A, pp. 144, Orig. Records,). It was agreed upon, among others, that in case of default
in the payment of any installment the total principal sum, together with the interest,
shall become immediately due and payable (Exhibit A; p. 144, Orig. Records). As a
security for the promissory note, a chattel mortgage was constituted over the said
motor vehicle (Exhibit B, ibid.), with a deed of assignment incorporated therein such
that the credit and mortgage rights were assigned by Fortune Motors Corp. in favor of
Filinvest Credit Corporation with the consent of the mortgagor-debtor Leticia Laus
(Exhibits B-1 and B-2; p. 147, ibid.). The vehicle was then registered in the name of
Leticia L. Laus with the chattel mortgage annotated on said certificate. (Exhibit "H";
p. 154, ibid.)

On September 25, 1978, Filinvest Credit Corporation in turn assigned the credit in
favor of Servicewide Specialists, Inc. (Servicewide, for brevity) transferring unto the
latter all its rights under the promissory note and the chattel mortgage (Exhibit B-3; p.
149, ibid.) with the corresponding notice of assignment sent to the registered car
owner (Exhibit C; p. 150, Ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installment for that
month. The installments for the succeeding 17 months were not likewise fully paid,
hence on September 25, 1978, pursuant to the provisions of the promissory note,
Servicewide demanded payment of the entire outstanding balance of P46,775.24
inclusive of interests (Exhibits D and E; pp. 151-152, ibid.). Despite said formal
demand, Leticia Laus failed to pay all the monthly installments due until July 18,
1980.

On July 25, 1984, Servicewide sent a statement of account to Leticia Laus and
demanded payment of the amount of P86,613.32 representing the outstanding balance
plus interests up to July 25, 1985, attorneys fees, liquidated damages, estimated
repossession expense, and bonding fee (Exhibit F; p. 153, ibid.)

As a result of the failure of Leticia Laus to settle her obligation, or at least to surrender
possession of the motor vehicle for the purpose of foreclosure, Servicewide instituted
a complaint for replevin, impleading Hilda Tee and John Dee in whose custody the
vehicle was believed to be at the time of the filing of the suit.

In its complaint, plaintiff alleged that it had superior lien over the mortgaged vehicle;
that it is lawfully entitled to the possession of the same together with all its
accessories and equipments; (sic) that Hilda Tee was wrongfully detaining the motor
vehicle for the purpose of defeating its mortgage lien; and that a sufficient bond had
been filed in court. (Complaint with Annexes, pp. 1-13, ibid.).On July 30, 1984, the
court approved the replevin bond (p. 20, ibid.)

On August 1, 1984, Alberto Villafranca filed a third party claim contending that he is
the absolute owner of the subject motor vehicle duly evidenced by the Bureau of Land
Transportations Certificate of Registration issued in his name on June 22, 1984; that
he acquired the said mother vehicle from a certain Remedios D. Yang under a Deed of
Sale dated May 16, 1984; that he acquired the same free from all lien and
emcumbrances; and that on July 30, 1984, the said automobile was taken from his
residence by Deputy Sheriff Bernardo Bernabe pursuant to the seizure order issued by
the court a quo.

Upon motion of the plaintiff below, Alberto Villafranca was substituted as

defendant. Summons was served upon him. (pp. 55-56, ibid).

On March 20, 1985, Alberto Villafranca moved for the dismissal of the complaint on
the ground that there is another action pending between the same parties before the
Regional Trial Court of Makati, Branch 140, docketed as Civil Case No. 8310,
involving the seizure of subject motor vehicle and the indemnity bond posted by
Servicewide (Motion to Dismiss with Annexes; pp. 57-110, ibid.) On March 28, 1985,
the court granted the aforesaid motion (p. 122, ibid.), but subsequently the order of
dismissal was reconsidered and set aside (pp. 135-136, ibid.). For failure to file his
Answer as required by the court a quo, Alberto Villafranca was declared in default
and plaintiffs evidence was received ex parte.

On December 27, 1985, the lower court rendered a decision dismissing the complaint
for insufficiency of evidence. Its motion for reconsideration of said decision having
been denied, xxx.

In its appeal to the Court of Appeals, petitioner theorized that a suit for replevin
aimed at the foreclosure of a chattel is an action quasi in rem, and does not require the
inclusion of the principal obligor in the Complaint. However, the appellate court
affirmed the decision of the lower Court; ratiocinating, thus:

A cursory reading, however, of the Promissory Note dated May 14, 1976 in favor of
Fortune Motors (Phils.) Corp. in the sum of P56,028.00 (Annex A of Complaint, p. 7,
Original Records) and the Chattel Mortgage of the same date (Annex B of Complaint;
pp. 8-9, ibid.) will disclose that the maker and mortgagor respectively are one and the
same person: Leticia Laus. In fact, plaintiff-appellant admits in paragraphs (sic) nos. 2
and 3 of its Complaint that the aforesaid public documents (Annexes A and B thereof)
were executed by Leticia Laus, who, for reasons not explained, was never
impleaded. In the case under consideration, plaintiff-appellants main case is for
judicial foreclosure of the chattel mortgage against Hilda Tee and John Doe who was
later substituted by appellee Alberto Villafranca. But as there is no privity of contract,
not even a causal link, between plaintiff-appellant Servicewide Specialists, Inc. and
defendant-appellee Alberto Villafranca, the court a quo committed no reversible error
when it dismissed the case for insufficiency of evidence against Hilda Tee and
Alberto Villafranca since the evidence adduced pointed to Leticia Laus as the party
liable for the obligation sued upon (p. 2, RTC Decision).[3]

Petitioner presented a Motion for Reconsideration but in its Resolution [4] of May
10, 1993, the Court of Appeals denied the same, taking notice of another case pending
between the same parties xxx relating to the very chattel mortgage of the motor
vehicle in litigation.
Hence, the present petition for review on certiorari under Rule 45. Essentially, the
sole issue here is: Whether or not a case for replevin may be pursued against the
defendant, Alberto Villafranca, without impleading the absconding debtor-mortgagor?
Rule 60 of the Revised Rules of Court requires that an applicant for replevin must
show that he is the owner of the property claimed, particularly describing it, or is
entitled to the possession thereof.[5] Where the right of the plaintiff to the possession of
the specified property is so conceded or evident, the action need only be maintained
against him who so possesses the property. In rem action est per quam rem nostram
quae ab alio possidetur petimus, et semper adversus eum est qui rem possidet.[6]
Citing Northern Motors, Inc. vs. Herrera,[7] the Court said in the case of BA
Finance (which is of similar import with the present case):

There can be no question that persons having a special right of property in the goods
the recovery of which is sought, such as a chattel mortgagee, may maintain an action
for replevin therefor. Where the mortgage authorizes the mortgagee to take possession
of the property on default, he may maintain an action to recover possession of the
mortgaged chattels from the mortgagor or from any person in whose hands he may
find them.[8]

Thus, in default of the mortgagor, the mortgagee is thereby constituted as

attorney-in-fact of the mortgagor, enabling such mortgagee to act for and in behalf of
the owner. That the defendant is not privy to the chattel mortgage should be
inconsequential. By the fact that the object of replevin is traced to his possession, one
properly can be a defendant in an action for replevin. It is here assumed that the
plaintiffs right to possess the thing is not or cannot be disputed.[9] (Italics supplied)
However, in case the right of possession on the part of the plaintiff, or his
authority to claim such possession or that of his principal, is put to great doubt (a
contending party may contest the legal bases for plaintiffs cause of action or an
adverse and independent claim of ownership or right of possession may be raised by
that party), it could become essential to have other persons involved and impleaded
for a complete determination and resolution of the controversy. [10] In the case under
scrutiny, it is not disputed that there is an adverse and independent claim of ownership
by the respondent as evinced by the existence of a pending case before the Court of
Appeals involving subject motor vehicle between the same parties herein. [11] Its
resolution is a factual matter, the province of which properly lies in the lower Court
and not in the Supreme Court, in the guise of a petition for review on certiorari.For it
is basic that under Rule 45, this Court only entertains questions of law, and rare are
the exceptions and the present case does not appear to be one of them.
In a suit for replevin, a clear right of possession must be established. (Italics
supplied) A foreclosure under a chattel mortgage may properly be commenced only
once there is default on the part of the mortgagor of his obligation secured by the
mortgage. The replevin in this case has been resorted to in order to pave the way for
the foreclosure of what is covered by the chattel mortgage. The conditions essential
for such foreclosure would be to show, firstly, the existence of the chattel mortgage
and, secondly, the default of the mortgagor. These requirements must be shown
because the validity of the plaintiffs exercise of the right of foreclosure is inevitably
dependent thereon.[12]
 Since the mortgagees right of possession is conditioned upon the actual fact of
default which itself may be controverted, the inclusion of other parties, like the debtor
or the mortgagor himself, may be required in order to allow a full and conclusive
determination of the case. When the mortgagee seeks a replevin in order to effect the
eventual foreclosure of the mortgage, it is not only the existence of, but also the
mortgagors default on, the chattel mortgage that, among other things, can properly
uphold the right to replevy the property. The burden to establish a valid justification
for such action lies with the plaintiff. An adverse possessor, who is not the mortgagor,
cannot just be deprived of his possession, let alone be bound by the terms of the
chattel mortgage contract, simply because the mortgagee brings up an action for
replevin.[13]
Leticia Laus, being an indispensable party, should have been impleaded in the
complaint for replevin and damages. An indispensable party is one whose interest will
be affected by the courts action in the litigation, and without whom no final
determination of the case can be had. The partys interest in the subject matter of the
suit and in the relief sought are so inextricably intertwined with the other parties that
his legal presence as a party to the proceeding is an absolute necessity. In his absence,
there cannot be a resolution of the dispute of the parties before the Court which is
effective, complete, or equitable.
Conversely, a party is not indispensable to the suit if his interest in the
controversy or subject matter is distinct and divisible from the interest of the other
parties and will not necessarily be prejudiced by a judgment which does complete
justice to the parties in Court. He is not indispensable if his presence would merely
complete relief between him and those already parties to the action or will simply
avoid multiple litigation.[14] Without the presence of indispensable parties to a suit or
proceeding, a judgment of a Court cannot attain real finality.[15]
That petitioner could not locate the mortgagor, Leticia Laus, is no excuse for
resorting to a procedural short-cut. It could have properly availed of substituted
service of summons under the Revised Rules of Court.[16] If it deemed such a mode to
be unavailing, it could have proceeded in accordance with Section 14 of the same
Rule.[17] Indeed, petitioner had other proper remedies, it could have resorted to but
failed to avail of. For instance, it could have properly impleaded the mortgagor. Such
failure is fatal to petitioners cause.
With the foregoing disquisition and conclusion, the other issues raised by
petitioner need not be passed upon.
WHEREFORE, the Petition is DENIED and the Decision of the Court of
Appeals in CA-G.R. CV No. 19571 AFFIRMED. No pronouncement as to costs.
SO ORDERED.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
G.R. No. 92989 July 8, 1991

PERFECTO DY, JR. petitioner,

vs.
COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents.

Zosa & Quijano Law Offices for petitioner.

Expedito P. Bugarin for respondent GELAC Trading, Inc.

GUTIERREZ, JR., J.:

This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of the
Court of Appeals which ruled that the petitioner's purchase of a farm tractor was not validly
consummated and ordered a complaint for its recovery dismissed.

The facts as established by the records are as follows:

The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy purchased
a truck and a farm tractor through financing extended by Libra Finance and Investment Corporation
(Libra). Both truck and tractor were mortgaged to Libra as security for the loan.

The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a letter to
Libra requesting that he be allowed to purchase from Wilfredo Dy the said tractor and assume the
mortgage debt of the latter.

In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the petitioner's
request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the petitioner
over the tractor in question.

At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's failure to
pay the amortizations.

Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate release could
not be effected because Wilfredo Dy had obtained financing not only for said tractor but also for a
truck and Libra insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full
payment could be made for both. On November 22, 1979, a PNB check was issued in the amount of
P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy with the financing
firm. Payment having been effected through an out-of-town check, Libra insisted that it be cleared
first before Libra could release the chattels in question.

Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection case to
recover the sum of P12,269.80 was pending in another court in Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff was
able to seize and levy on the tractor which was in the premises of Libra in Carmen, Cebu. The
tractor was subsequently sold at public auction where Gelac Trading was the lone bidder. Later,
Gelac sold the tractor to one of its stockholders, Antonio Gonzales.

It was only when the check was cleared on January 17, 1980 that the petitioner learned about
GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an
action to recover the subject tractor against GELAC Trading with the Regional Trial Court of Cebu
City.

On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion of the
decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter of this
case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to
return the same to the plaintiff herein; directing the defendants jointly and severally to pay to
the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral
damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint with
costs against the petitioner. The Court of Appeals held that the tractor in question still belonged to
Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ of execution issued
in Civil Case No. R-16646.

The petitioner now comes to the Court raising the following questions:

A.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE

FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN
PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT TO
AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF
RESPONDENT GELAC TRADING INC.

B.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE

CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID
TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S CREDITORS,
THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE TRIAL COURT.

C.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE

FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT
THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS CO-
RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 AT WHICH TIME BOTH
RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE WAS
VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE AND
 RENDERED THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED
AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)

The respondents claim that at the time of the execution of the deed of sale, no constructive delivery
was effected since the consummation of the sale depended upon the clearance and encashment of
the check which was issued in payment of the subject tractor.

In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80 [1989]),
we stated that:

xxx xxx xxx

The rule is settled that the chattel mortgagor continues to be the owner of the property, and
therefore, has the power to alienate the same; however, he is obliged under pain of penal
liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised
Rules of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the instruments
of mortgage are binding, while they subsist, not only upon the parties executing them but
also upon those who later, by purchase or otherwise, acquire the properties referred to
therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged property in
favor of a third person, therefore, affects not the validity of the sale but only the penal liability
of the mortgagor under the Revised Penal Code and the binding effect of such sale on the
mortgagee under the Deed of Chattel Mortgage.

xxx xxx xxx

The mortgagor who gave the property as security under a chattel mortgage did not part with the
ownership over the same. He had the right to sell it although he was under the obligation to secure
the written consent of the mortgagee or he lays himself open to criminal prosecution under the
provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was obtained from
the mortgagee, the validity of the sale would still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject tractor.
There is no dispute that the consent of Libra Finance was obtained in the instant case. In a letter
dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and assume the
mortgage debt of his brother. The sale between the brothers was therefore valid and binding as
between them and to the mortgagee, as well.

Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the vendee
from the moment it is delivered to him in any of the ways specified in Articles 1497 to 1501 or in any
other manner signing an agreement that the possession is transferred from the vendor to the
vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable in the case at bar.

Article 1498 states:

Art. 1498. When the sale is made through a public instrument, the execution thereof shall be
equivalent to the delivery of the thing which is the object of the contract, if from the deed the
contrary does not appear or cannot clearly be inferred.

xxx xxx xxx

Article 1499 provides:

Article 1499. The delivery of movable property may likewise be made by the mere consent or
agreement of the contracting parties, if the thing sold cannot be transferred to the possession
of the vendee at the time of the sale, or if the latter already had it in his possession for any
other reason. (1463a)

In the instant case, actual delivery of the subject tractor could not be made. However, there was
constructive delivery already upon the execution of the public instrument pursuant to Article 1498
and upon the consent or agreement of the parties when the thing sold cannot be immediately
transferred to the possession of the vendee. (Art. 1499)

The respondent court avers that the vendor must first have control and possession of the thing
before he could transfer ownership by constructive delivery. Here, it was Libra Finance which was in
possession of the subject tractor due to Wilfredo's failure to pay the amortization as a preliminary
step to foreclosure. As mortgagee, he has the right of foreclosure upon default by the mortgagor in
the performance of the conditions mentioned in the contract of mortgage. The law implies that the
mortgagee is entitled to possess the mortgaged property because possession is necessary in order
to enable him to have the property sold.

While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor, his
right of ownership was not divested from him upon his default. Neither could it be said that Libra was
the owner of the subject tractor because the mortgagee can not become the owner of or convert and
appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said property continues to
belong to the mortgagor. The only remedy given to the mortgagee is to have said property sold at
public auction and the proceeds of the sale applied to the payment of the obligation secured by the
mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra Finance
has already foreclosed the mortgage and that it was the new owner of the subject tractor.
Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It was aware of
the transfer of rights to the petitioner.

Where a third person purchases the mortgaged property, he automatically steps into the shoes of
the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His right of
ownership shall be subject to the mortgage of the thing sold to him. In the case at bar, the petitioner
was fully aware of the existing mortgage of the subject tractor to Libra. In fact, when he was
obtaining Libra's consent to the sale, he volunteered to assume the remaining balance of the
mortgage debt of Wilfredo Dy which Libra undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was never intended nor could it be considered as
payment of the purchase price because the relationship between Libra and the petitioner is not one
of sale but still a mortgage. The clearing or encashment of the check which produced the effect of
payment determined the full payment of the money obligation and the release of the chattel
mortgage. It was not determinative of the consummation of the sale. The transaction between the
brothers is distinct and apart from the transaction between Libra and the petitioner. The contention,
therefore, that the consummation of the sale depended upon the encashment of the check is
untenable.

The sale of the subject tractor was consummated upon the execution of the public instrument on
September 4, 1979. At this time constructive delivery was already effected. Hence, the subject
tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in December,
1979. Well settled is the rule that only properties unquestionably owned by the judgment debtor and
which are not exempt by law from execution should be levied upon or sought to be levied upon. For
the power of the court in the execution of its judgment extends only over properties belonging to the
judgment debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771, January
23, 1991).

The respondents further claim that at that time the sheriff levied on the tractor and took legal custody
thereof no one ever protested or filed a third party claim.

It is inconsequential whether a third party claim has been filed or not by the petitioner during the time
the sheriff levied on the subject tractor. A person other than the judgment debtor who claims
ownership or right over levied properties is not precluded, however, from taking other legal remedies
to prosecute his claim. (Consolidated Bank and Trust Corp. v. Court of Appeals, supra) This is
precisely what the petitioner did when he filed the action for replevin with the RTC.

Anent the second and third issues raised, the Court accords great respect and weight to the findings
of fact of the trial court. There is no sufficient evidence to show that the sale of the tractor was in
1âw phi1

fraud of Wilfredo and creditors. While it is true that Wilfredo and Perfecto are brothers, this fact alone
does not give rise to the presumption that the sale was fraudulent. Relationship is not a badge of
fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud can not be presumed; it must be
established by clear convincing evidence.

We agree with the trial court's findings that the actuations of GELAC Trading were indeed violative of
the provisions on human relations. As found by the trial court, GELAC knew very well of the transfer
of the property to the petitioners on July 14, 1980 when it received summons based on the complaint
for replevin filed with the RTC by the petitioner. Notwithstanding said summons, it continued to sell
the subject tractor to one of its stockholders on August 2, 1980.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals promulgated
on March 23, 1990 is SET ASIDE and the decision of the Regional Trial Court dated April 8, 1988 is
REINSTATED.

SO ORDERED.

XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
X
 [G.R. No. 106435. July 14, 1999]

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES,

VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO, petitioners,
vs. HON. COURT OF APPEALS and DEVELOPMENT BANK OF
THE PHILIPPINES, respondents.

DECISION
GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in CA
G.R. CV No. 27861, promulgated on April 23, 1992,[1] affirming in toto the decision of the
Regional Trial Court of Makati[2] to award respondent banks deficiency claim, arising from a
loan secured by chattel mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA) obtained a
loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent Bank. By virtue of
this loan, petitioner PAMECA, through its President, petitioner Herminio C. Teves, executed a
promissory note for the said amount, promising to pay the loan by installment. As security for
the said loan, a chattel mortgage was also executed over PAMECAs properties in Dumaguete
City, consisting of inventories, furniture and equipment, to cover the whole value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent bank
extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public auction,
purchased the foreclosed properties for a sum of P322,350.00. On June 29, 1984, respondent
bank filed a complaint for the collection of the balance of P4,366,332.46[3] with Branch 132 of
the Regional Trial Court of Makati City against petitioner PAMECA and private petitioners
herein, as solidary debtors with PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the dispositive
portion of which we reproduce as follows:

WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly

and severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim
of the latter as of March 31, 1984, plus 21% interest per annum and other charges
from April 1, 1984 until the whole amount is fully paid and (2) the costs of the
suit. SO ORDERED.[4]

The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing the decision of the trial
court, and in not holding that the public auction sale of petitioner PAMECAs chattels
were tainted with fraud, as the chattels of the said petitioner were bought by private
respondent as sole bidder in only 1/6 of the market value of the property, hence
unconscionable and inequitable, and therefore null and void.

2. Respondent appellate court gravely erred in not applying by analogy Article 1484
and Article 2115 of the Civil Code by reading the spirit of the law, and taking into
consideration the fact that the contract of loan was a contract of adhesion.

3. The appellate court gravely erred in holding the petitioners Herminio Teves,
Victoria Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood
Treatment Plant, Inc. when the intention of the parties was that the loan is only for the
corporations benefit.

Relative to the first ground, petitioners contend that the amount of P322,350.00 at which
respondent bank bid for and purchased the mortgaged properties was unconscionable and
inequitable considering that, at the time of the public sale, the mortgaged properties had a total
value of more than P2,000,000.00. According to petitioners, this is evident from an inventory
dated March 31, 1980[5], which valued the properties at P2,518,621.00, in accordance with the
terms of the chattel mortgage contract[6] between the parties that required that the inventories be
maintained at a level no less than P2 million. Petitioners argue that respondent banks act of
bidding and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their
actual value in a public sale in which it was the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment of the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel mortgage
contract were not in fact submitted as evidence before the RTC of Makati, and that these
documents were first produced by petitioners only when the case was brought to the Court of
Appeals.[7] The Court of Appeals, in turn, disregarded these documents for petitioners failure to
present them in evidence, or to even allude to them in their testimonies before the lower
court.[8] Instead, respondent court declared that it is not at all unlikely for the chattels to have
sufficiently deteriorated as to have fetched such a low price at the time of the auction
sale.[9] Neither did respondent court find anything irregular or fraudulent in the circumstance that
respondent bank was the sole bidder in the sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise to the presumption of regularity in the
performance of public duties.[10]
Petitioners also question the ruling of respondent court, affirming the RTC, to hold private
petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA for the
obligation under the loan obtained from respondent bank, contrary to the doctrine of separate and
distinct corporate personality.[11] Private petitioners contend that they became signatories to the
promissory note only as a matter of practice by the respondent bank, that the promissory note
was in the nature of a contract of adhesion, and that the loan was for the benefit of the
corporation, PAMECA, alone.[12]
 Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that
Articles 1484[13] and 2115[14] of the Civil Code be applied in analogy to the instant case to
preclude the recovery of a deficiency claim.[15]
Petitioners are not the first to posit the theory of the applicability of Article 2115 to
foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio[16], the lower court
dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the
Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to
chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the
lower courts opinion that, by virtue of Article 2141, the provisions of Article 2115 which deny
the creditor-pledgee the right to recover deficiency in case the proceeds of the foreclosure sale
are less than the amount of the principal obligation, will apply.
This Court reversed the ruling of the lower court and held that the provisions of the Chattel
Mortgage Law regarding the effects of foreclosure of chattel mortgage, being contrary to the
provisions of Article 2115, Article 2115 in relation to Article 2141, may not be applied to the
case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

xxx

The officer making the sale shall, within thirty days thereafter, make in writing a
return of his doings and file the same in the office of the Registry of Deeds where the
mortgage is recorded, and the Register of Deeds shall record the same. The fees of the
officer for selling the property shall be the same as the case of sale on execution as
provided in Act Numbered One Hundred and Ninety, and the amendments thereto,
and the fees of the Register of Deeds for registering the officers return shall be taxed
as a part of the costs of sale, which the officer shall pay to the Register of Deeds. The
return shall particularly describe the articles sold, and state the amount received for
each article, and shall operate as a discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be applied to the payment, first, of the costs
and expenses of keeping and sale, and then to the payment of the demand or
obligation secured by such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the mortgage,
shall be paid to the mortgagor or persons holding under him on demand. (Emphasis
supplied)

It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in pledge, the
sale of the thing pledged extinguishes the entire principal obligation, such that the pledgor may
no longer recover proceeds of the sale in excess of the amount of the principal obligation,
Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor to the balance of the
proceeds, upon satisfaction of the principal obligation and costs.
 Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the excess of the
sale proceeds there is a corollary obligation on the part of the debtor-mortgagee to pay the
deficiency in case of a reduction in the price at public auction. As explained in Manila Trading
and Supply Co. vs. Tamaraw Plantation Co.[17], cited in Ablaza vs. Ignacio, supra:

While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a
conditional sale, it further provides that it is a conditional sale of personal property
as security for the payment of a debt, or for the performance of some other obligation
specified therein. The lower court overlooked the fact that the chattels included in the
chattel mortgage are only given as security and not as a payment of the debt, in case
of a failure of payment.

The theory of the lower court would lead to the absurd conclusion that if the chattels
mentioned in the mortgage, given as security, should sell for more than the amount of
the indebtedness secured, that the creditor would be entitled to the full amount for
which it might be sold, even though that amount was greatly in excess of the
indebtedness. Such a result certainly was not contemplated by the legislature when it
adopted Act No. 1508. There seems to be no reason supporting that theory under the
provision of the law. The value of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should greatly increase in value
and a sale under that condition should result in largely overpaying the indebtedness,
and if the creditor is not permitted to retain the excess, then the same token would
require the debtor to pay the deficiency in case of a reduction in the price of the
chattels between the date of the contract and a breach of the condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on
the question of chattel mortgages, have said, that in case of a sale under a foreclosure
of a chattel mortgage, there is no question that the mortgagee or creditor may maintain
an action for the deficiency, if any should occur. And the fact that Act No. 1508
permits a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater
extent than the value of the property at the time of the sale. The amount received at
the time of the sale, of course, always requiring good faith and honesty in the sale, is
only a payment, pro tanto, and an action may be maintained for a deficiency in the
debt.

We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating it[18]
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code to
the instant case. As correctly pointed out by the trial court, the said article applies clearly and
solely to the sale of personal property the price of which is payable in installments. Although
Article 1484, paragraph (3) expressly bars any further action against the purchaser to recover an
unpaid balance of the price, where the vendor opts to foreclose the chattel mortgage on the thing
sold, should the vendees failure to pay cover two or more installments, this provision is
specifically applicable to a sale on installments.
 To accommodate petitioners prayer even on the basis of equity would be to expand the
application of the provisions of Article 1484 to situations beyond its specific purview, and ignore
the language and intent of the Chattel Mortgage Law. Equity, which has been aptly described as
justice outside legality, is applied only in the absence of, and never against, statutory law or
judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that the public auction sale is void
on grounds of fraud and inadequacy of price. Petitioners never assailed the validity of the sale in
the RTC, and only in the Court of Appeals did they attempt to prove inadequacy of price through
the documents, i.e., the Open-End Mortgage on Inventory and inventory dated March 31, 1980,
likewise attached to their Petition before this Court. Basic is the rule that parties may not bring
on appeal issues that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage document as part of the
records, We are not convinced that they effectively prove that the mortgaged properties had a
market value of at least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale. At
best, the chattel mortgage contract only indicates the obligation of the mortgagor to maintain the
inventory at a value of at least P2,000,000.00, but does not evidence compliance therewith. The
inventory, in turn, was as of March 31, 1980, or even prior to April 17, 1980, the date when the
parties entered into the contracts of loan and chattel mortgage, and is far from being an accurate
estimate of the market value of the properties at the time of the foreclosure sale four years
thereafter. Thus, even assuming that the inventory and chattel mortgage contract were duly
submitted as evidence before the trial court, it is clear that they cannot suffice to substantiate
petitioners allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for the mortgaged
properties in the public sale does not warrant the conclusion that the transaction was attended
with fraud. Fraud is a serious allegation that requires full and convincing evidence,[20] and may
not be inferred from the lone circumstance that it was only respondent bank that bid in the sale of
the foreclosed properties. The sparseness of petitioners evidence in this regard leaves Us no
discretion but to uphold the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with petitioner corporation
in the loan. As found by the trial court and the Court of Appeals, the terms of the promissory
note unmistakably set forth the solidary nature of private petitioners commitment. Thus:

On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT
PLANT, INC., a corporation organized and existing under the laws of the Philippines,
with principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to
pay to the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office
located at corner Buendia and Makati Avenues, Makati, Metro Manila, the principal
sum of TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND
EIGHTY ONE & 67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of
three per cent (3%) per annum over DBPs borrowing rate for these funds. Before the
date of maturity, we hereby bind ourselves, jointly and severally, to make partial
payments as follows:
 xxx

In case of default in the payment of any installment above, we bind ourselves to pay
DBP for advances xxx

xxx

We further bind ourselves to pay additional interest and penalty charges on loan
amortizations or portion thereof in arrears as follows:

xxx

"In addition to the above, we also bind ourselves to pay for bank advances for
insurance premiums, taxes xxx

xxx

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred
by DBP on the foreign currency borrowings from where the loan shall be drawn xxx

xxx

In case of non-payment of the amount of this note or any portion of it on demand,

when due, or any other amount or amounts due on account of this note, the entire
obligation shall become due and demandable, and if, for the enforcement of the
payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained
to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for
attorneys fees as provided for in the mortgage contract, in addition to the legal fees
and other incidental expenses. In the event of foreclosure of the mortgage securing
this note, we further bind ourselves jointly and severally to pay the deficiency, if
any. (Emphasis supplied)[21]

The promissory note was signed by private petitioners in the following manner:

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES[22]

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily
with petitioner PAMECA in the loan.As correctly submitted by respondent bank, private
petitioners are not made to answer for the corporate act of petitioner PAMECA, but are made
liable because they made themselves co-makers with PAMECA under the promissory note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court
of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against
petitioners.
SO ORDERED.
MAGNA FINANCIAL G.R. No. 158635
SERVICES GROUP, INC.,
Petitioner, Present:

PUNO,
Chairman,
AUSTRIA-MARTINEZ,
- versus - CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
ELIAS COLARINA,
R e s p o n d e n t. December 9, 2005
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought
on installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki
Multicab, more particularly described as follows:

MAKE - SUZUKI MULTICAB

MODEL - ER HT
ENGINE NO. - 834963
FRAME NO. - LTO -067886-RO7-C
COLOR - WHITE[1]

After making a down payment, Colarina executed a promissory note for the
balance of P229,284.00 payable in thirty-six (36) equal monthly installments
at P6,369.00 monthly, beginning 18 July 1997. To secure payment thereof,
Colarina executed an integrated promissory note and deed of chattel mortgage over
the motor vehicle.

Colarina failed to pay the monthly amortization beginning January 1999,

accumulating an unpaid balance of P131,607.00. Despite repeated demands, he
failed to make the necessary payment. On 31 October 2000 Magna Financial
Services Group, Inc. filed a Complaint for Foreclosure of Chattel Mortgage with
Replevin[2] before the Municipal Trial Court in Cities (MTCC), Branch 2, Legaspi
City, docketed as Civil Case No. 4822.[3] Upon the filing of a Replevin Bond, a
Writ of Replevin was issued by the MTCC. On 27 December 2000, summons,
together with a copy of the Writ of Replevin, was served on Colarina who
voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr.
Antonio Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over
by the sheriff to Magna Financial Services Group, Inc.[4] On 12 July 2001, Colarina
was declared in default for having filed his answer after more than six (6) months
from the service of summons upon him. Thereupon, the trial court rendered
judgment based on the facts alleged in the Complaint. In a decision dated 23 July
2001, it held:[5]

WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna

Financial Services Group, Inc. and against the defendant Elias Colarina,
ordering the latter:

a) to pay plaintiff the principal sum of one hundred thirty one

thousand six hundred seven (P131,607.00) pesos plus
penalty charges at 4.5% per month computed from
January, 1999 until fully paid;

b) to pay plaintiff P10,000.00 for attorneys fees; and

 c) to pay the costs.

The foregoing money judgment shall be paid within ninety (90) days from
the entry of judgment. In case of default in such payment, the one (1) unit
of Suzuki Multicab, subject of the writ of replevin and chattel mortgage,
shall be sold at public auction to satisfy the said judgment.[6]

Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4,
where the case was docketed as Civil Case No. 10013. During the pendency of his
appeal before the RTC, Colarina died and was substituted in the case by his
heirs.[7] In a decision dated 30 January 2002, the RTC affirmed in toto the decision
of the MTCC.[8]

Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-
G.R. SP No. 69481. On 21 January 2003, the Court of Appeals rendered its
decision[9] holding:

. . . We find merit in petitioners assertion that the MTC and the RTC erred
in ordering the defendant to pay the unpaid balance of the purchase price of
the subject vehicle irrespective of the fact that the instant complaint was for
the foreclosure of its chattel mortgage. The principal error committed by
the said courts was their immediate grant, however erroneous, of relief in
favor of the respondent for the payment of the unpaid balance without
considering the fact that the very prayer it had sought was inconsistent with
its allegation in the complaint.

Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of
the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for the
foreclosure of the said mortgage is glaring proof that it intentionally
devised the same to deprive the defendant of his rights. A judgment in its
favor will in effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant for the
unpaid balance of its purchase price. In such a case, the respondent would
luckily have its cake and eat it too. Unfortunately for the defendant, the
 lower courts had readily, probably unwittingly, made themselves abettors to
respondents devise to the detriment of the defendant.

...

WHEREFORE, finding error in the assailed decision, the instant petition is

hereby GRANTED and the assailed decision is hereby REVERSED AND
SET ASIDE. Let the records be remanded to the court of origin.
Accordingly, the foreclosure of the chattel mortgage over the subject
vehicle as prayed for by the respondent in its complaint without any right to
seek the payment of the unpaid balance of the purchase price or any
deficiency judgment against the petitioners pursuant to Article 1484 of the
Civil Code of the Philippines, is hereby ORDERED.[10]

A Motion for Reconsideration dated 11 February 2003[11] filed by Magna Financial

Services Group, Inc., was denied by the Court of Appeals in a resolution dated 22
May 2003.[12] Hence, this Petition for Review on Certiorari based on the sole
issue:

WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL

MORTGAGE, EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF
THE 3RD OPTION UNDER ARTICLE 1484, PARAGRAPH 3 OF THE
CIVIL CODE.

In its Memorandum, petitioner assails the decision of the Court of Appeals and
asserts that a mortgage is only an accessory obligation, the principal one being the
undertaking to pay the amounts scheduled in the promissory note. To secure the
payment of the note, a chattel mortgage is constituted on the thing sold. It argues
that an action for foreclosure of mortgage is actually in the nature of an action for
sum of money instituted to enforce the payment of the promissory note, with
execution of the security. In case of an extrajudicial foreclosure of chattel
mortgage, the petition must state the amount due on the obligation and the sheriff,
after the sale, shall apply the proceeds to the unpaid debt. This, according to
petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68,
Section 2 of the Rules of Court.[13]

On the other hand, respondent countered that the Court of Appeals correctly set
aside the trial courts decision due to the inconsistency of the remedies or reliefs
sought by the petitioner in its Complaint where it prayed for the custody of the
chattel mortgage and at the same time asked for the payment of the unpaid balance
on the motor vehicle.[14]

Article 1484 of the Civil Code explicitly provides:

ART. 1484. In a contract of sale of personal property the price of which is

payable in installments, the vendor may exercise any of the following
remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;

(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void.

Our Supreme Court in Bachrach Motor Co., Inc. v. Millan[15] held: Undoubtedly
the principal object of the above amendment (referring to Act 4122 amending Art.
1454, Civil Code of 1889) was to remedy the abuses committed in connection with
the foreclosure of chattel mortgages. This amendment prevents mortgagees from
seizing the mortgaged property, buying it at foreclosure sale for a low price and
then bringing the suit against the mortgagor for a deficiency judgment. The almost
invariable result of this procedure was that the mortgagor found himself minus the
property and still owing practically the full amount of his original indebtedness.

In its Complaint, Magna Financial Services Group, Inc. made the following prayer:

WHEREFORE, it is respectfully prayed that judgment render ordering

defendant:

1. To pay the principal sum of P131,607.00 with penalty charges at 4.5%

per month from January 1999 until paid plus liquidated damages.

2. Ordering defendant to reimburse the plaintiff for attorneys fee at 25% of

the amount due plus expenses of litigation at not less than P10,000.00.

3. Ordering defendant to surrender to the plaintiff the possession of the

Multicab described in paragraph 2 of the complaint.

4. Plaintiff prays for other reliefs just and equitable in the premises.

It is further prayed that pendent lite, an Order of Replevin issue

commanding the Provincial Sheriff at Legazpi City or any of his deputies to
take such multicab into his custody and, after judgment, upon default in the
payment of the amount adjudged due to the plaintiff, to sell said chattel at
public auction in accordance with the chattel mortgage law.[16]

In its Memorandum before us, petitioner resolutely declared that it has opted for
the remedy provided under Article 1484(3) of the Civil Code,[17] that is,
to foreclose the chattel mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred to avail
itself of the first and third remedies under Article 1484, at the same time suing for
replevin. For this reason, the Court of Appeals justifiably set aside the decision of
the RTC. Perusing the Complaint, the petitioner, under its prayer number 1, sought
for the payment of the unpaid amortizations which is a remedy that is provided
under Article 1484(1) of the Civil Code, allowing an unpaid vendee to exact
fulfillment of the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately be sold at
public auction, which remedy is contained under Article 1484(3). Such a scheme is
not only irregular but is a flagrant circumvention of the prohibition of the law. By
praying for the foreclosure of the chattel, Magna Financial Services Group, Inc.
renounced whatever claim it may have under the promissory note.[18]

Article 1484, paragraph 3, provides that if the vendor has availed himself of the
right to foreclose the chattel mortgage, he shall have no further action against the
purchaser to recover any unpaid balance of the purchase price. Any agreement to
the contrary shall be void. In other words, in all proceedings for the foreclosure of
chattel mortgages executed on chattels which have been sold on the installment
plan, the mortgagee is limited to the property included in the mortgage.[19]

Contrary to petitioners claim, a contract of chattel mortgage, which is the

transaction involved in the present case, is in the nature of a conditional sale of
personal property given as a security for the payment of a debt, or the performance
of some other obligation specified therein, the condition being that the sale shall be
void upon the seller paying to the purchaser a sum of money or doing some other
act named.[20] If the condition is performed according to its terms, the mortgage
and sale immediately become void, and the mortgagee is thereby divested of his
title.[21] On the other hand, in case of non payment, foreclosure is one of the
remedies available to a mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure that for which the mortgage was given.
Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary
action or by foreclosure under power of sale contained in the mortgage. It may be
effected by the usual methods, including sale of goods at public
auction.[22]Extrajudicial foreclosure, as chosen by the petitioner, is attained by
causing the mortgaged property to be seized by the sheriff, as agent of the
mortgagee, and have it sold at public auction in the manner prescribed by Section
14 of Act No. 1508, or the Chattel Mortgage Law.[23] This rule governs
extrajudicial foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of foreclosure under
Article 1484(3) of the Civil Code, it is bound by its election and thus may not be
allowed to change what it has opted for nor to ask for more. On this point, the
Court of Appeals correctly set aside the trial courts decision and instead rendered a
judgment of foreclosure as prayed for by the petitioner.

The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in the
possession of the petitioner, Magna Financial Services Group, Inc. However,
actual foreclosure has not been pursued, commenced or concluded by it.

Where the mortgagee elects a remedy of foreclosure, the law requires the actual
foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the mortgaged chattel
in accordance with Sec. 14 of Act No. 1508 that would bar the creditor (who
chooses to foreclose) from recovering any unpaid balance.[25] And it is deemed that
there has been foreclosure of the mortgage when all the proceedings of the
foreclosure, including the sale of the property at public auction, have been
accomplished.[26]

That there should be actual foreclosure of the mortgaged vehicle was reiterated in
the case of De la Cruz v. Asian Consumer and Industrial Finance Corporation:[27]

It is thus clear that while ASIAN eventually succeeded in taking possession

of the mortgaged vehicle, it did not pursue the foreclosure of the mortgage
as shown by the fact that no auction sale of the vehicle was ever conducted.
As we ruled in Filinvest Credit Corp. v. Phil. Acetylene Co., Inc. (G.R. No.
50449, 30 January 1982, 111 SCRA 421)

Under the law, the delivery of possession of the mortgaged property to the
mortgagee, the herein appellee, can only operate to extinguish appellants
liability if the appellee had actually caused the foreclosure sale of the
mortgaged property when it recovered possession thereof (Northern
Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v.
Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez,
99 Phil. 782 [1956]).

Be that as it may, although no actual foreclosure as contemplated under the law has
taken place in this case, since the vehicle is already in the possession of Magna
Financial Services Group, Inc. and it has persistently and consistently avowed that
it elects the remedy of foreclosure, the Court of Appeals, thus, ruled correctly in
directing the foreclosure of the said vehicle without more.
WHEREFORE, premises considered, the instant petition is DENIED for lack of
merit and the decision of the Court of Appeals dated 21 January 2003 is
AFFIRMED. Costs against petitioner.
CRISTE A. TA-OCTA, complainant, vs. Sheriff IV WINSTON T. EGUIA,
Sheriff IV EDWIN G. TORRES, Regional Trial Court, Iloilo City,
Branch 26 and Branch 38, respectively, respondents.

DECISION
VITUG, J.:

In a complaint, dated 20 March 2000, filed with the Office of the Executive Judge
of the Regional Trial Court (RTC) of Iloilo City, Criste Ta-Octa charged respondent
sheriffs Winston Eguia and Edwin Torres with grave abuse of authority in connection
with a petition for foreclosure of chattel mortgage instituted by AC (Iloilo) Lenders,
Inc., against complainant Ta-Octa for the latter's failure to comply with the conditions
of the Chattel Mortgage and Promissory Note he had executed on 02 July 1999. The
chattel mortgage covered a one (1) unit motor vehicle, viz:

Make : FUSO
Type : Fighter Tanker
Motor NO. : 6D14-563562
Serial No. : FK335J-530111
Plate No. : FEA-691

Complainant claimed that the petition for foreclosure of chattel mortgage had
been served by respondent sheriffs on the same day it was filed with the Office of
Provincial/City Sheriff of Iloilo, without any raffle being first conducted and sans the
approval of the trial court. He asserted that no notice or demand from either AC
(Iloilo) Lenders, Inc., or respondents had been made before possession of the motor
vehicle was taken away from him nor did respondents issue any receipt on the
accessories of the vehicle. Complainant said that respondents, after taking possession
of the subject vehicle, hid it instead of having it parked at the grounds of the Hall of
Justice. Complainant added that respondents had made erasures on the entry in the
foreclosure book at the Office of the Sheriff when the petition for foreclosure of
mortgage was filed and recorded.
Executive Judge Tito A. Gustilo required respondents to submit their respective
answers to the complaint.
In their joint comment, respondents averred that they had complied with the
procedure for extrajudicial foreclosures of mortgages. The petition was filed and
docketed, and the filing fees were duly paid with the Office of the Clerk of Court.
Respondents, however, admitted that the petition was immediately served, without a
raffle having first been conducted because of the fear, entertained by AC Lenders,
Inc., that complainant might abscond. In fact, respondents already found the subject
vehicle at the house of a relative of complainant. Respondents were informed that
complainant had pending criminal cases before the municipal trial courts for violation
of Batas Pambansa Blg. 22. Respondents denied having made erasures on the entries
in the foreclosure book and, by way of substantiating the denial, submitted the
affidavits of Josephine Marie Lagura and Jonalyn Gasataya, employees both assigned
at the Office of the Clerk of Court ("OCC") of the Regional Trial Court of Iloilo City
and tasked with receiving, docketing and updating the entries in the Sheriff and
Notary Public Foreclosure cases filed before the OCC. In her affidavit, Josephine
Lagura attested that on 22 February 2000 (the date when petition was filed), the Rural
Bank of Guimbal, through its counsel, had filed notarial foreclosure incidents which
she erroneously docketed in the Sheriff's Foreclosure Book, and the mistake was only
discovered when Atty. Gerry Sumaculub, Assistant Clerk of Court, reviewed the
book. She claimed that the erasures and erroneous entries were done in good faith.
Jonalyn Gasataya, in her affidavit, corroborated the statements of Josephine.
The Executive Judge conducted an investigation pursuant to Administrative Order
No. 6, dated 30 June 1975.[1] In his report of 13 October 2000, Judge Gustilo stated
that -

"After a thorough reading and evaluation of the evidence both oral and documentary
submitted by the complainant and the respondents the undersigned Executive Judge
finds respondents Sheriff Winston T. Eguia and Edwin G. Torres, of RTC, Branch 26
and Branch 38, respectively, Guilty for violation of Administrative Circular No. 3-98,
dated February 5, 1998, and Administrative Order No. 3, dated October 9, 1984,
which mandates the raffling of extra-judicial foreclosure of mortgage shall be strictly
enforced by the Executive Judge among the deputy sheriffs in order to avoid an
unequal distribution of cases and fraternization between sheriffs and the applicant
mortgagee."

The Investigating Judge recommended that the penalty of one month suspension,
without pay, be imposed on respondents.
The Office of the Court Administrator, in its memorandum of 02 March 2001,
adopted in toto the findings and recommendation of the Investigating Judge.
The Court sees the findings of the Investigating Judge and the Office of the Court
Administrator to be well-taken but finds the recommended penalty of suspension,
given the circumstances, a bit too harsh.
A.M. No. 99-10-05-0, issued by the Court En Banc on 07 August 2001 and made
effective on 01 September 2001, provides for the procedure in the extra-judicial
foreclosure of mortgage, thusly:
 "1. All applications for extra-judicial foreclosure of mortgage whether under the
direction of the sheriff or a notary public, pursuant to Act 3135, as amended by
Act 4118, and Act 1508, as amended, shall be filed with the Executive Judge,
through the Clerk of Court who is also the Ex-Officio Sheriff.

"2. Upon receipt of an application for extra-judicial foreclosure of mortgage, it

shall be the duty of the Clerk of Court to:

"a) receive and docket said application and to stamp thereon the
corresponding file number, date and time of filing;

"b) collect the filing fees therefor pursuant to Rule 141, Section 7(c), as
amended by A.M. No. 00-2-01-SC, and issue the corresponding official
receipt;

"x x x x x x x x x

"d) sign and issue the certificate of sale, subject to the approval of the
Executive Judge, or in his absence, the Vice-Executive Judge. No
certificate of sale shall be issued in favor of the highest bidder until all
fees provided for in the aforementioned sections and in Rule 141,
Section 9(1), as amended by A.M. No. 00-2-01-SC, shall have been
paid; Provided, that in no case shall the amount payable under Rule 141,
Section 9(1), as amended, exceed P100,000.00;

"e) after the certificate of sale has been issued to the highest bidder, keep the
complete records, while awaiting any redemption within a period of one
(1) year from date of registration of the certificate of sale with the
Register of Deeds concerned, after which, the records shall be archived.
Notwithstanding the foregoing provision, juridical persons whose
property is sold pursuant to an extra-judicial foreclosure, shall have the
right to redeem the property until, but not after, the registration of the
certificate of foreclosure sale which in no case shall be more than three
(3) months after foreclosure, whichever is earlier, as provided in Section
47 of Republic Act No. 8791 (as amended, Res. of August 7, 2001).

"x x x x x x x x x

"3. The notices of auction sale in extrajudicial foreclosure for publication by the
sheriff or by a notary public shall be published in a newspaper of general
circulation pursuant to Section 1, Presidential Decree No. 1079, dated January
 2, 1977, and non-compliance therewith shall constitute a violation of Section 6
thereof.

"4. The Executive Judge shall, with the assistance of the Clerk of Court,
raffle applications for extrajudicial foreclosure of mortgage under the
direction of the sheriff among all sheriffs, including those assigned to the
Office of the Clerk of Court and Sheriffs IV assigned in the branches.

"5. The name/s of the bidder/s shall be reported by the sheriff or the notary public
who conducted the sale to the Clerk of Court before the issuance of the
certificate of sale."

Verily, respondent sheriffs have violated the procedure set forth in A.M. No. 99-10-
05-0 in failing to conduct a raffle of the petition for extrajudicial foreclosure of
mortgage filed by AC Lenders, Inc., against complainant before the office of the Clerk
of Court. The raffling of cases is designed to avoid the unequal distribution of cases
and fraternization between the sheriff and the applicant-mortgagee.[2]
While it might be true that petitioner (AC Iloilo Lenders Inc.) requested for the
immediate enforcement of the petition for foreclosure of chattel mortgage on the
ground that complainant could likely flee and abscond with his assets and that, in fact,
the subject vehicle was recovered from the house of one of his relatives, respondents,
nevertheless, were not excused from observing the mandated procedure therefor.
Respondents should not forget that they are public officials entrusted with a grave
responsibility, and their conduct not only should be characterized by great
circumspection but also be always above suspicion.[3] Sheriffs play an important role
in the administration of justice, called upon, no less than others, to carry out their
tasks with utmost care and diligence. High standards in their performance of duty are
rightly required of them.[4]
Regrettably, respondents have failed to live up to expectations. Being respondents
first offense, however, the Court deems it proper to decrease the recommended
penalty of suspension to a fine of One Thousand Pesos (P1,000.00) on each
respondent and to caution them to do better than what they have shown.
WHEREFORE, respondents Winston T. Eguia and Edwin G. Torres are found to
have violated A.M. No. 99-10-05-0 relative to the procedure on extrajudicial
foreclosure of mortgage and are each hereby ordered to pay a fine in the amount of
One Thousand Pesos (P1,000.00), with a warning that the commission of similar or
other infractions in the future will be dealt with severely.
SO ORDERED.
G.R. No. L-31816 February 15, 1930

RECAREDO F. PANDO, plaintiff-appellee,

vs.
ANTONIO GIMENEZ, ET AL., defendants.
ANTONIO GIMENEZ, appellant.

Harvey and O'Brien and Eugenio Angeles for appellant.

Antonio Sanz for appellee.

ROMUALDEZ, J.:

This action was instituted for the purpose of foreclosing a mortgage executed by defendant Antonio
Gimenez. Massy Teague was also impleaded for having purchased at public auction one of the
mortgaged properties.

The answer of the defendant Teague set up a general denial and a special defense, which are not
involved in this appeal.

Defendant Antonio Gimenez also filed a general denial, and raised four special defenses in his
answer, to wit:

As a first special defense said defendant alleges:

1. That on the 27th day of October, 1924, said defendant Gimenez was indebted to the
plaintiff in the sum of P8,000, and to secure the payment of the said amount duly made,
executed and delivered a real estate mortgage in favor of the said plaintiff over the properties
and leasehold rights mentioned in paragraph VIII of the plaintiff's complaint, and which
contract of mortgage is evidenced by the document, Exhibit A attached to the complaint.

2. That owing to the fact that said defendant was leaving the City of Manila in order to attend
to his business in the Province of Cagayan, and at the special instance and request of the
herein plaintiff, said defendant gave to the plaintiff the full control, and complete and absolute
administration of the building and the parcel of land on which said building was erected,
situated in Santa Mesa, District of Santa Mesa, mortgaged to the plaintiff, under the condition
that said plaintiff would attend to the administration, care and preservation of the said
building and the property leased from the Hacienda Tuason on which said building was
erected, the payment of the premium on the insurance of this building, the payment of the
taxes might become due on the said building, the payment to the lessor Hacienda Tuason of
the rents of the leased property, and to collect the rents from the tenants of the said building.

3. That the rents that would be collected from the said building, the plaintiff would apply the
same to the payment of all the expenses necessary for the preservation and maintenance of
the said building, the rents of the leased property, and the balance to be applied in payment
on account of the interest that may become due in favor of the plaintiff under the mortgage.

4. That in accordance with this agreement, the defendant gave, and the plaintiff took
absolute control and possession and entered in the full administration of the said building
and land since October 27, 1924, and up to the present time.
 5. That in the course of the administration by the plaintiff of the said building and land leased
from the Hacienda Tuason, said plaintiff failed and neglected to pay to the government of the
City of Manila taxes due for several years on the said building and has also failed and
neglected to pay to the lessor Hacienda Tuason the rents due for several years on the land
leased and on which said building was erected.

6. That by reason of this failure, neglect and abandonment by the plaintiff to pay the taxes
due on the said building, the City of Manila, on November 23, 1926, sold at public auction the
said building was sold for the sum of P244.50, and was bought by the other defendant
Massy Teague, and since that time the said building was lost to the defendant Gimenez.

7. That by reason of the failure, neglect and abandonment of the plaintiff to pay
the Hacienda Tuason the rents due for several years on the leased property on which the
building in question is erected, the said lessor cancelled the contract of lease of the
defendant Gimenez, and has brought a suit against the said defendant Gimenez
for desahucio in the municipal court of the City of Manila.

As a second special defense, alleges that the building which was sold to the defendant
Massy Teague is worth P11,000, and the leasehold right of the defendant which was
cancelled by the Hacienda Tuason as above stated is worth P3,000.

As a third special defense, alleges that by reason of the negligence, failure and
abandonment of the plaintiff to properly administer the building and land in question and to
pay the taxes due to the government and the rents due the lessor Hacienda Tuason, and as
a result of which the defendant Gimenez has been deprived of the building, and his
leasehold right was cancelled, said defendant has suffered irreparable damages in the sum
of P14,000.

And as a fourth special defense and by way of counter-claim and set-off against the claim of
the said plaintiff, the defendant Gimenez alleges that he reproduces herein the first three
special defenses heretofore mentioned, and that by reason of the negligent acts committed
by the plaintiff in the administration of the said building and land which caused irreparable
damage and prejudice to the defendant Gimenez, said defendant has suffered damages in
the sum of P14,000.

Wherefore, the defendant Gimenez by the undersigned attorneys, respectfully prays the
court to render judgment in his favor and against the plaintiff, condemning the latter to pay
the former the sum of fourteen thousand pesos (P14,000), as damages suffered by the
defendant Gimenez; and that should this court find that the said defendant Gimenez is liable
to pay to plaintiff any sum of money under the mortgage, that this amount of P14,000 be set-
off against the amount that might rightfully be found by the court to be due and owing by the
defendant Gimenez to plaintiff, and that should there be a difference in favor of the
defendant Gimenez that the plaintiff be condemned to pay to the said defendant Gimenez
the amount of such difference and for the costs of this action; and also asks for such other
and further relief as may be proper and equitable under the premises. (Pages 23, 24, 25, 26
and 27, Bill of Exceptions.)

After trial, the Court of First Instance of Manila rendered a decision, dismissing the counterclaim
presented by the defendant Antonio Gimenez, the dispositive part of which reads as follows:

For the foregoing considerations, the court renders judgment, ordering Antonio Gimenez to
pay Recaredo Pando eight thousand pesos (P8,000), Philippine currency, with annual
 interest at twelve per centum from June 1, 1928, until fully paid; two thousand three hundred
and forty-four pesos and sixty centavos (P2,344.60) as accrued interest with legal interest
thereon from the date of the complaint, May 19, 1928, until fully paid; and eight hundred
pesos (P800) as the stipulated attorney's fees, and the costs; all of said sums to be paid
within three months from the date hereof.

Defendant Massy Teague is hereby authorized to pay to the plaintiff the amounts set forth in
the preceding paragraph, if he so desires, in order to obtain the cancellation of the plaintiff's
mortgage, and to acquire the properties of defendant Gimenez free of all liens and
encumbrances, within the same three-month period from the date hereof.

In case neither of the defendants pay to the plaintiff the foregoing amounts within the period
named, the mortgaged properties shall be sold at public auction in accordance with the law,
and from the proceeds of the sale, the aggregate sum of the aforementioned amounts shall
be paid to the plaintiff, and the balance, if any, delivered to defendant Massy Teague, the
present owner of the mortgaged property. (Pages 40 and 41, Bill of Exceptions.)

Antonio Gimenez, defendant, appealed from this decision and now makes the following assignments
of error:

I. The lower court erred in not finding that, after the execution of the contract of mortgage,
Exhibit A, and just before the time said mortgage matured, the appellee and the appellant
entered into an agreement by virtue of which:

(a) The appellee assumed and took over the general administration (administracion
directa) of the house No. 655 Santa Mesa, Manila, with the right to collect the rents
of the said house;

(b) But with the duty and obligation, that said appellee should pay the taxes owing or
accruing on the said house to the City of Manila;

(c) Should pay the rentals owing or accruing on the land occupied by said house to
the owners of said land the "Hacienda de Santa Mesa y Diliman", in accordance with
the terms of the contract of lease; and

(d) Should pay all other expenses necessary for the proper preservation and
maintenance of said house, such as repairs and so forth, including the premium of
the policy of insurance thereon and that the balance of said rents should be applied
by him toward the liquidation of interest accruing under the mortgage.

II. The lower court erred in not finding that the appellee violated his duty by neglecting and
failing to pay the taxes on the house No. 655 Santa Mesa, to the Government of the City of
Manila, which became due during the years 1925 and 1926, while said house was under his
general administration, and that by reason of that failure to pay said taxes, said house was
sold by public auction by the City of Manila to satisfy said taxes, and finally adjudicated to the
defendant Massy Teague, the immediate consequence thereof being the loss to the
appellant of all his rights, legal and equitable in the said house.

III. The lower court erred in not finding that the appellant had suffered damages for the loss
of his said house No. 655 Santa Mesa, and that the appellee should be responsible to the
appellant for all damages suffered by him.
 IV. The lower court erred in not finding that the appellee violated his duty by neglecting and
failing to pay the rentals for the land occupied by said house No. 655 Santa Mesa, to the
owners thereof, which rentals became due during the years 1925, 1926, 1927 and 1928,
while the said land and house were under his general administration, and that by reason of
that failure to pay said rentals, the owners of the land cancelled the contract of lease of the
appellant, the immediate consequence thereof being that the appellant lost all his rights, use
and enjoyment of said land for the remaining unexpired period of 26 years.

V. The lower court erred in not finding that the appellant had suffered damages for the loss of
his leasehold right, the improvements on the land and the use and enjoyment of said land for
the remaining unexpired period of 26 years, and that the appellee should be responsible to
the appellant for all damages suffered by him.

VI. The lower court erred in not rendering judgment in favor of the appellant and against the
appellee on the counterclaim for the damages suffered by the appellant for the total amount
proven.

VII. The lower court erred in not granting the motion for new trial.

In order to secure the payment of P8,000 which the defendant Gimenez owed the plaintiff, he
mortgaged the house at No. 655 Santa Mesa, Manila, and the leasehold right on the lot upon which
it stands (Exhibit A). It was agreed between them that the plaintiff would collect the rents of said
house, in order to apply them to the payment of interest on the amount of the indebtedness. This
was payable on October 27, 1925, but, in spite of nonpayment, the creditor, who is the plaintiff
herein, did not foreclose the mortgage.

For default in the payment of taxes for the years 1925 and 1926, the house was on November 23,
1926 sold at public auction, and, for failure to exercise the right of legal redemption, the City of
Manila, the attachment creditor and vendor of the property, executed a final deed of sale in favor of
the purchaser, the other defendant Massy Teague. Furthermore, for default in the payment of the
rents due on the lot of said house for the years 1925 to 1928, the Santa Mesa estate, the lessor of
said land, cancelled the lease on July 13, 1928, pursuant to the terms of the contract.

The appellant Gimenez contends that the plaintiff was responsible for the delinquency in the
payment of both the tax on the house and the rent of the lot, which caused him the loss of the said
house and the leasehold right on the lot, because the plaintiff was at that time in charge of the
administration of the premises with the obligation to attend to the payment of the tax and the rents.
The plaintiff denied that he had such obligation, alleging that his duties were confined to the
collection of the rents of the house in order to apply them to the payment of the interest on the
mortgage.

Such was in fact the original agreement; but the appellant asserts that it was modified by the letter
Exhibit 1, quoted below:

MANILA, October 29, 1925

Mr. ANTONIO GIMENEZ

A. Luna, San Juan del Monte

ESTEEMED DON ANTONIO: Yesterday Mrs. Xaudaro came to pay me the rents for
the months of July and August, and forty pesos on account of September, saying that
she did not pay the balance of the rent for that month and the rent for the whole of
 October, because your wife had demanded the delivery of the difference, or P90. I
am surprised at such a procedure, since you yourself authorized me one year ago to
collect the rent from Mr. Xaudaro, and I have done so up to date.

Mrs. Xaudaro has also informed me that, upon your demand, they would leave the
chalet next month and it appears that this, too, was done using me as a shield, which
is another surprise to me.

I believe, Mr. Gimenez, that the best thing would be for you to turn over the chalet to
me, since the period has expired, so that I may take direct charge of the
administration of the premises.

Yours very truly,

(Sgd.) R. PANDO
(Page 63, record.)

The appellant testified further, that when he turned over the administration of the property to the
plaintiff, it was agreed that the plaintiff "would keep the property in good condition of repair, pay the
insurance and other expenses inherent in the preservation of the building, such as land taxes," and
"would pay the rents of the land upon which the property is situated" (transcript of the stenographic
notes, page 6). These points have not been contradicted by the plaintiff.

Taking into account the language of the letter Exhibit 1 and the appellant's unimpeached testimony,
we are constrained to hold that it has been proved by a preponderance of evidence, that even
though at first the plaintiff had only undertaken to collect the rents of the house, later on, towards the
end of October, 1925, he assumed the obligation to pay both the tax on the house, and the rent of
the lot.

As to the consideration contained in the judgment appealed from to the effect that, in view of the
reduction of the rent of the house in May, 1926, the plaintiff would not have accepted the
administration under the conditions alleged by the defendant-appellant, it must be remembered that
the plaintiff took over such complete administration months before such reduction of rents, and it
does not appear that the reduction was foreseen.

From all these circumstances it follows that the administration of the property in question assumed
by the plaintiff toward the end of October, 1925 is antichretic in character, and therefore justice and
equity demand that application be here made of the Civil Code provisions touching the obligations of
the antichretic creditor, to wit:

The creditor is obliged to pay the taxes and charges which burden the estate, in the absence
of an agreement to the contrary.

He shall also be obliged to pay any expenses necessary for its preservation and repair.

Any sums he may expend for such purposes shall be chargeable against the fruits. (Art.
1882, Civil Code.)

These obligations arise from the very nature of the covenant, and are correlated with the plaintiff's
acquired right to take charge of the property and collect the fruits for himself. Hence, the illustrious
Manresa, explains the basis of this article 1882 in the following terms:
 The right which the creditor acquires by virtue of antichresis to enjoy the fruits of the property
delivered to him, carries two obligations which are a necessary consequence of the contract,
because they arise from its very nature.

And the plaintiff having failed in his obligation to pay the tax on the house and the rent of the lot, he
is by law required to pay indemnity for damages (article 1101, Civil Code).

Considering the evidence of record as to the value and condition of the house and the improvements
made by the appellant upon said lot, as well as the other circumstances of the case the total amount
of the damages sustained by said appellant must be fixed at P5,000.

Wherefore, the judgment appealed from is modified, and it is held that the appellant, Antonio
Gimenez, is entitled to recover from the plaintiff the sum of P5,000 and it is so ordered; and the
judgment appealed from is hereby affirmed in all respects consistent with the present decision,
without express pronouncement of costs.
ABUNDIO BARAYOGA and G.R. No. 160073
BISUDECO-PHILSUCOR
CORFARM WORKERS UNION Present:
(PACIWU CHAP-TPC),
Petitioners, Panganiban, J., Chairman,
Sandoval-Gutierrez,
Corona,
- versus - Carpio Morales, and
Garcia, JJ
ASSET PRIVATIZATION Promulgated:
TRUST,*
Respondent. October 24, 2005

x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- x
DECISION

PANGANIBAN, J.:

R
esponsibility for the liabilities of a mortgagor towards its
employees cannot be transferred via an auction sale to a
purchaser who is also the mortgagee-creditor of the foreclosed
 assets and chattels. Clearly, the mortgagee-creditor has no employer-
__________________
* The Privatization and Management Office has succeeded APT. Comment, p. 1; rollo, p.
480.

employee relations with the mortgagors workers. The mortgage

constitutes a lien on the determinate properties of the employer-debtor,
because it is a specially preferred credit to which the workers monetary
claims is deemed subordinate.

The Case

Before us is a Petition for Review[1] under Rule 45 of the Rules of

Court, assailing the January 30, 2003 Decision[2] and the August 27, 2003
Resolution[3]of the Court of Appeals (CA), in CA-GR SP No. 58813. The
disposition or fallo of the questioned Decision reads as follows:

IN VIEW OF ALL THE FOREGOING, the instant petition

is GRANTED and the assailed NLRC Decision dated February 18,
2000 is hereby RECALLED and SET ASIDE insofar as herein
petitioner APT is concerned. No cost.[4]
The reversed Decision[5] of the National Labor Relations Commission
(NLRC) disposed as follows:

WHEREFORE, premises considered, the decision appealed from is

AFFIRMED with modifications as follows:

1. Complainants are awarded their monetary claims for underpayment of salaries

and payment of allowances per their computation on pp. 97-99 and 142-144 of the records;

2. Complainants are declared to have been illegally dismissed and should be

[6]
paid their backwages from 01 May 1991 to 30 October 1992.

The challenged August 27, 2003 Resolution denied petitioners

Motion for Reconsideration.

The Facts

The CA summarized the antecedents in this portion of its Decision,

which we quote:
 Bisudeco-Philsucor Corfarm Workers Union is composed of
workers of Bicolandia Sugar Development Corporation
(BISUDECO), a sugar plantation mill located in Himaao, Pili,
Camarines Sur.

On December 8, 1986, [Respondent] Asset Privatization Trust

(APT), a public trust was created under Proclamation No. 50, as
amended, mandated to take title to and possession of, conserve,
provisionally manage and dispose of non-performing assets of the
Philippine government identified for privatization or disposition.

Pursuant to Section 23 of Proclamation No. 50, former

President Corazon Aquino issued Administrative Order No. 14
identifying certain assets of government institutions that were to be
transferred to the National Government. Among the assets
transferred was the financial claim of the Philippine National Bank
against BISUDECO in the form of a secured loan. Consequently, by
virtue of a Trust Agreement executed between the National
Government and APT on February 27, 1987, APT was constituted
as trustee over BISUDECOs account with the PNB.

Sometime later, on August 28, 1988, BISUDECO contracted

the services of Philippine Sugar Corporation (Philsucor) to take over
the management of the sugar plantation and milling operations until
August 31, 1992.

Meanwhile, because of the continued failure of BISUDECO to

pay its outstanding loan with PNB, its mortgaged properties were
foreclosed and subsequently sold in a public auction to APT, as the
sole bidder. On April 2, 1991, APT was issued a Sheriffs Certificate
of Sale.
 On July 23, 1991, the union filed a complaint for unfair labor
practice, illegal dismissal, illegal deduction and underpayment of
wages and other labor standard benefits plus damages.

In the meantime, on July 15, 1992, APTs Board of Trustees

issued a resolution accepting the offer of Bicol-Agro-Industrial
Cooperative (BAPCI) to buy the sugar plantation and mill. Again, on
September 23, 1992, the board passed another resolution
authorizing the payment of separation benefits to BISUDECOs
employees in the event of the companys privatization. Then, on
October 30, 1992, BAPCI purchased the foreclosed assets of
BISUDECO from APT and took over its sugar milling operations
under the trade name Peafrancia Sugar Mill (Pensumil).

On December 17, 1992, the union filed a similar complaint,

later to be consolidated with its earlier complaint and docketed as
RAB V Case No. 07-00184-91.

On March 2, 1993, it filed an amended complaint, impleading

as additional party respondents APT and Pensumil.

In their Position Paper, the union alleged that when Philsucor

initially took over the operations of the company, it retained
BISUDECOs existing personnel under the same terms and
conditions of employment. Nonetheless, at the start of the season
sometime in May 1991, Philsucor started recalling workers back to
work, to the exception of the union members. Management told them
that they will be re-hired only if they resign from the union. Just the
same, thereafter, the company started to employ the services of
outsiders under the pakyaw system.
 BISUDECO, Pensumil and APT all interposed the defense of
lack of employer-employee relationship.

xxxxxxxxx

After due proceedings, on April 30, 1998, Labor Arbiter

Fructuoso T. Aurellano disposed as follows:

WHEREFORE, premises considered, respondent APT is hereby

ordered to pay herein complainants of the mandated employment
benefits provided for under Section 27 of Proclamation No. 50
which benefits had been earlier extended to other employees
similarly situated.

SO ORDERED.

Both the union and APT elevated the labor arbiters decision
before NLRC.[7]

The NLRC affirmed APTs liability for petitioners money claims. While no
employer-employee relationship existed between members of the petitioner
union and APT, at the time of the employees illegal dismissal, the assets of
BISUDECO had been transferred to the national government through
APT. Moreover, the NLRC held that APT should have treated petitioners
claim as a lien on the assets of BISUDECO. The Commission opined that
APT should have done so, considering its awareness of the pending
complaint of petitioners at the time BISUDECO sold its assets to BAPCI,
and APT started paying separation pay to the workers.

Finding their computation to be in order, the NLRC awarded to petitioners

their money claims for underpayment, labor-standard benefits, and
ECOLA. It also awarded them their back wages, computed at the
prevailing minimum wage, for the period May 1, 1991 (the date of their
illegal dismissal) until October 30, 1992 (the sale of BISUDECO assets to
the BAPCI). On the other hand, the NLRC ruled that petitioners were not
entitled to separation pay because of the huge business losses incurred by
BISUDECO, which had resulted in its bankruptcy.

Respondent sought relief from the CA via a Petition for Certiorari under
Rule 65 of the Rules of Court.

Ruling of the Court of Appeals

 The CA ruled that APT should not be held liable for petitioners
claims for unfair labor practice, illegal dismissal, illegal deduction and
underpayment of wages, as well as other labor-standard benefits plus
damages. As found by the NLRC, APT was not the employer of
petitioners, but was impleaded only for possessing BISUDECOs
mortgaged properties as trustee and, later, as the highest bidder in the
foreclosure sale of those assets.

Citing Batong Buhay Gold Mines v. Dela Serna,[8] the CA concluded that
petitioners claims could not be enforced against APT as mortgagee of the
foreclosed properties of BISUDECO.

Hence, this Petition.[9]

Issues
In their Memorandum, petitioners raise the following issues for our
consideration:

I. Whether or not the Court of Appeals erred in ruling that

Respondent Asset Privatization Trust (APT) should not be held liable
for the petitioner unions claim for unfair labor practice, illegal
dismissal, illegal deduction and underpayment of wages and other
labor standard benefits plus damages.

II. Whether or not the claims of herein petitioners cannot be

enforced against APT/PNB as mortgagee of the foreclosed
properties of BISUDECO.

III. Whether or not the entitlement of petitioners upon their claims

against Respondent APT is recognized under the law.[10]

In brief, the main issue raised is whether Respondent APT is liable

for petitioners monetary claims.

The Courts Ruling

The Petition has no merit.

 Main Issue:

Whether APT Is Liable for the Claims of

Petitioners Against Their Former Employer

It should be stressed at the outset that, pursuant to Administrative

Order No. 14, Series of 1987,[11] PNBs assets, loans and receivables from
its borrowers were transferred to APT as trustee of the national
government. Among the liabilities transferred to APT was PNBs financial
claim against BISUDECO, not the latters assets and chattel. Contrary to
petitioners assertions, BISUDECO remained the owner of the mortgaged
properties in August 1988, when the Philippine Sugar Corporation
(Philsucor) undertook the operation and management of the sugar
plantation until August 31, 1992, under a so-called Contract of Lease
between the two corporations. At the time, APT was merely a secured
creditor of BISUDECO.[12]
 It was only in April 1991 that APT foreclosed the assets and chattels
of BISUDECO because of the latters continued failure to pay outstanding
loan obligations to PNB/APT. The properties were sold at public auction
to APT, the highest bidder, as indicated in the Sheriffs Certificate of Sale
issued on April 2, 1991. It was only in September 1992 (after the expiration
of the lease/management Contract with Philsucor in August 1992),
however, when APT took over BISUDECO assets, preparatory to the
latters privatization.

In the present case, petitioner-unions members who were not

recalled to work by Philsucor in May 1991 seek to hold APT liable for their
monetary claims and allegedly illegal dismissal. Significantly, prior to the
actual sale of BISUDECO assets to BAPCI on October 30, 1992, the APT
board of trustees had approved a Resolution on September 23, 1992. The
Resolution authorized the payment of separation benefits to the employees
of the corporation in the event of its privatization. Not included in the
Resolution, though, were petitioner-unions members who had not been
recalled to work in May 1991.
 The question now before the Court is whether APT is liable to pay
petitioners monetary claims, including back wages from May 1, 1991, to
October 30, 1992 (the date of the sale of BISUDECO assets to BAPCI).

We rule in the negative. The duties and liabilities of BISUDECO,

including its monetary liabilities to its employees, were not all automatically
assumed by APT as purchaser of the foreclosed properties at the auction
sale. Any assumption of liability must be specifically and categorically
agreed upon. In Sundowner Development Corp. v. Drilon,[13] the Court ruled
that, unless expressly assumed, labor contracts like collective bargaining
agreements are not enforceable against the transferee of an enterprise.
Labor contracts are in personam and thus binding only between the parties.

No succession of employment rights and obligations can be said to

have taken place between the two. Between the employees of BISUDECO
and APT, there is no privity of contract that would make the latter a
substitute employer that should be burdened with the obligations of the
corporation. To rule otherwise would result in unduly imposing upon APT
an unwarranted assumption of accounts not contemplated in Proclamation
No. 50 or in the Deed of Transfer between the national government and
PNB.

Furthermore, under the principle of absorption, a bona fide buyer or

transferee of all, or substantially all, the properties of the seller or transferor
is not obliged to absorb the latters employees.[14] The most that the
purchasing company may do, for reasons of public policy and social justice,
is to give preference of reemployment to the selling companys qualified
separated employees, who in its judgment are necessary to the continued
operation of the business establishment.[15]

In any event, the national government (in whose trust APT previously held
the mortgage credits of BISUDECO) is not the employer of petitioner-
unions members, who had been dismissed sometime in May 1991, even
before APT took over the assets of the corporation. Hence, under existing
law and jurisprudence, there is no reason to expect any kind of bailout by
the national government.[16] Even the NLRC found that no employer-
employee relationship existed between APT and petitioners. Thus, the
Commission gravely abused its discretion in nevertheless holding that APT,
as the transferee of the assets of BISUDECO, was liable to petitioners.
 Petitioners also contend that in Central Azucarera del Danao v. Court of
Appeals,[17] this Court supposedly ruled that the sale of a business of a going
concern does not ipso facto terminate the employer-employee relations
insofar as the successor-employer is concerned, and that change of
ownership or management of an establishment or company is not one of
the just causes provided by law for termination of employment[.][18]

A careful reading of the Courts Decision in that case plainly shows

that it does not contain the words quoted by counsel for petitioners. At
this juncture, we admonish their counsel[19] of his bounden duty as an
officer of the Court to refrain from misquoting or misrepresenting the text
of its decisions.[20] Ever present is the danger that, if not faithfully and
exactly quoted, they may lose their proper and correct meaning, to the
detriment of other courts, lawyers and the public who may thereby be
misled.[21]

In that case, contrary to the assertions of petitioners, the Court held

as follows:

There can be no controversy for it is a principle well-recognized, that

it is within the employers legitimate sphere of management control of

the business to adopt economic policies or make some changes or

adjustments in their organization or operations that would insure

profit to itself or protect the investment of its stockholders. As in the

exercise of such management prerogative, the employer may merge

or consolidate its business with another, or sell or dispose all or

substantially all of its assets and properties which may bring about

the dismissal or termination of its employees in the process. Such

dismissal or termination should not however be interpreted in such a

manner as to permit the employer to escape payment of termination

pay. x x x.

In a number of cases on this point, the rule has been laid down that

the sale or disposition must be motivated by good faith as an

element of exemption from liability. Indeed, an innocent transferee of

a business establishment has no liability to the employees of the

transferor to continue employing them. Nor is the transferee liable for

past unfair labor practices of the previous owner, except, when the

liability therefor is assumed by the new employer under the contract

of sale, or when liability arises because of the new owners

participation in thwarting or defeating the rights of the

employees.[22] (Citations omitted.)

In other words, the liabilities of the previous owner to its employees are
not enforceable against the buyer or transferee, unless (1) the latter
unequivocally assumes them; or (2) the sale or transfer was made in bad
faith. Thus, APT cannot be held responsible for the monetary claims of
petitioners who had been dismissed even before it actually took over
BISUDECOs assets.

Moreover, it should be remembered that APT merely became a transferee

of BISUDECOs assets for purposes of conservation because of its lien on
those assets -- a lien it assumed as assignee of the loan secured by the
corporation from PNB. Subsequently, APT, as the highest bidder in the
auction sale, acquired ownership of the foreclosed properties.

Relevant to this transfer of assets is Article 110 of the Labor Code, as

amended by Republic Act No. 6715, which reads:
Article 110. Workers preference in case of bankruptcy. In the event

of bankruptcy or liquidation of the employers business, his workers

shall enjoy first preference as regards their unpaid wages and other

monetary claims shall be paid in full before the claims of the

Government and other creditors may be paid.[23]

 This Court has ruled in a long line of cases[24] that under Articles 2241
and 2242 of the Civil Code, a mortgage credit is a special preferred credit
that enjoys preference with respect to a specific/determinate property of
the debtor. On the other hand, the workers preference under Article 110 of
the Labor Code is an ordinary preferred credit. While this provision raises
the workers money claim to first priority in the order of preference
established under Article 2244 of the Civil Code, the claim has no
preference over special preferred credits.

Thus, the right of employees to be paid benefits due them from the
properties of their employer cannot have any preference over the latters
mortgage credit. In other words, being a mortgage credit, APTs lien on
BISUDECOs mortgaged assets is a special preferred lien that must be
satisfied first before the claims of the workers.

Development Bank of the Philippines v. NLRC[25] explained the rationale

of this ruling as follows:
 x x x. 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 insolvents assets. It is a

right to a first preference in the discharge of the funds of the

judgment debtor. x x x

Furthermore, workers claims for unpaid wages and monetary benefits

cannot be paid outside of a bankruptcy or judicial liquidation proceedings
against the employer.[26] It is settled that the application of Article 110 of
the Labor Code is contingent upon the institution of those proceedings,
during which all creditors are convened, their claims ascertained and
inventoried, and their preferences determined.[27] Assured thereby is an
orderly determination of the preference given to creditors claims; and
preserved in harmony is the legal scheme of classification, concurrence and
preference of credits in the Civil Code, the Insolvency Law, and the Labor
Code.

The Court hastens to add that the present Petition was brought
against APT alone. In holding that the latter, which has never really been
an employer of petitioners, is not liable for their claims, this Court is not
reversing or ruling upon their entitlement to back wages and other unpaid
benefits from their previous employer.

On the basis of the foregoing clarification, the Court finds no

reversible error in the questioned CA Decision, which set aside the
February 8, 2000 Decision of the NLRC. As a mere transferee of the
mortgage credit and later as the purchaser in a public auction of
BISUDECOs foreclosed properties, APT cannot be held liable for
petitioners claims against BISUDECO: illegal dismissal, unpaid back wages
and other monetary benefits.

WHEREFORE, the Petition is hereby DENIED, and the assailed

Decision and Resolution AFFIRMED. Costs against petitioners.
ATLANTIC ERECTORS, INC., petitioner, vs. HERBAL COVE REALTY
CORPORATION, respondent.

DECISION
PANGANIBAN, J.:

The pendency of a simple collection suit arising from the alleged

nonpayment of construction services, materials, unrealized income and
damages does not justify the annotation of a notice of lis pendens on the title
to a property where construction has been done.

Statement of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of

[1]

the Rules of Court, challenging the May 30, 2000 Decision of the Court of
[2]

Appeals (CA) in CA-GR SP No. 56432. The dispositive portion of the Decision
is reproduced as follows:

WHEREFORE, the petition is granted and the assailed November 4, 1998 and
October 22, 1999 orders annulled and set aside. The July 30, 1998 order of respondent
judge is reinstated granting the cancellation of the notices of lis pendens subject of
this petition.
[3]

In its July 21, 2001 Resolution, the CA denied petitioners Motion for
[4]

Reconsideration.

The Facts

The factual antecedents of the case are summarized by the CA in this

wise:

On June 20, 1996, [respondent] and [petitioner] entered into a Construction Contract
whereby the former agreed to construct four (4) units of [townhouses] designated as
16-A, 16-B, 17-A and 17-B and one (1) single detached unit for an original contract
price of P15,726,745.19 which was late[r] adjusted to P16,726,745.19 as a result of
additional works. The contract period is 180 days commencing [on] July 7, 1996 and
to terminate on January 7, 1997. [Petitioner] claimed that the said period was not
followed due to reasons attributable to [respondent], namely: suspension orders,
additional works, force majeure, and unjustifiable acts of omission or delay on the
part of said [respondent]. [Respondent], however, denied such claim and instead
pointed to [petitioner] as having exceeded the 180 day contract period aggravated by
defective workmanship and utilization of materials which are not in compliance with
specifications.

xxxxxxxxx

On November 21, 1997, [petitioner] filed a complaint for sum of money with damages
(Civil Case No. 97-2707) with the Regional Trial Court of Makati entitled Atlantic
Erectors, Incorporated vs. Herbal Cove Realty Corp. and Ernest C. Escal[e]r. This
case was raffled to Branch 137, x x x Judge Santiago J. Ranada presiding. In said
initiatory pleading, [petitioner] AEI asked for the following reliefs:

AFTER DUE NOTICE AND HEARING, to order x x x defendant to:

1. Pay plaintiff the sum of P4,854,229.94 for the unpaid construction services already
rendered;

2. To x x x pay plaintiff the sum of P1,595,551.00 for the construction materials,

equipment and tools of plaintiff held by defendant;

3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss] x x x of expected

income from the construction project;

4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of income by way of
rental from the equipment of plaintiff held by defendants;

5. To x x x pay plaintiff the sum of P5,000,000.00 for moral damages;

6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary damages;

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

8. To x x x pay the cost of suit.

On the same day of November 21, 1997, [petitioner] filed a notice of lis pendens for
annotation of the pendency of Civil Case No. 97-707 on titles TCTs nos. T-30228,
30229, 30230, 30231 and 30232. When the lots covered by said titles were
subsequently subdivided into 50 lots, the notices of lis pendens were carried over to
the titles of the subdivided lots, i.e., Transfer Certificate of Title Nos. T-36179 to T-
36226 and T-36245 to T-36246 of the Register of Deeds of Tagaytay City.
On January 30, 1998, [respondent] and x x x Ernest L. Escaler, filed a Motion to
Dismiss [petitioners] Complaint for lack of jurisdiction and for failure to state a cause
of action. They claimed [that] the Makati RTC has no jurisdiction over the subject
matter of the case because the parties Construction Contract contained a clause
requiring them to submit their dispute to arbitration.

xxxxxxxxx

On March 17, 1998, [RTC Judge Ranada] dismissed the Complaint as against
[respondent] for [petitioners] failure to comply with a condition precedent to the filing
of a court action which is the prior resort to arbitration and as against x x x Escaler for
failure of the Complaint to state a cause of action x x x.

[Petitioner] filed a Motion for Reconsideration of the March 17, 1998 dismissal
order. [Respondent] filed its Opposition thereto.

On April 24, 1998, [respondent] filed a Motion to Cancel Notice of Lis Pendens. It
argued that the notices of lis pendens are without basis because [petitioners] action is
a purely personal action to collect a sum of money and recover damages and x x x
does not directly affect title to, use or possession of real property.

In his July 30, 1998 Order, [Judge Ranada] granted [respondents] Motion to Cancel
Notice of Lis Pendens x x x:

[Petitioner] filed a Motion for Reconsideration of the aforesaid July 30, 1998 Order to
which [respondent] filed an Opposition.

In a November 4, 1998 Order, [Judge Ranada,] while finding no merit in the grounds
raised by [petitioner] in its Motion for Reconsideration, reversed his July 30, 1998
Order and reinstated the notices of lis pendens, as follows:

1. The Court finds no merit in plaintiffs contention that in dismissing the above-
entitled case for lack of jurisdiction, and at the same time granting defendant Herbal
Coves motion to cancel notice of lis pendens, the Court [took] an inconsistent
posture. The Rules provide that prior to the transmittal of the original record on
appeal, the court may issue orders for the protection and preservation of the rights of
the parties which do not involve any matter litigated by the appeal (3 rd par., Sec. 10,
Rule 41). Even as it declared itself without jurisdiction, this Court still has power to
act on incidents in this case, such as acting on motions for reconsideration, for
correction, for lifting of lis pendens, or approving appeals, etc.
As correctly argued by defendant Herbal Cove, a notice of lis pendens serves only as a
precautionary measure or warning to prospective buyers of a property that there is a
pending litigation involving the same.

The Court notes that when it issued the Order of 30 July 1998 lifting the notice of lis
pendens, there was as yet no appeal filed by plaintiff. Subsequently, on 10 September
1998, after a notice of appeal was filed by plaintiff on 4 September 1998, the Branch
Clerk of Court was ordered by the Court to elevate the entire records of the above-
entitled case to the Court of Appeals. It therefore results that the above-entitled case is
still pending. After a careful consideration of all matters relevant to the lis pendens,
the Court believes that justice will be better served by setting aside the Order of 30
July 1998.

On November 27, 1998, [respondent] filed a Motion for Reconsideration of the

November 4, 1998 Order arguing that allowing the notice of lis pendens to remain
annotated on the titles would defeat, not serve, the ends of justice and that equitable
considerations cannot be resorted to when there is an applicable provision of law.

xxxxxxxxx

On October 22, 1999, [Judge Ranada] issued an order denying [respondents] Motion
for Reconsideration of the November 4, 1998 Order for lack of sufficient merit. [5]

Thereafter, Respondent Herbal Cove filed with the CA a Petition for

Certiorari.

Ruling of the Court of Appeals

Setting aside the Orders of the RTC dated November 4, 1998 and October
22, 1999, the CA reinstated the formers July 30, 1998 Order granting Herbal
[6]

Coves Motion to Cancel the Notice of Lis Pendens. According to the appellate
court, the re-annotation of those notices was improper for want of any legal
basis. It specifically cited Section 76 of Presidential Decree No. 1529 (the
Property Registration Decree). The decree provides that the registration of
such notices is allowed only when court proceedings directly affect the title to,
or the use or the occupation of, the land or any building thereon.
The CA opined that the Complaint filed by petitioner in Civil Case No. 97-
2707 was intended purely to collect a sum of money and to recover
damages. The appellate court ruled that the Complaint did not aver any
ownership claim to the subject land or any right of possession over the
buildings constructed thereon. It further declared that absent any claim on the
title to the buildings or on the possession thereof, the notices of lis
pendens had no leg to stand on.
Likewise, the CA held that Judge Ranada should have maintained the
notice cancellations, which he had directed in his July 30, 1998 Order. Those
notices were no longer necessary to protect the rights of petitioner, inasmuch
as it could have procured protective relief from the Construction Industry
Arbitral Commission (CIAC), where provisional remedies were available.The
CA also mentioned petitioners admission that there was already a pending
case before the CIAC, which in fact rendered a decision on March 11, 1999.
The appellate court further explained that the re-annotation of the Notice
of Lis Pendens was no longer warranted after the court a quo had ruled that
the latter had no jurisdiction over the case. The former held that the rationale
behind the principle of lis pendens -- to keep the subject matter of the litigation
within the power of the court until the entry of final judgment -- was no longer
applicable. The reason for such inapplicability was that the Makati RTC
already declared that it had no jurisdiction or power over the subject matter of
the case.
Finally, the CA opined that petitioners Complaint had not alleged or
claimed, as basis for the continued annotation of the Notice of Lis
Pendens, the lien of contractors and laborers under Article 2242 of the New
Civil Code. Moreover, petitioner had not even referred to any lien of whatever
nature. Verily, the CA ruled that the failure to allege and claim the contractors
lien did not warrant the continued annotation on the property titles of
Respondent Herbal Cove.
Hence, this Petition. [7]

The Issues

Petitioner raises the following issues for our consideration:

I. Whether or not money claims representing cost of materials [for] and labor [on] the
houses constructed on a property [are] a proper lien for annotation of lis pendens on
the property title[.]
II. Whether or not the trial court[,] after having declared itself without jurisdiction to try
the case[,] may still decide on [the] substantial issue of the case.[8]

This Courts Ruling

 The Petition has no merit.

First Issue:
Proper Basis for a
Notice of Lis Pendens

Petitioner avers that its money claim on the cost of labor and materials for
the townhouses it constructed on the respondents land is a proper lien that
justifies the annotation of a notice of lis pendens on the land titles. According
to petitioner, the money claim constitutes a lien that can be enforced to secure
payment for the said obligations. It argues that, to preserve the alleged
improvement it had made on the subject land, such annotation on the property
titles of respondent is necessary.
On the other hand, Respondent Herbal Cove argues that the annotation is
bereft of any factual or legal basis, because petitioners Complaint does not
[9]

directly affect the title to the property, or the use or the possession thereof. It
also claims that petitioners Complaint did not assert ownership of the property
or any right to possess it. Moreover, respondent attacks as baseless
the annotation of the Notice of Lis Pendens through the enforcement of a
contractors lien under Article 2242 of the Civil Code. It points out that the said
provision applies only to cases in which there are several creditors carrying on
a legal action against an insolvent debtor.
As a general rule, the only instances in which a notice of lis pendens may
be availed of are as follows: (a) an action to recover possession of real estate;
(b) an action for partition; and (c) any other court proceedings that directly
affect the title to the land or the building thereon or the use or the occupation
thereof. Additionally, this Court has held that resorting to lis pendens is not
[10]

necessarily confined to cases that involve title to or possession of real

property. This annotation also applies to suits seeking to establish a right to,
or an equitable estate or interest in, a specific real property; or to enforce a
lien, a charge or an encumbrance against it. [11]

Apparently, petitioner proceeds on the premise that its money claim

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

xxxxxxxxx

(3) Claims of laborers, masons, mechanics and other workmen, as well as of

architects, engineers and contractors, engaged in the construction, reconstruction or
repair of buildings, canals or other works, upon said buildings, canals or other works;

(4) Claims of furnishers of materials used in the construction, reconstruction, or repair

of buildings, canals or other works, upon said buildings, canals or other works[.]
(Emphasis supplied)

However, a careful examination of petitioners Complaint, as well as the

reliefs it seeks, reveals that no such lien or interest over the property was ever
alleged. The Complaint merely asked for the payment of construction services
and materials plus damages, without mentioning -- much less asserting -- a
lien or an encumbrance over the property. Verily, it was a purely personal
action and a simple collection case. It did not contain any material averment of
any enforceable right, interest or lien in connection with the subject property.
As it is, petitioners money claim cannot be characterized as an action that
involves the enforcement of a lien or an encumbrance, one that would thus
warrant the annotation of the Notice of Lis Pendens. Indeed, the nature of an
action is determined by the allegations of the complaint. [12]

Even assuming that petitioner had sufficiently alleged such lien or

encumbrance in its Complaint, the annotation of the Notice of Lis
Pendens would still be unjustified, because a complaint for collection and
damages is not the proper mode for the enforcement of a contractors lien.
In J.L. Bernardo Construction v. Court of Appeals, the Court explained
[13]

the concept of a contractors lien under Article 2242 of the Civil Code and the
proper mode for its enforcement as follows:

Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
preference with respect to specific personal or real property of the
debtor. Specifically, the contractors lien claimed by the petitioners is granted under
the third paragraph of Article 2242 which provides that the claims of contractors
engaged in the construction, reconstruction or repair of buildings or other works
shall be preferred with respect to the specific building or other immovable property
constructed.
However, Article 2242 finds application when there is a concurrence of credits, i.e.,
when the same specific property of the debtor is subjected to the claims of several
creditors and the value of such property of the debtor is insufficient to pay in full all
the creditors. In such a situation, the question of preference will arise, that is, there
will be a need to determine which of the creditors will be paid ahead of the
others. Fundamental tenets of due process will dictate that this statutory lien should
then only be enforced in the context of some kind of a proceeding where the claims
of all the preferred creditors may be bindingly adjudicated, such as insolvency
proceedings. (Emphasis supplied)
[14]

Clearly then, neither Article 2242 of the Civil Code nor the enforcement of
the lien thereunder is applicable here, because petitioners Complaint failed to
satisfy the foregoing requirements. Nowhere does it show that respondents
property was subject to the claims of other creditors or was insufficient to pay
for all concurring debts. Moreover, the Complaint did not pertain to insolvency
proceedings or to any other action in which the adjudication of claims of
preferred creditors could be ascertained.
Another factor negates the argument of petitioner that its money claim
involves the enforcement of a lien or the assertion of title to or possession of
the subject property: the fact that it filed its action with the RTC of Makati,
which is undisputedly bereft of any jurisdiction over respondents property in
Tagaytay City. Certainly, actions affecting title to or possession of real
property or the assertion of any interest therein should be commenced and
tried in the proper court that has jurisdiction over the area, where the real
property involved or a portion thereof is situated. If petitioner really intended
[15]

to assert its claim or enforce its supposed lien, interest or right over
respondents subject properties, it would have instituted the proper
proceedings or filed a real action with the RTC of Tagaytay City, which clearly
had jurisdiction over those properties. [16]

Narciso Pea, a leading authority on the subject of land titles and

registration, gives an explicit exposition on the inapplicability of the doctrine
of lis pendens to certain actions and proceedings that specifically include
money claims. He explains in this wise:

By express provision of law, the doctrine of lis pendens does not apply to attachments,
levies of execution, or to proceedings for the probate of wills, or for administration of
the estate of deceased persons in the Court of First Instance. Also, it is held generally
that the doctrine of lis pendens has no application to a proceeding in which the only
object sought is the recovery of a money judgment, though the title or right of
possession to property be incidentally affected. It is essential that the property
be directly affected, as where the relief sought in the action or suit includes the
recovery of possession, or the enforcement of a lien, or an adjudication between
conflicting claims of title, possession, or the right of possession to specific property,
or requiring its transfer or sale (Emphasis supplied)
[17]

Pea adds that even if a party initially avails itself of a notice of lis
pendens upon the filing of a case in court, such notice is rendered nugatory if
the case turns out to be a purely personal action. We quote him as follows:

It may be possible also that the case when commenced may justify a resort to lis
pendens, but during the progress thereof, it develops to be purely a personal action for
damages or otherwise. In such event, the notice of lis pendens has become functus
officio. (Emphasis supplied)
[18]

Thus, when a complaint or an action is determined by the courts to be in

personam, the rationale for or purpose of the notice of lis pendens ceases to
exist. To be sure, this Court has expressly and categorically declared that the
annotation of a notice of lis pendens on titles to properties is not proper in
cases wherein the proceedings instituted are actions in personam. [19]

Second Issue:
Jurisdiction of the Trial Court

Petitioner argues that the RTC had no jurisdiction to issue the Order
canceling the Notice of Lis Pendens as well as the Order reinstating
it. Supposedly, since both Orders were issued by the trial court without
jurisdiction, the annotation made by the Register of Deeds of Tagaytay City
must remain in force.
Petitioner avers that the trial court finally declared that the latter had no
jurisdiction over the case on July 27, 1998, in an Order denying the formers
Motion for Reconsideration of the March 17, 1998 Order dismissing the
Complaint. Petitioner insists that the subsequent July 30, 1998 Order
cancelling the subject Notice of Lis Pendens is void, because it was issued by
a court that had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from
regional trial courts, expressly provides that RTCs lose jurisdiction over a case
when an appeal is filed. The rule reads thus:

SEC. 9. Perfection of appeal; effect thereof. -- A partys appeal by notice of appeal is

deemed perfected as to him upon the filing of the notice of appeal in due time.
 xxxxxxxxx

In appeals by notice of appeal, the court loses jurisdiction over the case upon the
perfection of the appeals filed in due time and the expiration of the time to appeal of
the other parties. (Emphasis supplied)

On the basis of the foregoing rule, the trial court lost jurisdiction over the
case only on August 31, 1998, when petitioner filed its Notice of
Appeal. Thus, any order issued by the RTC prior to that date should be
[20]

considered valid, because the court still had jurisdiction over the
case. Accordingly, it still had the authority or jurisdiction to issue the July 30,
1998 Order canceling the Notice of Lis Pendens. On the other hand,
the November 4, 1998 Order that set aside the July 30, 1998 Order and
reinstated that Notice should be considered without force and effect, because
it was issued by the trial court after it had already lost jurisdiction.
In any case, even if we were to adopt petitioners theory that both the July
30, 1998 and the November 4, 1998 Orders were void for having been issued
without jurisdiction, the annotation is still improper for lack of factual and legal
bases.
As discussed previously, erroneously misplaced is the reliance of
petitioner on the premise that its money claim is an action for the enforcement
of a contractors lien. Verily, the annotation of the Notice of Lis Pendens on the
subject property titles should not have been made in the first place. The
Complaint filed before the Makati RTC -- for the collection of a sum of money
and for damages -- did not provide sufficient legal basis for such annotation.
Finally, petitioner vehemently insists that the trial court had no jurisdiction
to cancel the Notice. Yet, the former filed before the CA an appeal, docketed
as CA-GR CV No. 65647, questioning the RTCs dismissal of the Complaint
[21]

for lack of jurisdiction. Moreover, it must be remembered that it was petitioner

which had initially invoked the jurisdiction of the trial court when the former
sought a judgment for the recovery of money and damages against
respondent. Yet again, it was also petitioner which assailed that same
jurisdiction for issuing an order unfavorable to the formers cause. Indeed,
parties cannot invoke the jurisdiction of a court to secure affirmative relief,
then repudiate or question that same jurisdiction after obtaining or failing to
obtain such relief.[22]

WHEREFORE, the Petition is hereby DENIED and the assailed

Decision AFFIRMED. Costs against petitioner.
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs. HONORABLE COURT OF APPEALS and REMINGTON
INDUSTRIAL SALES CORPORATION, respondents.

DECISION
KAPUNAN, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the
Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a corporation engaged in
the manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides, copper
ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB)
various loan accommodations. To secure the loans, Marinduque Mining executed on October 9,
1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage
covered all of Marinduque Minings real properties, located at Surigao del Norte, Sipalay, Negros
Occidental, and at Antipolo, Rizal, including the improvements thereon. As of November 20,
1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest and charges.[1]
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank
of the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte, Sipalay,
Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The mortgage also
covered all of Marinduque Minings chattels, as well as assets of whatever kind, nature and
description which Marinduque Mining may subsequently acquire in substitution or
replenishment or in addition to the properties covered by the previous Deed of Real and Chattel
Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans
totaling P2 Billion from DBP, exclusive of interest and charges.[2]
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment
to Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of
PNB and DBP all other real and personal properties and other real rights subsequently acquired
by Marinduque Mining.[3]
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted
sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged
properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:

In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP
emerged and were declared the highest bidders over the foreclosed real properties,
buildings, mining claims, leasehold rights together with the improvements thereon as
well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel
Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and][o]ver
the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao del
Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. 5 to 5-A,
6, 7 to 7-AA- PNB/DBP). For the foreclosed real properties together with all the
buildings, major machineries & equipment and other improvements of MMIC located
at Antipolo, Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as
highest bidders in the sum of P1,107,167,950.00 (Exhs. 10 to 10-X- PNB/ DBP).

At the auction sale conducted on September 7, 1984[,] over the foreclosed real
properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros
Occidental were sold to PNB and DBP, as highest bidders, in the amount of
P2,383,534,000.00 and P543,040,000.00 respectively (Exhs. 8 to 8-BB, 9 to 90-
GGGGGGPNB/DBP).

Finally, at the public auction sale conducted on September 18, 1984 on the foreclosed
personal properties of MMIC, the same were sold to PNB and DBP as the highest
bidder in the sum of P678,772,000.00 (Exhs. 11 and12-QQQQQPNB).

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely, in
order to ensure the continued operation of the Nickel refinery plant and to prevent the
deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining and
Industrial Corporation all their rights, interest and participation over the foreclosed
properties of MMIC located at Nonoc Island, Surigao del Norte for an initial
consideration of P14,361,000,000.00 (Exh. 13-PNB).

Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned
and transferred in favor of Maricalum Mining Corp. all its rights, interest and
participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental
for an initial consideration of P325,800,000.00 (Exh. 14PNB/DBP).

On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as amended,
again assigned, transferred and conveyed to the National Government thru [sic] the
Asset Privatization Trust (APT) all its existing rights and interest over the assets of
MMIC, earlier assigned to Nonoc Mining and Industrial Corporation, Maricalum
Mining Corporation and Island Cement Corporation (Exh. 15 & 15-APNB/DBP). [4]

In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased
and caused to be delivered construction materials and other merchandise from Remington
Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid as
of August 1, 1984 when Remington filed a complaint for a sum of money and damages against
Marinduque Mining for the value of the unpaid construction materials and other merchandise
purchased by Marinduque Mining, as well as interest, attorneys fees and the costs of suit.
 On September 7, 1984, Remingtons original complaint was amended to include PNB and
DBP as co-defendants in view of the foreclosure by the latter of the real and chattel mortgages
on the real and personal properties, chattels, mining claims, machinery, equipment and other
assets of Marinduque Mining.[5]
On September 13, 1984, Remington filed a second amended complaint to include as
additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc
Mining is the assignee of all real and personal properties, chattels, machinery, equipment and all
other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.[6]
On March 26, 1986, Remington filed a third amended complaint including the Maricalum
Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-
defendants.Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum
Mining and Island Cement must be treated in law as one and the same entity by disregarding the
veil of corporate fiction since:

1. Co-defendants NMIC, Maricalum and Island Cement which are newly created
entities are practically owned wholly by defendants PNB and DBP, and managed by
their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum
and Island Cement were organized in such a hurry and in such suspicious
circumstances by co-defendants PNB and DBP after the supposed extra-judicial
foreclosure of MMICs assets as to make their supposed projects assets, machineries
and equipment which were originally owned by co-defendant MMIC beyond the
reach of creditors of the latter.

2. The personnel, key officers and rank-and-file workers and employees of co-
defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and
DBP were the personnel of co-defendant MMIC such that x x x practically there has
only been a change of name for all legal purpose and intents.

3. The places of business not to mention the mining claims and project premises of co-
defendants NMIC, Maricalum and Island Cement likewise used to be the places of
business, mining claims and project premises of co-defendant MMIC as to make the
aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts and
subsidiaries of co-defendants PNB and DBP, and subject to their control and
management.

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island Cement
being all corporations created by the government in the pursuit of business ventures
should not be allowed to ignore, x x x or obliterate with impunity nay illegally, the
financial obligations of x x x MMIC whose operations co-defendants PNB and DBP
had highly financed before the alleged extrajudicial foreclosure of defendant MMICs
assets, machineries and equipment to the extent that major policies of co-defendant
MMIC were being decided upon by co-defendants PNB and DBP as major financiers
who were represented in its board of directors forming part of the majority thereof
which through the alleged extrajudicial foreclosure culminated in a complete take-
over by co-defendants PNB and DBP bringing about the organization of their co-
defendants NMIC, Maricalum and Island Cement to which were transferred all the
assets, machineries and pieces of equipment of co-defendant MMIC used in its nickel
mining project in Surigao del Norte, copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of co-
defendant MMIC such as plaintiff Remington Industrial Sales Corporation whose
stockholders, officers and rank-and-file workers in the legitimate pursuit of its
business activities, invested considerable time, sweat and private money to supply,
among others, co-defendant MMIC with some of its vital needs for its operation,
which co-defendant MMIC during the time of the transactions material to this case
became x x x co-defendants PNB and DBPs instrumentality, business conduit, alter
ego, agency (sic), subsidiary or auxiliary corporation, by virtue of which it becomes
doubly necessary to disregard the corporation fiction that co-defendants PNB, DBP,
MMIC, NMIC, Maricalum and Island Cement, six (6) distinct and separate entities,
when in fact and in law, they should be treated as one and the same at least as far as
plaintiffs transactions with co-defendant MMIC are concerned, so as not to defeat
public convenience, justify wrong, subvert justice, protect fraud or confuse legitimate
issues involving creditors such as plaintiff, a fact which all defendants were as (sic)
still are aware of during all the time material to the transactions subject of this case.[7]

On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint
impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended complaint
was admitted by the lower court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of
Remington, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the

defendants Marinduque Mining & Industrial Corporation, Philippine National Bank,
Development Bank of the Philippines, Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization
Trust to pay, jointly and severally, the sum of P920,755.95, representing the principal
obligation, including the stipulated interest as of June 22, 1984, plus ten percent
(10%) surcharge per annum by way of penalty, until the amount is fully paid; the sum
equivalent to 10% of the amount due as and for attorneys fees; and to pay the costs. [8]

Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT,
the Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the
RTC. Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated
August 29, 1996.
 Hence, this petition, DBP maintaining that Remington has no cause of action against it or
PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the
APT.
On the other hand, private respondent Remington submits that the transfer of the properties
was made in fraud of creditors. The presence of fraud, according to Remington, warrants the
piercing of the corporate veil such that Marinduque Mining and its transferees could be
considered as one and the same corporation. The transferees, therefore, are also liable for the
value of Marinduque Minings purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,[9] cited by the Court of Appeals in its
decision,[10] this Court declared:

It is an elementary and fundamental principle of corporation law that a corporation is

an entity separate and distinct from its stockholders and from other corporations to
which it may be connected. However, when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons or in case of two corporations, merge
them into one. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) xxx

In accordance with the foregoing rule, this Court has disregarded the separate personality of
the corporation where the corporate entity was used to escape liability to third parties. [11] In this
case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to
warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the
past due account had incurred arrearages of more than 20% of the total outstanding obligation.
Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides:

It shall be mandatory for government financial institutions, after the lapse of sixty (60)
days from the issuance of this decree, to foreclose the collateral and/or securities for
any loan, credit accommodation, and/or guarantees granted by them whenever the
arrearages on such account, including accrued interest and other charges, amount to at
least twenty percent (20%) of the total outstanding obligations, including interest and
other charges, as appearing in the books of account and/or related records of the
financial institution concerned. This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies available to them
under their respective contracts with their debtors, including the right to foreclose on
loans, credits, accomodations and/or guarantees on which the arrearages are less than
twenty (20%) percent.

Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose
upon the subject properties. The banks had no choice but to obey the statutory command.
 The import of this mandate was lost on the Court of Appeals, which reasoned that under
Article 19 of the Civil Code, Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith. The appellate court, however, did not point to any fact evidencing bad faith on the part of
the Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by holding that
the question of actual fraudulent intent on the part of the interlocking directors of DBP and
Marinduque Mining was irrelevant because:

As aptly stated by the appellee in its brief, x x x where the corporations have directors
and officers in common, there may be circumstances under which their interest as
officers in one company may disqualify them in equity from representing both
corporations in transactions between the two. Thus, where one corporation was
insolvent and indebted to another, it has been held that the directors of the creditor
corporation were disqualified, by reason of self-interest, from acting as directors of
the debtor corporation in the authorization of a mortgage or deed of trust to the former
to secure such indebtedness x x x (page 105 of the Appellees Brief). In the same
manner that x x x when the corporation is insolvent, its directors who are its creditors
can not secure to themselves any advantage or preference over other creditors. They
can not thus take advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their representatives, without
reference to the question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon fraud in fact, but upon
the violation of the fiduciary relation to the directors. xxx. (page 106 of the Appellees
Brief.)

We also concede that x x x directors of insolvent corporation, who are creditors of the
company, can not secure to themselves any preference or advantage over other
creditors in the payment of their claims. It is not good morals or good law. The
governing body of officers thereof are charged with the duty of conducting its affairs
strictly in the interest of its existing creditors, and it would be a breach of such trust
for them to undertake to give any one of its members any advantage over any other
creditors in securing the payment of his debts in preference to all others. When
validity of these mortgages, to secure debts upon which the directors were indorsers,
was questioned by other creditors of the corporation, they should have been classed as
instruments rendered void by the legal principle which prevents directors of an
insolvent corporation from giving themselves a preference over outside creditors. x x
x (page 106-107 of the Appellees Brief.) [12]

The Court of Appeals made reference to two principles in corporation law. The first pertains
to transactions between corporations with interlocking directors resulting in the prejudice to one
of the corporations. This rule does not apply in this case, however, since the corporation
allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking
directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves directors who are creditors
which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the
directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining,
Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its
charter to engage in the mining business.[13] The creation of the three corporations was necessary
to manage and operate the assets acquired in the foreclosure sale lest they deteriorate from non-
use and lose their value. In the absence of any entity willing to purchase these assets from the
bank, what else would it do with these properties in the meantime? Sound business practice
required that they be utilized for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining,
Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the latters
officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP
in the foreclosure sale, convenience and practicality dictated that the corporations so created
occupy the premises where these assets were found instead of relocating them. No doubt, many
of these assets are heavy equipment and it may have been impossible to move them. The same
reasons of convenience and practicality, not to mention efficiency, justified the hiring by Nonoc
Mining, Maricalum and Island Cement of Marinduque Minings personnel to manage and operate
the properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.[14] To disregard the separate juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established. It cannot be presumed.[15] In this case, the Court finds that
Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining
and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing
of the corporate veil.
The Court of Appeals also held that there exists in Remingtons favor a lien on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held
liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be
enforced against DBP. Article 2241 of the Civil Code provides:

Article 2241. With reference to specific movable property of the debtor, the following
claims or liens shall be preferred:

xxx

(3) Claims for the unpaid price of movables sold, on said movables, so long as they
are in the possession of the debtor, up to the value of the same; and if the movable has
been resold by the debtor and the price is still unpaid, the lien may be enforced on the
price; this right is not lost by the immobilization of the thing by destination, provided
it has not lost its form, substance and identity, neither is the right lost by the sale of
the thing together with other property for a lump sum, when the price thereof can be
determined proportionally;

(4) Credits guaranteed with a pledge so long as the things pledged are in the hands of
the creditor, or those guaranteed by a chattel mortgage, upon the things pledged or
mortgaged, up to the value thereof;

xxx
In Barretto vs. Villanueva,[16] the Court had occasion to construe Article 2242, governing
claims or liens over specific immovable property. The facts that gave rise to the case were
summarized by this Court in its resolution as follows:

x x x Rosario Cruzado sold all her right, title, and interest and that of her children in
the house and lot herein involved to Pura L. Villanueva for P19,000.00. The purchaser
paid P1,500 in advance, and executed a promissory note for the balance of
P17,500.00. However, the buyer could only pay P5,500 on account of the note, for
which reason the vendor obtained judgment for the unpaid balance. In the meantime,
the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and
mortgaged the property to appellant Magdalena C. Barretto, married to Jose C.
Baretto, to secure a loan of P30,000.03, said mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
foreclosed the mortgage in her favor, obtained judgment, and upon its becoming final
asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a motion for
recognition for her "vendor's lien" in the amount of P12,000.00, plus legal interest,
invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the
court below ordered the "lien" annotated on the back of Certificate of Title No. 32526,
with the proviso that in case of sale under the foreclousre decree the vendor's lien and
the mortgage credit of appellant Barretto should be paid pro rata from the
proceeds. Our original decision affirmed this order of the Court of First Instance of
Manila.

In its decision upholding the order of the lower court, the Court ratiocinated thus:

Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable property, and among them are:

"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same specific real property or real rights, they shall be satisfied pro-
rata, after the payment of the taxes and assessments upon the immovable property or
real rights."

Application of the above-quoted provisions to the case at bar would mean that the
herein appellee Rosario Cruzado as an unpaid vendor of the property in question has
the right to share pro-rata with the appellants the proceeds of the foreclosure sale.

xxx

As to the point made that the articles of the Civil Code on concurrence and preference
of credits are applicable only to the insolvent debtor, suffice it to say that nothing in
the law shows any such limitation. If we are to interpret this portion of the Code as
intended only for insolvency cases, then other creditor-debtor relationships where
there are concurrence of credits would be left without any rules to govern them, and it
would render purposeless the special laws on insolvency. [17]

Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L.
Reyes, speaking for the Court, explained the reasons for the reversal:

A. The previous decision failed to take fully into account the radical changes
introduced by the Civil Code of the Philippines into the system of priorities among
creditors ordained by the Civil Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to

specific real property under Article 1923 were to be resolved according to an order of
priorities established by Article 1927, whereby one class of creditors could exclude
the creditors of lower order until the claims of the former were fully satisfied out of
the proceeds of the sale of the real property subject of the preference, and could even
exhaust proceeds if necessary.

Under the system of the Civil Code of the Philippines, however, only taxes enjoy a
similar absolute preference. All the remaining thirteen classes of preferred creditors
under Article 2242 enjoy no priority among themselves, but must be paid pro rata,
i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:

"If there are two or more credits with respect to the same specific real property or real
rights, they shall be satisfied pro rata, after the payment of the taxes and assessments
upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated
in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims ascertained. It is thus apparent
that the full application of Articles 2249 and 2242 demands that there must be first
some proceeding where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of decedent's estate under Rule 87 of
the Rules of Court, or other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that -

"The claims or credits enumerated in the two preceding articles shall be considered as
mortgages or pledges of real or personal property, or liens within the purview of legal
provisions governing insolvencyxxx (Italics supplied).

And the rule is further clarified in the Report of the Code Commission, as follows:

"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be enforced in accordance with the Insolvency
Law." (Italics supplied)

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds
of a foreclosure sale (as in the case now before us) is not the proceeding contemplated
by law for the enforcement of preferences under Article 2242, unless the claimant
were enforcing a credit for taxes that enjoy absolute priority. If none of the claims is
for taxes, a dispute between two creditors will not enable the Court to ascertain
the pro rata dividend corresponding to each, because the rights of the other creditors
likewise enjoying preference under Article 2242 can not be ascertained. Wherefore,
the order of the Court of First Instance of Manila now appealed from, decreeing that
the proceeds of the foreclosure sale be apportioned only between appellant and
appellee, is incorrect, and must be reversed. [Underscoring supplied]

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et
al., and in two cases both entitled Development Bank of the Philippines vs. NLRC.[19]
[18]

Although Barretto involved specific immovable property, the ruling therein should apply
equally in this case where specific movable property is involved. As the extra-judicial
foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the
Civil Code, Remington cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated
October 6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET
ASIDE. The original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is
hereby DISMISSED
JOSE C. CORDOVA, G.R. No. 146555

Petitioner,

Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,*

- v e r s u s - CORONA,

AZCUNA and

GARCIA, JJ. **

REYES DAWAY LIM BERNARDO

LINDO ROSALES LAW OFFICES,
ATTY. WENDELL CORONEL and
the SECURITIES AND EXCHANGE
COMMISSION,***
Respondents. Promulgated:

July 3, 2007

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

DECISION

CORONA, J.:
This is a petition for review on certiorari[1] of a decision[2] and resolution[3] of the
Court of Appeals (CA) dated July 31, 2000 and December 27, 2000, respectively, in
CA-G.R. SP No. 55311.

Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from

Philippine Underwriters Finance Corporation (Philfinance) certificates of stock of
Celebrity Sports Plaza Incorporated (CSPI) and shares of stock of various
other corporations. He was issued a confirmation of sale.[4] The CSPI shares were
physically delivered by Philfinance to the former Filmanbank[5] and Philtrust Bank,
as custodian banks, to hold these shares in behalf of and for the benefit of
petitioner.[6]

On June 18, 1981, Philfinance was placed under receivership by public

respondent Securities and Exchange Commission (SEC). Thereafter, private
respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty.
Wendell Coronel (private respondents) were appointed as
liquidators.[7] Sometime in 1991, without the knowledge and consent of petitioner
and without authority from the SEC, private respondents withdrew the CSPI
shares from the custodian banks.[8] On May 27, 1996, they sold the shares to
Northeast Corporation and included the proceeds thereof in the funds of
Philfinance. Petitioner learned about the unauthorized sale of his shares only on
September 10, 1996.[9] He lodged a complaint with private respondents but the
latter ignored it[10] prompting him to file, on May 6, 1997,[11] a formal complaint
against private respondents in the receivership proceedings with the SEC, for the
return of the shares.

Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for
Philfinances creditors and investors.[12] On May 13, 1997, the liquidators began
the process of settling the claims against Philfinance, from its assets.[13]

On April 14, 1998, the SEC rendered judgment dismissing the petition.
However, it reconsidered this decision in a resolution dated September 24, 1999
and granted the claims of petitioner. It held that petitioner was the owner of the
CSPI shares by virtue of a confirmation of sale (which was considered as a deed of
assignment) issued to him by Philfinance. But since the shares had already been
sold and the proceeds commingled with the other assets of Philfinance,
petitioners status was converted into that of an ordinary creditor for the value of
such shares. Thus, it ordered private respondents to pay petitioner the amount
of P5,062,500 representing 15% of the monetary value of his CSPI shares plus
interest at the legal rate from the time of their unauthorized sale.

On October 27, 1999, the SEC issued an order clarifying its September 24,
1999 resolution. While it reiterated its earlier order to pay petitioner the amount
of P5,062,500, it deleted the award of legal interest. It clarified that it never
meant to award interest since this would be unfair to the other claimants.
 On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed
the owner of the CSPI shares but the recovery of such shares had become

impossible. It also declared that the clarificatory order merely harmonized the
dispositive portion with the body of the resolution. Petitioners motion for
reconsideration was denied.

Hence this petition raising the following issues:

1) whether petitioner should be considered as a preferred (and
secured) creditor of Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or
merely 15% thereof like all other ordinary creditors of Philfinance
and
3) whether petitioner is entitled to legal interest.[14]

To resolve these issues, we first have to determine if petitioner was

indeed a creditor of Philfinance.

There is no dispute that petitioner was the owner of the CSPI

shares. However, private respondents, as liquidators of Philfinance, illegally
withdrew said certificates of stock without the knowledge and consent of

petitioner and authority of the SEC.[15] After selling the CSPI shares, private
respondents added the proceeds of the sale to the assets of
Philfinance.[16] Under these circumstances, did the petitioner become a creditor
of Philfinance? We rule in the affirmative.

The SEC, after holding that petitioner was the owner of the shares,

stated:

Petitioner is seeking the return of his CSPI shares which, for the present, is no longer

possible, considering that the same had already been sold by the respondents, the

proceeds of which are ADMITTEDLY commingled with the assets of PHILFINANCE.

This being the case, [petitioner] is now but a claimant for the value of those shares. As a

claimant, he shall be treated as an ordinary creditor in so far as the value of those

certificates is concerned.[17]

The CA agreed with this and elaborated:

Much as we find both detestable and reprehensible the grossly abusive and

illicit contrivance employed by private respondents against petitioner, we, nevertheless,

concur with public respondent that the return of petitioners CSPI shares is well-nigh

impossible, if not already an utter impossibility, inasmuch as the certificates of stocks

have already been alienated or transferred in favor of Northeast Corporation, as early as

May 27, 1996, in consequence whereof the proceeds of the sale have been transmuted

into corporate assets of Philfinance, under custodia legis, ready for distribution to its
 creditors and/or investors. Case law holds that the assets of an institution under

receivership or liquidation shall be deemed in custodia legis in the hands of the receiver

or liquidator, and shall from the moment of such receivership or liquidation, be exempt

from any order, garnishment, levy, attachment, or execution.

Concomitantly, petitioners filing of his claim over the subject CSPI shares before

the SEC in the liquidation proceedings bound him to the terms and conditions thereof.

He cannot demand any special treatment [from] the liquidator, for this flies in the face

of, and will contravene, the Supreme Court dictum that when a corporation threatened

by bankruptcy is taken over by a receiver, all the creditors shall stand on equal footing.

Not one of them should be given preference by paying one or some [of] them ahead of

the others. This is precisely the philosophy underlying the suspension of all pending

claims against the corporation under receivership. The rule of thumb is equality in

equity.[18]

We agree with both the SEC and the CA that petitioner had become an
ordinary creditor of Philfinance.

Certainly, petitioner had the right to demand the return of his CSPI
shares.[19] He in fact filed a complaint in the liquidation proceedings in the SEC
to get them back but was confronted by an impossible situation as they had
already been sold. Consequently, he sought instead to recover their monetary
value.
 Petitioners CSPI shares were specific or determinate movable
properties.[20] But after they were sold, the money raised from the sale became
generic[21] and were commingled with the cash and other assets of Philfinance.

Unlike shares of stock, money is a generic thing. It is designated merely by its

class or genus without any particular designation or physical segregation from
all others of the same class.[22] This means that once a certain amount is added

to the cash balance, one can no longer pinpoint the specific amount included
which then becomes part of a whole mass of money.

It thus became impossible to identify the exact proceeds of the sale of

the CSPI shares since they could no longer be particularly designated nor
distinctly segregated from the assets of Philfinance. Petitioners only remedy
was to file a claim on the whole mass of these assets, to which unfortunately all

of the other creditors and investors of Philfinance also had a claim.

Petitioners right of action against Philfinance was a claim properly to be

litigated in the liquidation proceedings.[23] In Finasia Investments and Finance
Corporation v. CA,[24] we discussed the definition of claims in the context of

liquidation proceedings:

We agree with the public respondent that the word claim as used
in Sec. 6(c) of P.D. 902-A,[25] as amended, refers to debts or demands of
 a pecuniary nature. It means "the assertion of a right to have money
paid. It is used in special proceedings like those before [the
administrative court] on insolvency."

The word "claim" is also defined as:

Right to payment, whether or not such right is reduced to

judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, unsecured.[26]

Undoubtedly, petitioner had a right to the payment of the value of his

shares. His demand was of a pecuniary nature since he was claiming the

monetary value of his shares.It was in this sense (i.e. as a claimant) that he was
a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are

applicable to the liquidation proceedings.[27] The next question is, was

petitioner a preferred or ordinary creditor under these provisions?

Petitioner argues that he was a preferred creditor because private

respondents illegally withdrew his CSPI shares from the custodian banks and
sold them without his knowledge and consent and without authority from the
SEC. He quotes Article 2241 (2) of the Civil Code:

With reference to specific movable property of the debtor, the following claims or liens

shall be preferred:

xxx xxx xxx

(2) Claims arising from misappropriation, breach of trust, or malfeasance by public

officials committed in the performance of their duties, on the movables, money or

securities obtained by them;

xxx xxx xxx

(Emphasis supplied)

He asserts that, as a preferred creditor, he was entitled to the entire monetary

value of his shares.

Petitioners argument is incorrect. Article 2241 refers only to specific

movable property. His claim was for the payment of money, which, as already
discussed, is generic property and not specific or determinate.
 Considering that petitioner did not fall under any of the provisions
applicable to preferred creditors, he was deemed an ordinary creditor under

Article 2245:

Credits of any other kind or class, or by any other right or title not comprised in the four

preceding articles, shall enjoy no preference.

This being so, Article 2251 (2) states that:

Common credits referred to in Article 2245 shall be paid pro rata regardless of dates.

Like all the other ordinary creditors or claimants against Philfinance, he was
entitled to a rate of recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?

The SEC argues that awarding interest to petitioner would have given
petitioner an unfair advantage or preference over the other
creditors.[28] Petitioner counters that he was entitled to 12% legal interest per

annum under Article 2209 of the Civil Code from the time he was deprived of
the shares until fully paid.

The guidelines for awarding interest were laid down in Eastern Shipping
Lines, Inc. v. CA:[29]
I. When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the contravenor
can be held liable for damages. The provisions under Title XVIII on
"Damages" of the Civil Code govern in determining the measure of
recoverable damages.

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

actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:

1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal interest
from the time it is judicially demanded. In the absence of stipulation,
the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of

money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims
or damages except when or until
the demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable

certainty, the interest shall begin to run from the time the claim is
made judicially or extrajudicially (Art. 1169, Civil Code) but when such
 certainty cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be
on the amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a forbearance of
credit.[30] (Emphasis supplied)

Under this ruling, petitioner was not entitled to legal interest of 12% per
annum (from demand) because the amount owing to him was not a loan[31] or
forbearance of money.[32]

Neither was he entitled to legal interest of 6% per annum under Article

2209 of the Civil Code[33] since this provision applies only when there is a delay
in the payment of a sum of money.[34] This was not the case here. In fact,
petitioner himself manifested before the CA that the SEC (as liquidator) had
already paid him P5,062,500 representing 15% of P33,750,000.[35]

Accordingly, petitioner was not entitled to interest under the law and
current jurisprudence.
 Considering that petitioner had already received the amount
of P5,062,500, the obligation of the SEC as liquidator of Philfinance was totally

extinguished.[36]

We note that there is an undisputed finding by the SEC and CA that private
respondents sold the subject shares without authority from the SEC. Petitioner
evidently has a cause of action against private respondents for their bad faith
and unauthorized acts, and the resulting damage caused to him.[37]
WHEREFORE, the petition is hereby DENIED.