G.R. Nos. L-10837-38 May 30, 1958 to the surety company for P8,000.
to the surety company for P8,000.00, the highest bid received therefor. The surety
ASSOCIATED INSURANCE and SURETY COMPANY, INC., plaintiff,
vs.
ISABEL IYA, ADRIANO VALINO and LUCIA VALINO, defendants.
ISABEL IYA, plaintiff,
vs.
ADRIANO VALINO, LUCIA VALINO and ASSOCIATED INSURANCE and SURETY
COMPANY. INC., defendants.
Jovita L. de Dios for defendant Isabel Iya.
M. Perez Cardenas and Apolonio Abola for defendant Associated Insurance and
Surety Co., Inc.
FELIX, J.:
Adriano Valino and Lucia A. Valino, husband and wife, were the owners and
possessors of a house of strong materials constructed on Lot No. 3, Block No. 80 of
the Grace Park Subdivision in Caloocan, Rizal, which they purchased on installment
basis from the Philippine Realty Corporation. On November 6, 1951, to enable her to
purchase on credit rice from the NARIC, Lucia A. Valino filed a bond in the sum of
P11,000.00 (AISCO Bond No. G-971) subscribed by the Associated Insurance and
Surety Co., Inc., and as counter-guaranty therefor, the spouses Valino executed an
alleged chattel mortgage on the aforementioned house in favor of the surety
company, which encumbrance was duly registered with the Chattel Mortgage
Register of Rizal on December 6, 1951. It is admitted that at the time said
undertaking took place, the parcel of land on which the house is erected was still
registered in the name of the Philippine Realty Corporation. Having completed
payment on the purchase price of the lot, the Valinos were able to secure on October
18, 1958, a certificate of title in their name (T.C.T. No. 27884). Subsequently,
however, or on October 24, 1952, the Valinos, to secure payment of an indebtedness
in the amount of P12,000.00, executed a real estate mortgage over the lot and the
house in favor of Isabel Iya, which was duly registered and annotated at the back of
the certificate of title.
On the other hand, as Lucia A. Valino, failed to satisfy her obligation to the NARIC,
the surety company was compelled to pay the same pursuant to the undertaking of
the bond. In turn, the surety company demanded reimbursement from the spouses
Valino, and as the latter likewise failed to do so, the company foreclosed the chattel
mortgage over the house. As a result thereof, a public sale was conducted by the
Provincial Sheriff of Rizal on December 26, 1952, wherein the property was awarded
company then caused the said house to be declared in its name for tax purposes
(Tax Declaration No. 25128).
Sometime in July, 1953, the surety company learned of the existence of the real
estate mortgage over the lot covered by T.C.T. No. 26884 together with the
improvements thereon; thus, said surety company instituted Civil Case No. 2162 of
the Court of First Instance of Manila naming Adriano and Lucia Valino and Isabel Iya,
the mortgagee, as defendants. The complaint prayed for the exclusion of the
residential house from the real estate mortgage in favor of defendant Iya and the
declaration and recognition of plaintiff's right to ownership over the same in virtue of
the award given by the Provincial Sheriff of Rizal during the public auction held on
December 26, 1952. Plaintiff likewise asked the Court to sentence the spouses
Valino to pay said surety moral and exemplary damages, attorney's fees and costs.
Defendant Isabel Iya filed her answer to the complaint alleging among other things,
that in virtue of the real estate mortgage executed by her co-defendants, she
acquired a real right over the lot and the house constructed thereon; that the auction
sale allegedly conducted by the Provincial Sheriff of Rizal as a result of the
foreclosure of the chattel mortgage on the house was null and void for non-
compliance with the form required by law. She, therefore, prayed for the dismissal of
the complaint and anullment of the sale made by the Provincial Sheriff. She also
demanded the amount of P5,000.00 from plaintiff as counterclaim, the sum of
P5,000.00 from her co-defendants as crossclaim, for attorney's fees and costs.
Defendants spouses in their answer admitted some of the averments of the
complaint and denied the others. They, however, prayed for the dismissal of the
action for lack of cause of action, it being alleged that plaintiff was already the owner
of the house in question, and as said defendants admitted this fact, the claim of the
former was already satisfied.
On October 29, 1953, Isabel Iya filed another civil action against the Valinos and the
surety company (Civil Case No. 2504 of the Court of First Instance of Manila) stating
that pursuant to the contract of mortgage executed by the spouses Valino on
October 24, 1952, the latter undertook to pay a loan of P12,000.00 with interest at
12% per annum or P120.00 a month, which indebtedness was payable in 4 years,
extendible for only one year; that to secure payment thereof, said defendants
mortgaged the house and lot covered by T.C.T. No. 27884 located at No. 67 Baltazar
St., Grace Park Subdivision, Caloocan, Rizal; that the Associated Insurance and
Surety Co., Inc., was included as a party defendant because it claimed to have an
interest on the residential house also covered by said mortgage; that it was
stipulated in the aforesaid real estate mortgage that default in the payment of the
interest agreed upon would entitle the mortgagee to foreclose the same even before
the lapse of the 4-year period; and as defendant spouses had allegedly failed to pay
the interest for more than 6 months, plaintiff prayed the Court to order said
defendants to pay the sum of P12,000.00 with interest thereon at 12% per annum
from March 25, 1953, until fully paid; for an additional sum equivalent to 20% of the
total obligation as damages, and for costs. As an alternative in case such demand
may not be met and satisfied plaintiff prayed for a decree of foreclosure of the land,
building and other improvements thereon to be sold at public auction and the
proceeds thereof applied to satisfy the demands of plaintiff; that the Valinos, the
surety company and any other person claiming interest on the mortgaged properties
be barred and foreclosed of all rights, claims or equity of redemption in said
properties; and for deficiency judgment in case the proceeds of the sale of the
mortgaged property would be insufficient to satisfy the claim of plaintiff.
Defendant surety company, in answer to this complaint insisted on its right over the
building, arguing that as the lot on which the house was constructed did not belong
to the spouses at the time the chattel mortgage was executed, the house might be
considered only as a personal property and that the encumbrance thereof and the
subsequent foreclosure proceedings made pursuant to the provisions of the Chattel
Mortgage Law were proper and legal. Defendant therefore prayed that said building
be excluded from the real estate mortgage and its right over the same be declared
superior to that of plaintiff, for damages, attorney's fees and costs.
Taking side with the surety company, defendant spouses admitted the due execution
of the mortgage upon the land but assailed the allegation that the building was
included thereon, it being contended that it was already encumbered in favor of the
surety company before the real estate mortgage was executed, a fact made known
to plaintiff during the preparation of said contract and to which the latter offered no
objection. As a special defense, it was asserted that the action was premature
because the contract was for a period of 4 years, which had not yet elapsed.
The two cases were jointly heard upon agreement of the parties, who submitted the
same on a stipulation of facts, after which the Court rendered judgment dated March
8, 1956, holding that the chattel mortgage in favor of the Associated Insurance and
Surety Co., Inc., was preferred and superior over the real estate mortgage
subsequently executed in favor of Isabel Iya. It was ruled that as the Valinos were
not yet the registered owner of the land on which the building in question was
constructed at the time the first encumbrance was made, the building then was still a
personality and a chattel mortgage over the same was proper. However, as the
mortgagors were already the owner of the land at the time the contract with Isabel
Iya was entered into, the building was transformed into a real property and the real
estate mortgage created thereon was likewise adjudged as proper. It is to be noted
in this connection that there is no evidence on record to sustain the allegation of the
spouses Valino that at the time they mortgaged their house and lot to Isabel Iya, the
latter was told or knew that part of the mortgaged property, i.e., the house, had
previously been mortgaged to the surety company.
The residential building was, therefore, ordered excluded from the foreclosure
prayed for by Isabel Iya, although the latter could exercise the right of a junior
encumbrance. So the spouses Valino were ordered to pay the amount demanded by
said mortgagee or in their default to have the parcel of land subject of the mortgage
sold at public auction for the satisfaction of Iya's claim.
There is no question as to appellant's right over the land covered by the real estate
mortgage; however, as the building constructed thereon has been the subject of 2
mortgages; controversy arise as to which of these encumbrances should receive
preference over the other. The decisive factor in resolving the issue presented by
this appeal is the determination of the nature of the structure litigated upon, for where
it be considered a personality, the foreclosure of the chattel mortgage and the
subsequent sale thereof at public auction, made in accordance with the Chattel
Mortgage Law would be valid and the right acquired by the surety company
therefrom would certainly deserve prior recognition; otherwise, appellant's claim for
preference must be granted. The lower Court, deciding in favor of the surety
company, based its ruling on the premise that as the mortgagors were not the
owners of the land on which the building is erected at the time the first encumbrance
was made, said structure partook of the nature of a personal property and could
properly be the subject of a chattel mortgage. We find reason to hold otherwise, for
as this Court, defining the nature or character of a building, has said:
. . . while it is true that generally, real estate connotes the land and the building
constructed thereon, it is obvious that the inclusion of the building, separate and
distinct from the land, in the enumeration of what may constitute real properties (Art.
415, new Civil Code) could only mean one thing that a building is by itself an
immovable property . . . Moreover, and in view of the absence of any specific
provision to the contrary, a building is an immovable property irrespective of whether
or not said structure and the land on which it is adhered to belong to the same
owner. (Lopez vs. Orosa, G.R. Nos. supra, p. 98).
A building certainly cannot be divested of its character of a realty by the fact that the
land on which it is constructed belongs to another. To hold it the other way, the
possibility is not remote that it would result in confusion, for to cloak the building with
an uncertain status made dependent on the ownership of the land, would create a
situation where a permanent fixture changes its nature or character as the ownership
of the land changes hands. In the case at bar, as personal properties could only be
the subject of a chattel mortgage (Section 1, Act 3952) and as obviously the
structure in question is not one, the execution of the chattel mortgage covering said
building is clearly invalid and a nullity. While it is true that said document was
correspondingly registered in the Chattel Mortgage Register of Rizal, this act
produced no effect whatsoever for where the interest conveyed is in the nature of a
real property, the registration of the document in the registry of chattels is merely a
futile act. Thus, the registration of the chattel mortgage of a building of strong
materials produce no effect as far as the building is concerned (Leung Yee vs.
Strong Machinery Co., 37 Phil., 644). Nor can we give any consideration to the
contention of the surety that it has acquired ownership over the property in question
by reason of the sale conducted by the Provincial Sheriff of Rizal, for as this Court
has aptly pronounced:
A mortgage creditor who purchases real properties at an extrajudicial foreclosure
sale thereof by virtue of a chattel mortgage constituted in his favor, which mortgage
has been declared null and void with respect to said real properties, acquires no right
thereto by virtue of said sale (De la Riva vs. Ah Keo, 60 Phil., 899).
Wherefore the portion of the decision of the lower Court in these two cases appealed
from holding the rights of the surety company, over the building superior to that of
Isabel Iya and excluding the building from the foreclosure prayed for by the latter is
reversed and appellant Isabel Iya's right to foreclose not only the land but also the
building erected thereon is hereby recognized, and the proceeds of the sale thereof
at public auction (if the land has not yet been sold), shall be applied to the unsatisfied
judgment in favor of Isabel Iya. This decision however is without prejudice to any
right that the Associated Insurance and Surety Co., Inc., may have against the
spouses Adriano and Lucia Valino on account of the mortgage of said building they
executed in favor of said surety company. Without pronouncement as to costs. It is
so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.
G.R. No. L-9451 March 29, 1957
OLAF N. BORLOUGH, petitioner,
vs.
FORTUNE ENTERPRISES, INC. and THE HONORABLE COURT OF APPEALS
(2nd DIVISION), respondents.
Arturo M. del Rosario and Alfredo G. Fernando for petitioner.
Laurel & Salonga for respondents.
LABRADOR, J.:
Appeal by certiorari against a judgment of the Court of Appeals, Second Division.
The facts of the case have been briefly stated as follows:
On March 8, 1952, the United Car Exchange sold to the Fortune Enterprises, Inc.,
the following described car
Make: Chevrolet (1947); Plate No. 34-1465
Type : Sedan; Motor No. EAA-20834 (Exhibit D).
The same car was sold by the Fortune Enterprises, Inc. to one Salvador Aguinaldo,
and for not having paid it in full, the latter executed on the same date a promissory
note in the amount of P2,400 payable in 20 installments including interest thereon at
12 per cent per annum, the last of which installments fell due on January 9, 1953
(Exhibit "A").
To secure the payment of this note, Aguinaldo executed a deed of chattel mortgage
over said car. The deed was duly registered in the office of the Register of Deeds of
Manila at 1:12 p.m. on March 11, 1952 (Exhibit "B"). As the buyer-mortgagor
defaulted in the payment of the installments due, counsel for Fortune Enterprises Inc.
addressed a letter on May 16, 1952 (Exhibit "C"), requesting him to make the
necessary payment and to keep his account up to date, to that no court action would
be resorted to.
It further appears that the above-described car found its way again into the United
Car Exchange which sold the same in cash for P4,000 to one O. N. Borlough on April
6, 1952. Accordingly, he registered it on the following day with the Motor Vehicles
Office. (Decision, Court of Appeal.).
It also appears from the record that defendant 0. N. Borlough took possession of the
vehicle from the time he purchased it, On July 10, 1952, Fortune Enterprises, Inc.
brought action against Salvador Aguinaldo to recover the balance of the purchase
price. Borlough filed a third-party complaint, claiming the vehicle. Thereupon,
Fortune Enterprises, Inc. amended its complaint, including Borlough as a defendant
and alleging that he was in connivance with Salvador Aguinaldo and was unlawfully
hiding and concealing the vehicle in order to evade seizure by judicial process.
Borlough answered alleging that he was in legal possession thereof, having
purchased it in good faith and for the full price of P4,000, and that he had a
certificate of registration of the vehicle issued by the Motor Vehicles Office, and he
prayed for the dismissal of the complaint, the return of the vehicle and for damages
against the plaintiff.
The vehicle was seized by the sheriff of Manila on August 4, 1952 and was later sold
at public auction. The Court of First Instance rendered judgment in favor of Borlough,
and against plaintiff, ordering the latter to pay Borlough the sum of P4,000, with
interest at 6 per cent per annum, from the date of the seizure of the car on August 4,
1952, and in addition thereto, attorney's fees in the sum of P1,000.
Upon appeal to the Court of Appeals, this court rendered judgment ordering that Emil
B. Fajardo pay Borlough P4,000 plus attorney's fees and that plaintiff pay to
Borlough any amount received by it in excess of its credits and judicial expenses.
The reason for the modification of the judgment is that the mortgage was superior,
being prior in point of time, to whatever rights may have been acquired by Borlough
by reason of his possession and by the registration of his title in the Motor Vehicle
Office.
The question involved in the appeal in this case is one of law and may be stated
thus: As between a prior mortgage executed over a motor vehicle, registered under
the Chattel Mortgage Law only, without annotation thereof in the Motor Vehicles
Office, and a subsequent registration of the vehicle in the Motor Vehicles Office
accompanied by actual possession of the motor vehicle, which should prevail. While
the question can be resolved by the general principles found in the Civil Code and
expressly stated in Article 559, there is no need resorting thereto (the general
principles) in view of the express provisions of the Revised Motor Vehicles Law,
which expressly and specifically regulate the registration, sale or transfer and
mortgage of motor vehicles. The following provisions of said law may help decide the
legal question now under consideration:
SEC. 5 (c) Reports of motor vehicle sales. On the first day of each month, every
dealer in motor vehicles shall furnish the Chief of the Motor Vehicles Office a true
report showing the name and address of each purchase of a motor vehicle during the
previous month and the manufacturer's serial number and motor number; a brief
description of the vehicle, and such other information as the Chief of the Motor
Vehicles Office may require.
SEC. 5 (e) Report of mortgages. Whenever any owner hypothecates or mortgage
any motor vehicle as surety for a debt or other obligation, the creditor or person in
whose favor the mortgage is made shall, within seven days, notify the Chief of the
Motor Vehicles Office in writing to the effect, stating the registration number of the
motor vehicle, date of mortgage, names and addresses of both parties, and such
other information as the Chief of the Motor Vehicles Office may require. This notice
shall be signed jointly by the parties to the mortgage.
On termination, cancellation or foreclosure of the mortgage, a similar written notice
signed by both parties, shall be forwarded to the Chief of the Motor Vehicles Office
by the owner.
These notice shall be filed by the Chief of the Motor Vehicles Office in the motor
records, and in the absence of more specific information, shall be deemed evidence
of the true status of ownership of the motor vehicle. (Revised Motor Vehicles Law.)
It is to be noted that under section 4 (b) of the Revised Motor Vehicles Law the Chief
of the Motor Vehicles Office is required to enter or record, among other things,
transfers of motor vehicles "with a view of making and keeping the same and each
all of them as accessible as possible to and for persons and officers properly
interested in the same," and to "issue such reasonable regulations governing the
search and examination of the documents and records . . . as will be consistent with
their availability to the public and their safe and secure prevention."
Two recording laws are here being invoked, one by each contending party the
Chattel Mortgage Law (Act No. 1508), by the mortgagor and the Revised Motor
Vehicles Law (Act No. 3992), by a purchaser in possession. What effect did the
passenger of the Revised Motor Vehicles Law have on the previous enactment?
The Revised Motor Vehicles Law is a special legislation enacted to "amend and
compile the laws relative to motor vehicles," whereas the Chattel Mortgage Law is a
general law covering mortgages of all kinds of personal property. The former is the
latest attempt to assemble and compile the motor vehicle laws of the Philippines, all
the earlier laws on the subject having been found to be very deficient in form as well
as in substance (Villar and De Vega, Revised Motor Vehicles Law, p. 1); it had been
designed primarily to control the registration and operation of motor vehicles (section
2, Act No. 3992).
Counsel for petitioner contends that the passage of the Revised Motor Vehicles Law
had the effect of repealing the Chattel Mortgage Law, as regards registration of
motor vehicles and of the recording of transaction affecting the same. We do not
believe that it could have been the intention of the legislature to bring about such a
repeal. In the first place, the provisions of the Revised Motor Vehicles Law on
registration are not inconsistent with does of the Chattel Mortgage Law. In the
second place, implied repeals are not favored; implied repeals are permitted only in
cases of clear and positive inconsistency. The first paragraph of section 5 indicates
that the provisions of the Revised Motor Vehicles Law regarding registration and
recording of mortgage are not incompatible with a mortgage under the Chattel
Mortgage Law. The section merely requires report to the Motor Vehicles Office of a
mortgage; it does not state that the registration of the mortgage under the Chattel
Mortgage Law is to be dispensed with. We have, therefore, an additional
requirements in the Revised Motor Vehicles Law, aside from the registration of a
chattel mortgage, which is to report a mortgage to the Motor Vehicles Office, if the
subject of the mortgage is a motor vehicle; the report merely supplements or
complements the registration.
The recording provisions of the Revised Motor Vehicles Law, therefore, are merely
complementary to those of the Chattel Mortgage Law. A mortgage in order to affect
third persons should not only be registered in the Chattel Mortgage Registry, but the
same should also be recorded in the motor Vehicles Office as required by section 5
(e) of the Revised Motor Vehicles Law. And the failure of the respondent mortgage to
report the mortgage executed in its favor had the effect of making said mortgage
ineffective against Borlough, who had his purchase registered in the said Motor
Vehicles Office.
On failure to comply with the statute, the transferee's title is rendered invalid as
against a subsequent purchaser from the transferor, who is enabled by such failure
of compliance to retain the indicia of ownership, such as a subsequent purchaser in
good faith, or a purchaser from a conditional buyer in possession; and the lien of a
chattel mortgage given by the buyer to secure a purchase money loan never
becomes effective in such case as against an innocent purchaser. (60 Corpus Juris
Secundum, p. 171.)
One holding a lien on a motor vehicle, in so far as he can reasonably do so, must
protect himself and others thereafter dealing in good faith by complying and requiring
compliance with the provisions of the laws concerning certificates of title to motor
vehicles, such as statutes providing for the notation of liens or claims against the
motor vehicle certificate of title or manufacturer's certificate, or for the issuance to the
mortgagee of a new certificate of ownership. Where the lien holder has satisfied
himself that the existence of the lien is recited in the certificate of title, he has done
all that the law contemplates that he should do, and there is notice to the public of
the existing lien, which continues valid until the record shows that it has been
satisfied and a new certificate issued on legal authority, even through another
certificate which does not disclose the lien is procured as the result of false
statements made in the application therefore, and the vehicle is purchased by a bona
fide purchaser.
The holder of a lien who is derelict in his duty to comply and require compliance with
the statutory provisions acts at his own peril, and must suffer the consequence of his
own negligence; and accordingly, he is not entitled to the lien as against a
subsequent innocent purchaser filed as provided by other chattel mortgage statutes.
The rule is otherwise, however, as against claimants not occupying the position of
innocent purchaser, such as a judgment creditor, or one acquiring title with actual
notice of an unregistered lien, and the statutes do not protect a purchaser holding
under registered title if a link in the title is forgery. Moreover, such statute will not
impair vested rights of a mortgage under a chattel mortgage duly recorded. (60
C.J.S., pp. 181-182.)
The above authorities leave no room for doubt that purchaser O. N. Borlough's right
to the vehicle as against the previous and prior mortgage Fortune Enterprises, Inc.,
which failed to record its lien in accordance with the Revised Motor Vehicles Law,
should be upheld.
For the foregoing consideration, the judgment of the Court of Appeals is hereby
reversed and that of the Court of First Instance affirmed, with costs against
respondent.
Paras, C.J., Bengzon, Padilla, Reyes, A., Bautista Angelo, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
G.R. No. L-41506 March 25, 1935
PHILIPPINE REFINING CO., INC., plaintiff-appellant,
vs.
FRANCISCO JARQUE, JOSE COROMINAS, and ABOITIZ & CO., defendants.
JOSE COROMINAS, in his capacity as assignee of the estate of the insolvent
Francisco Jarque, appellee.
Thos. G. Ingalls, Vicente Pelaez and DeWitt, Perkins and Brady for appellant.
D.G. McVean and Vicente L. Faelnar for appellee.
MALCOLM, J.:
First of all the reason why the case has been decided by the court in banc needs
explanation. A motion was presented by counsel for the appellant in which it was
asked that the case be heard and determined by the court sitting in banc because
the admiralty jurisdiction of the court was involved, and this motion was granted in
regular course. On further investigation it appears that this was error. The mere
mortgage of a ship is a contract entered into by the parties to it without reference to
navigation or perils of the sea, and does not, therefore, confer admiralty jurisdiction.
(Bogart vs. Steamboat John Jay [1854], 17 How., 399.)
Coming now to the merits, it appears that on varying dates the Philippine Refining
Co., Inc., and Francisco Jarque executed three mortgages on the motor vessels
Pandan and Zaragoza. These documents were recorded in the record of transfers
and incumbrances of vessels for the port of Cebu and each was therein denominated
a "chattel mortgage". Neither of the first two mortgages had appended an affidavit of
good faith. The third mortgage contained such an affidavit, but this mortgage was not
registered in the customs house until May 17, 1932, or within the period of thirty days
prior to the commencement of insolvency proceedings against Francisco Jarque;
also, while the last mentioned mortgage was subscribed by Francisco Jarque and M.
N. Brink, there was nothing to disclose in what capacity the said M. N. Brink signed.
A fourth mortgage was executed by Francisco Jarque and Ramon Aboitiz on the
motorship Zaragoza and was entered in the chattel mortgage registry of the register
of deeds on May 12, 1932, or again within the thirty-day period before the institution
of insolvency proceedings. These proceedings were begun on June 2, 1932, when a
petition was filed with the Court of First Instance of Cebu in which it was prayed that
Francisco Jarque be declared an insolvent debtor, which soon thereafter was
granted, with the result that an assignment of all the properties of the insolvent was
executed in favor of Jose Corominas.
On these facts, Judge Jose M. Hontiveros declined to order the foreclosure of the
mortgages, but on the contrary sustained the special defenses of fatal defectiveness
of the mortgages. In so doing we believe that the trial judge acted advisedly.
Vessels are considered personal property under the civil law. (Code of Commerce,
article 585.) Similarly under the common law, vessels are personal property although
occasionally referred to as a peculiar kind of personal property. (Reynolds vs.
Nielson [1903], 96 Am. Rep., 1000; Atlantic Maritime Co vs. City of Gloucester
[1917], 117 N. E., 924.) Since the term "personal property" includes vessels, they are
subject to mortgage agreeably to the provisions of the Chattel Mortgage Law. (Act
No. 1508, section 2.) Indeed, it has heretofore been accepted without discussion that
a mortgage on a vessel is in nature a chattel mortgage. (McMicking vs. Banco
Espaol-Filipino [1909], 13 Phil., 429; Arroyo vs. Yu de Sane [1930], 54 Phil., 511.)
The only difference between a chattel mortgage of a vessel and a chattel mortgage
of other personalty is that it is not now necessary for a chattel mortgage of a vessel
to be noted n the registry of the register of deeds, but it is essential that a record of
documents affecting the title to a vessel be entered in the record of the Collector of
Customs at the port of entry. (Rubiso and Gelito vs. Rivera [1917], 37 Phil., 72;
Arroyo vs. Yu de Sane, supra.) Otherwise a mortgage on a vessel is generally like
other chattel mortgages as to its requisites and validity. (58 C.J., 92.)
The Chattell Mortgage Law in its section 5, in describing what shall be deemed
sufficient to constitute a good chattel mortgage, includes the requirement of an
affidavit of good faith appended to the mortgage and recorded therewith. The
absence of the affidavit vitiates a mortgage as against creditors and subsequent
encumbrancers. (Giberson vs. A. N. Jureidini Bros. [1922], 44 Phil., 216; Benedicto
de Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros
[1923], 46 Phil., 753.) As a consequence a chattel mortgage of a vessel wherein the
affidavit of good faith required by the Chattel Mortgage Law is lacking, is
unenforceable against third persons.
In effect appellant asks us to find that the documents appearing in the record do not
constitute chattel mortgages or at least to gloss over the failure to include the
affidavit of good faith made a requisite for a good chattel mortgage by the Chattel
Mortgage Law. Counsel would further have us disregard article 585 of the Code of
Commerce, but no reason is shown for holding this article not in force. Counsel
would further have us revise doctrines heretofore announced in a series of cases,
which it is not desirable to do since those principles were confirmed after due
liberation and constitute a part of the commercial law of the Philippines. And finally
counsel would have us make rulings on points entirely foreign to the issues of the
case. As neither the facts nor the law remains in doubt, the seven assigned errors
will be overruled.
Judgment affirmed, the costs of this instance to be paid by the appellant. 8 Tables, stateside.

Avancea, C.J., Street, Villa-Real, Abad Santos, Hull, Vickers, Imperial, Butte, and 32 Chromium chairs, stateside.
Goddard, JJ., concur.
1 Sala set upholstered, 6 pieces.

1 Bedroom set, 6 pieces.

G.R. No. L-13194 January 29, 1960
And all other furniture's, fixtures or equipment found in the said premises.
BUENAVENTURA T. SALDANA, plaintiff-appellant,
vs. Subsequent to the execution of said mortgage and while the same was still in force,
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees. the defendant Hospital de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of
the Municipal Court of Pasay City, a judgment was duly Josewfina Vda. de Eleazar.
Gatchalian & Padilla for appellant. A writ of execution was duly issued and, on January 28, 1957, the same was served
Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees. on the judgment debtor by the sheriff of Pasay City; whereupon the following
properties of Josefina Eleazar were levied upon:
REYES, J.B.L., J.:
8 Tables with 4 (upholstered) chairs each.
This case arose from a complaint for damages filed by Buenaventura Saldana
(docketed as Civil Case No. 32703 of the Court of First Instance of Manila) that was 1 Table with 4 (wooden) chairs.
dismissed by order of the Court dated August 20, 1957, for lack of sufficient cause of
action. In another order of September 30, 1957 of the same court, plaintiff's motion 1 Table (large) with 5 chairs.
for reconsideration was denied, and the case was appealed to this Court.
1 Radio-phono (Zenith, 8 tubes).
The facts are that on May 8, 1953, in order to secure an indebtedness of
P15,000.00, Josefina Vda. de Aleazar executed in favor of the plaintiff-appellant 2 Showcases (big, with mirrors).
Buenaventura Saldana a chattel mortgage covering properties described as follows:
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .
A building of strong materials, used for restaurant business, located in front of the
San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following 1 Wooden drawer.
personal properties therein contained:
1 Tocador (brown with mirror).
1 Radio, Zenith, cabinet type.
1 Aparador .
1 Cooler.
2 Beds (single type).
1 Electric range, stateside, 4 burners.
1 Freezer (deep freeze).
1 Frigidaire, 8 cubic feet.
1 Gas range (magic chef, with 4 burners).
1 G.E. Deepfreezer.
1 Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim
asserting that the above-described properties levied are subject to his chattel
mortgage of May 8, 1953. In virtue thereof, the sheriff released only some of the
property originally included in the levy of January 28, 1957, to wit:
1 Radio, Zenith, cabinet type.
8 Tables, stateside.
32 Chromiun chairs, stateside.
1 G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties still under levy, the
defendants-appellees Hospital de San Juan de Dios, Inc. and the Philippine
Guaranty Co., Inc., executed an indemnity bond to answer for any damages that
plaintiff might suffer. Accordingly, on February 13, 1957, the said properties were
sold to the defendant hospital as the highest bidder, for P1,500.00.
Appellants claims that the phrase in the chattel mortgage contract "and all other
furnitures, fixtures and equipment found in the said premises", validly and sufficiently
covered within its terms the personal properties disposed of in the auction sale, as to
warrant an action for damages by the plaintiff mortgagee.
There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and
better known as the Chattel Mortgage Law, does not demand a minute and specific
description of every chattel mortgaged in the deal of mortgage but only requires that
the description of the properties be such "as to enable the parties in the mortgage, or
any other person, after reasonable inquiry and investigation to identify the same".
Gauged by this standard, general description have been held by this Court. (See
Stockholder vs. Ramirez, 44 Phil., 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72
Phil., 464).
A similar rule obtains in the United States courts and decisions there have repeatedly
upheld clauses of general import in mortgages of chattels other than goods for trade,
and containing expressions similar to that of the contract now before us. Thus, "and
all other stones belonging to me and all other goods and chattels" (Russel vs. Winne,
97 Am. Dec. 755); "all of the property of the said W.W. Allen used or situated upon
the leased premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in
the store where they are doing business in E. City, N.C." (Davis vs. Turner, 120 Fed.
605); "all and singular the goods, wares, stock, iron tools manufactured articles and
property of every description, being situated in or about the shop or building now
occupied by me in Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec.
368,) were held sufficient description, on the theory that parol evidence could
supplement it to render identification rule is expressed in Walker vs. Johnson (Mont.)
1254 A.L.R. 937:
The courts and textbook writers have developed several rules for determination of
the sufficiency of the description in a chattel mortgage. The rules are general in
nature and are different where the controversy is between the parties to the
mortgage from the situation where third parties with out actual notice come in. In 11
C.J. 457, it is said: "Ad against third persons the description in the mortgage must
point out its subject matter so that such person may identify the chattels observed,
but it is not essential that the description be so specific that the property may be
identified by it alone, if such description or means of identification which, if pursued
will disclose the property conveyed." In 5 R.C.L. 423 the rule is stated that a
description which will enable a third person, aided by inquires which the instrument
itself suggest to identify the property is sufficiently definite." In 1 Jones on Chattel
Mortgages and Conditional Sales, Bowers Edition, at page 95 the writer says: "As to
them (third persons), the description is sufficient if it points to evidence whereby the
precise thing mortgaged may be ascertained with certainty." Here there is nothing in
the description "873 head of sheep" from which anyone, the mortgagee or third
persons, could ascertain with any certainty what chattels were covered by the
mortgage.
In many instances the courts have held the description good where, though
otherwise faulty, the mortgage explicity states that the property is in the possession
of the mortgagor, and especially where it is the only property of that kind owned by
him.
The specifications in the chattel mortgage contract in the instant case, we believe, in
substantial compliance with the "reasonable description rule" fixed by the chattel
Mortgage Act. We may notice in the agreement, moreover, that the phrase in
question is found after an enumeration of other specific articles. It can thus be
reasonably inferred therefrom that the "furnitures, fixture and equipment" referred to
are properties of like nature, similarly situated or similarly used in the restaurant of
the mortgagor located in front of the San Juan de Dos Hospital at Dewey Boulevard,
Pasay City, which articles can be definitely pointed out or ascertain by simple inquiry
at or about the premises. Note that the limitation found in the last paragraph of
section 7 of the Chattel Mortgage Law1 on "like or subsituated properties" make
reference to those "thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgaged", not to those already existing and
originally included at the date of the constitution of the chattel mortgage. A contrary
view would unduly impose a more rigid condition than what the law prescribes, which
is that the description be only such as to enable identification after a reasonable
inquiry and investigation.
The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216, 219, cited by the
appellees and the lower court, cannot be likened to the case at bar, for there, what
were sought to be mortgaged included two stores wit all its merchandise, effects,
wares, and other bazar goods which were being constantly disposed of and replaced
with new supplies in connection with the business, thereby making any particular or
definite identification either impractical or impossible under the circumstances. Here,
the properties deemed overed were more or less fixed, or at least permanently
situated or used in the premises of the mortgagor's restaurant.
The rule in the Jureidini case is further weakened by the court's observation that (44
Phil., p. 220)
Moreover, if there should exist any doubts on the questions we have just discussed,
they should be treshed out in the insolvency proceedings,
which appears inconsistent with the definitive character of the rulings invoked.
We find that the ground for the appealed order (lack of cause of action) does not
appear so indubitable as to warrant a dismissal of the action without inquiry into the
merits and without the description in the deed of mortgage (Nico vs. Blanco, 81 Phil.,
213; Zobel vs. Abreau, 52 Off. Gaz., 3592).
Wherefore, the orders appealed from are set aside and the case remanded to the
lower court for further proceedings. Costs against appellee.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion,
Endencia, Barrera and Gutierrez David, J., concur.
Footnotes
1 "A chattel mortage shall be deem to cover only the property prescribed therein and
not like or substituted property thereafter acquired by the mortgagor and place in the
same depository as the property originally mortgaged, anything in the mortgage to
the contrary notwithstanding."
[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.[2] These 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.[3] Respondent bank thereupon applied for an 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[4] which, on 14 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[6] which the Court so reviews as a matter of course, an appeal from
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,[7] but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the accessory character[8] of
the agreement. As 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,[10] a
chattel mortgage, however, can only cover obligations existing 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.[11]
Refusal on the part of the borrower 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[12]), the fact,
however, that the statute has provided 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.,[14] the Court said -
"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,[16] there no longer was any chattel mortgage that 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."[17]
This prayer is not reflected in its complaint which has merely asked for the amount of
P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of
Appeals,[19] we have said:
"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."[21]
(Italics supplied.)
The statement is not called for. The Court invites counsel's attention to the
admonition in Guerrero vs. Villamor;[22] thus:
"(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.
Kapunan and Hermosisima, Jr., JJ., concur.
Padilla, J., took no part in view of lessor-lessee relationship with respondent bank.
Bellosillo, J., on leave.
[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 VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the
"In addition to the above, we also bind ourselves to pay for bank advances for Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby
insurance premiums, taxes xxx AFFIRMED. Costs against petitioners.

xxx SO ORDERED.

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs Romero (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.
incurred by DBP on the foreign currency borrowings from where the loan shall be
drawn xxx G.R. No. 179756

xxx RIZAL COMMERCIAL BANKING CORPORATION,

Petitioner,
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 - versus -
obligation shall become due and demandable, and if, for the enforcement of the
payment thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is constrained ROYAL CARGO CORPORATION,
to entrust the case to its attorneys, we jointly and severally bind ourselves to pay for Respondent.
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 Present:
this note, we further bind ourselves jointly and severally to pay the deficiency, if any. YNARES-SANTIAGO, *
(Emphasis supplied)[21] CARPIO MORALES,**
Acting Chairperson,
The promissory note was signed by private petitioners in the following manner: PERALTA,***
DEL CASTILLO, and
PAMECA WOOD TREATMENT PLANT, INC. ABAD, JJ.

By: Promulgated:
October 2, 2009
(Sgd) HERMINIO G. TEVES x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

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

(Sgd) HIRAM DIDAY PULIDO CARPIO MORALES, J.:

(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.
Terrymanila, Inc.[1] (Terrymanila) filed a petition for voluntary insolvency with the
Regional Trial Court (RTC) of Bataan on February 13, 1991.[2] One of its creditors
was Rizal Commercial Banking Corporation (petitioner) with which it had an
obligation of P3 Million that was secured by a chattel mortgage executed on
February 16, 1989. The chattel mortgage was duly recorded in the notarial register of
Amado Castano, a notary public for and in the Province of Bataan.[3]
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an
action before the RTC of Manila for collection of sum of money and preliminarily
attached some of Terrymanilas personal properties on March 5, 1991 to secure the
satisfaction of a judgment award of P296,662.16, exclusive of interests and attorneys
fees.[4]
On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.
On June 11, 1991,[5] the Manila RTC, by Decision of even date, rendered judgment
in the collection case in favor of respondent.
In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC
permission to extrajudicially foreclose the chattel mortgage which was granted by
Order of February 3, 1992.[6] It appears that respondent, together with its employees
union, moved to have this Order reconsidered but the motion was denied by Order of
March 20, 1992 Order.[7]
The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public
auction sale of the mortgaged personal properties at the Municipal Building of
Mariveles, Bataan. At the auction sale, petitioner, the sole bidder of the properties,
purchased them for P1.5 Million. Eventually, petitioner sold the properties to
Domingo Bondoc and Victoriano See.[8]
Respondent later filed on July 30, 1992 a petition before the RTC of Manila,
docketed as Civil Case No. 92-62106, against the Provincial Sheriff of the RTC
Bataan and petitioner, for annulment of the auction sale (annulment of sale case).
Apart from questioning the inclusion in the auction sale[9] of some of the properties
which it had attached, respondent questioned the failure to duly notify it of the sale at
least 10 days before the sale, citing Section 14 of Act No. 1508 or the Chattel
Mortgage Law which reads:
Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days,
from the time of condition broken, cause the mortgaged property, or any part thereof,
to be sold at public auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated, provided at least ten
days notice of the time, place, and purpose of such sale has been posted at two or
more public places in such municipality, and the mortgagee, his executor,
administrator or assignee shall notify the mortgagor or person holding under him and
the persons holding subsequent mortgages of the time and place of sale, either by
notice in writing directed to him or left at his abode, if within the municipality, or sent
by mail if he does not reside in such municipality, at least ten days previous to the
date. (Emphasis and underscoring supplied),
it claiming that its counsel received a notice only on the day of the sale.[10]
Petitioner, alleging that the annulment of sale case filed by respondent stated no
cause of action, filed on December 3, 1992 a Motion to Dismiss[11] which was,
however, denied by Branch 16 of the Manila RTC.[12]
Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of
Appeals, docketed as CA-G.R. SP No. 31125. The appellate court dismissed the
petition, by Decision of February 21, 1994, it holding that respondents petition for
annulment prima facie states a sufficient cause of action and that the [trial court] in
denying [herein petitioner RCBCs] motion to dismiss, had acted advisedly and well
within its powers and authority.[13]
Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante
Cautelam[14] in the annulment of sale case in which it lodged a Compulsory
Counterclaim by seeking P1 Million for moral damages, P500,000 for exemplary
damages, and P250,000 for attorneys fees. It thereafter elevated the case to this
Court via petition for review on certiorari, docketed as G.R. 115662. This Court by
minute Resolution of November 7, 1994,[15] denied the petition for failure to show
that a reversible error was committed by the appellate court.[16]
Trial on the merits of the annulment of sale case thereupon ensued. By Decision[17]
of October 15, 1997, Branch 16 of the Manila RTC rendered judgment in favor of
respondent, disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount
of P296,662.16 and P8,000.00 as reasonable attorneys fees.
2. No pronouncement as to costs.
3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan
RTC;
SO ORDERED.
Both parties appealed to the Court of Appeals which, by Decision[18] of April 17,
2007, denied herein petitioners appeal and partly granted herein respondents by
increasing to P50,000 the attorneys fees awarded to it and additionally awarding it
exemplary damages and imposing interest on the principal amount payable to it.
Thus it disposed:
WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is
hereby DENIED for lack of merit while the appeal of appellant Royal Cargo is
PARTLY GRANTED in that the amount of attorneys fees awarded by the RTC is
increased to P50,000.00.
In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00 as
exemplary damages. The principal amount of P296,662.18 [sic] to be paid by RCBC
to Royal Cargo shall likewise earn 12% interest per annum from the time the petition
was filed in the court a quo until fully paid. The rest of the decision is AFFIRMED.
SO ORDERED. (Emphasis and underscoring supplied)
In partly granting respondents appeal from the Decision of Br. 16 of RTC Manila, the
appellate court ratiocinated that respondent had a right to be timely informed of the
foreclosure sale.
RCBCs citations [sic] of numerous rulings on the matter more than supports the fact
that as mortgagee, it had preferential right over the chattels subject of the foreclosure
sale. This however is not at issue in this case. What is being contested is the right of
Royal Cargo to be timely informed of the foreclosure sale as it too had interests over
the mortgagee Terrymanila, Inc.s assets. We note that this matter had already been
passed upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125 as well
as by the Supreme Court on November 7, 1994 in G.R. No. [1]15662. RCBC, by
arguing about its preferential right as mortgagee in the instant appeal merely
reiterates what had already been considered and ruled upon in earlier proceedings.
xxxx
Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the
foreclosure of chattel mortgages provides, to wit:
xxxx
The above-quoted provision clearly requires that the mortgagee should notify in
writing the mortgagor or person holding under him of the time and place of the sale
by personal delivery of the notice. Thus, RCBCs failure to comply with this
requirement warranted a ruling against it by the RTC. (Italics in the original;
emphasis partly in the original; underscoring supplied)
Its motion for reconsideration having been denied by the appellate court,[19]
petitioner lodged the present petition for review which raises the following issues:
I
WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-
DAY PRIOR NOTICE OF THE JUNE 16, 1992 FORECLOSURE SALE
II
WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS
GRAVELY ERRED IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE
FRAUD IN FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR
NOTICE OF THE FORECLOSURE SALE.
III
WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY
RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY
DAMAGES AND ATTORNEYS FEES.
IV
WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEYS
FEES.[20] (Underscoring supplied)
Petitioner faults the appellate court in applying res judicata by holding that
respondents entitlement to notice of the auction sale had already been settled in its
Decision in CA G.R. SP No. 31125 and in this Courts Decision in G.R. No. 115662.
For, so it contends, the decisions in these cases dealt on interlocutory issues, viz:
the issue of whether respondents petition for annulment of the sale stated a cause of
action, and the issue of whether petitioners motion to dismiss was properly
denied.[21]
Arguing against respondents position that it was entitled to notice of the auction sale,
petitioner cites the Chattel Mortgage Law which enumerates who are entitled to be
notified under Section 14 thereof. It posits that [h]ad the law intended to include in
said Section an attaching creditor or a judgment creditor [like herein respondent], it
could have so specifically stated therein, since in the preceding section, Section 13,
it already mentioned that a subsequent attaching creditor may redeem.[22]

Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No.
31125 that Sections 13[23] and 14 of the Chattel Mortgage Law should be read in
tandem since the right given to the attaching creditor under Section 13 would not
serve its purpose if we were to exclude the subsequent attaching creditor from those
who under Section 14 need to be notified of the foreclosure sale ten days before it is
held.[24]
Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to
redeem the mortgage only before the holding of the auction sale, drawing attention to
Paray v. Rodriguez[25] which instructs that no right of redemption exists over
personal property as the Chattel Mortgage Law is silent thereon.[26]
Even assuming arguendo, petitioner contends, that there exists an obligation to
furnish respondent a notice of the auction sale 10 days prior thereto, respondents
judgment award of P296,662.16 with interest thereon at the legal rate from the date
of filing of the [c]omplaint and P10,000.00 as reasonable attorneys fees is very much
less than the P1.5 [m]illion bid of petitioner[27]
As for the issue of constructive fraud-basis of the award of damages to respondent,
petitioner maintains that both the trial and appellate courts erred in concluding that it
(petitioner) was the one which sent the notice of sheriffs sale to, which was received
on the day of the sale by, the counsel for respondent for, so it contends, it had
absolutely no participation in the preparation and sending of such notice.[28]
In its Comment,[29] respondent reiterates that the respective decisions of the
appellate court and this Court in CA G.R. SP No. 31125 and G.R. No. 115662 are
conclusive between the parties, hence, the right of [respondent] to a [ten-day] notice
has a binding effect and must be adopted in any other controversy between the
same parties in which the very same question is raised.[30]
And respondent maintains that the obligation to notify the mortgagor or person
holding under him and the persons holding subsequent mortgages falls upon
petitioner as the mortgagee.
The petition is MERITORIOUS.
The respective decisions of the appellate court in CA G.R. SP No. 31125 and this
Court in G.R. No. 115662 did not conclusively settle the issue on the need to give a
10-day notice to respondent of the holding of the public auction sale of the chattels.
The elements of res judicata are: (1) the judgment sought to bar the new action must
be final; (2) the decision must have been rendered by a court having jurisdiction over
the subject matter and the parties; (3) the disposition of the case must be a judgment
on the merits; and (4) there must be as between the first and second action, identity
of parties, subject matter, and causes of action.[31]
Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39,
Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness of judgment in
Rule 39, Section 47 (c).[32]
There is bar by prior judgment when, as between the first case where the judgment
was rendered, and the second case that is sought to be barred, there is identity of
parties, subject matter, and causes of action. Where there is identity of parties and
subject matter in the first and second cases, but no identity of causes of action, there
is conclusiveness of judgment.[33] The first judgment is conclusive only as to those
matters actually and directly controverted and determined, not as to matters merely
involved therein.
The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory
issue of whether the trial courts Order of April 12, 1993 denying petitioners motion to
dismiss respondents petition for annulment was attended by grave abuse of
discretion. The appellate court did not rule on the merits of the petition as to establish
a controlling legal rule which has to be subsequently followed by the parties in the
same case. It merely held that respondents petition in the trial court stated a
sufficient cause of action. Its determination of respondents entitlement to notice of
the public auction sale was at best prima facie. Thus, the appellate court held:
In view of the above, We are of the considered view that the private respondents
petition in the court a quo prima facie states a sufficient cause of action and that the
public respondent in denying the petitioners motion to dismiss, had acted advisedly
and well within its powers and authority. We, therefore, find no cause to annul the
challenged order issued by the respondent court in Civil Case No. 92-62106.
(Underscoring in the original; emphasis and italics supplied)[34]
An order denying a motion to dismiss is merely interlocutory and cannot give rise to
res judicata, hence, it is subject to amendments until the rendition of the final
judgment.[35]
On respondents contention that petitioner, as mortgagee, had the duty to notify it of
the public auction sale, the Court finds the same immaterial to the case.
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner
thereunder to redeem the mortgaged property only before its sale. Consider the
following pronouncement in Paray: [36]
[T]here is no law in our statute books which vests the right of redemption over
personal property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have
served as the vehicle for any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point. And Section 39 of
the 1997 Rules of Civil Procedure, extensively relied upon by the Court of Appeals,
starkly utters that the right of redemption applies to real properties, not personal
properties, sold on execution. (Emphasis, italics and underscoring supplied)
Unmistakably, the redemption cited in Section 13 partakes of an equity of
redemption, which is the right of the mortgagor to redeem the mortgaged property
after his default in the performance of the conditions of the mortgage but before the
sale of the property[37] to clear it from the encumbrance of the mortgage.[38] It is not
the same as right of redemption which is the right of the mortgagor to redeem the
mortgaged property after registration of the foreclosure sale,[39] and even after
confirmation of the sale.[40]
While respondent had attached some of Terrymanilas assets to secure the
satisfaction of a P296,662.16 judgment rendered in another case, what it effectively
attached was Terrymanilas equity of redemption. That respondents claim is much
lower than the P1.5 million actual bid of petitioner at the auction sale does not defeat
respondents equity of redemption. Top Rate International Services, Inc. v. IAC[41]
enlightens:
It is, therefore, error on the part of the petitioner to say that since private respondents
lien is only a total of P343,227.40, they cannot be entitled to the equity of redemption
because the exercise of such right would require the payment of an amount which
cannot be less than P40,000,000.00.
When herein private respondents prayed for the attachment of the properties to
secure their respective claims against Consolidated Mines, Inc., the properties had
already been mortgaged to the consortium of twelve banks to secure an obligation of
US$62,062,720.66. Thus, like subsequent mortgagees, the respondents liens on
such properties became inferior to that of banks, which claims in the event of
foreclosure proceedings, must first be satisfied. The appellate court, therefore, was
correct in holding that in reality, what was attached by the respondents was merely
Consolidated Mines . . . equity of redemption. x x x x
xxxx
We, therefore, hold that the appellate court did not commit any error in ruling that
there was no over-levy on the disputed properties. What was actually attached by
respondents was Consolidated Mines right or equity of redemption, an incorporeal
and intangible right, the value of which can neither be quantified nor equated with the
actual value of the properties upon which it may be exercised.[42] (Emphasis, italics
and underscoring supplied)
Having thus attached Terrymanilas equity of redemption, respondent had to be
informed of the date of sale of the mortgaged assets for it to exercise such equity of
redemption over some of those foreclosed properties, as provided for in Section 13.
Recall, however, that respondent filed a motion to reconsider the February 3, 1992
Order of the RTC Bataan-insolvency court which granted leave to petitioner to
foreclose the chattel mortgage, which motion was denied. Notably, respondent failed
to allege this incident in his annulment of sale case before the RTC of Manila.
Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on
the date of the auction sale itself on June 16, 1992, respondent was already put on
notice of the impending foreclosure sale of the mortgaged chattels. It could thus have
expediently exercised its equity of redemption, at the earliest when it received the
insolvency courts Order of March 20, 1992 denying its Motion for Reconsideration of
the February 3, 1992 Order.
Despite its window of opportunity to exercise its equity of redemption, however,
respondent chose to be technically shrewd about its chances, preferring instead to
seek annulment of the auction sale, which was the result of the foreclosure of the
mortgage, permission to conduct which it had early on opposed before the
insolvency court. Its negligence or omission to exercise its equity of redemption
within a reasonable time, or even on the day of the auction sale, warrants a
presumption that it had either abandoned it or opted not to assert it.[43] Equitable
considerations thus sway against it.
It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been
judicially declared insolvent. Respondents recourse was thus to demand the
satisfaction of its judgment award before the insolvency court as its judgment award
is a preferred credit under Article 2244[44] of the Civil Code. To now allow
respondent have its way in annulling the auction sale and at the same time let it
proceed with its claims before the insolvency court would neither rhyme with reason
nor with justice.
Parenthetically, respondent has not shown that it was prejudiced by the auction sale
since the insolvency court already determined that even if the mortgaged properties
were foreclosed, there were still sufficient, unencumbered assets of Terrymanila to
cover the obligations owing to other creditors, including that of respondents.[45]
In any event, even if respondent would have participated in the auction sale and
matched petitioners bid, the superiority of petitioners lien over the mortgaged assets
would preclude respondent from recovering the chattels.
It has long been settled by this Court that the right of those who acquire said
properties should not and can not be superior to that of the creditor who has in his
favor an instrument of mortgage executed with the formalities of the law, in good
faith, and without the least indication of fraud. x x x. In purchasing it, with full
knowledge that such circumstances existed, it should be presumed that he did so,
very much willing to respect the lien existing thereon, since he should not have
expected that with the purchase, he would acquire a better right than that which the
vendor then had. (Emphasis and underscoring supplied)[46]
It bears noting that the chattel mortgage in favor of petitioner was registered more
than two years before the issuance of a writ of attachment over some of
Terrymanilas chattels in favor of respondent. This is significant in determining who
between petitioner and respondent should be given preference over the subject
properties. Since the registration of a chattel mortgage is an effective and binding
notice to other creditors of its existence and creates a real right or lien that follows
the property wherever it may be,[47] the right of respondent, as an attaching creditor
or as purchaser, had it purchased the mortgaged chattel at the auction sale, is
subordinate to the lien of the mortgagee who has in his favor a valid chattel
mortgage.[48]
Contrary then to the appellate courts ruling, petitioner is not liable for constructive
fraud for proceeding with the auction sale. Nor for subsequently selling the chattel.
For foreclosure suits may be initiated even during insolvency proceedings, as long as
leave must first be obtained from the insolvency court[49] as what petitioner did.
The appellate courts award of exemplary damages and attorneys fees for
respondent, given petitioners good faith, is thus not warranted.
As for petitioners prayer for attorneys fees in its Compulsory Counterclaim, the same
is in order, the dismissal of respondents Complaint nowithstanding.[50] Perkin Elmer
Singapore v. Dakila Trading,[51] citing Pinga v. Heirs of German Santiago,[52]
enlightens:
It bears to emphasize that petitioners counterclaim against respondent is for
damages and attorneys fees arising from the unfounded suit. While respondents
Complaint against petitioner is already dismissed, petitioner may have very well
incurred damages and litigation expenses such as attorneys fees since it was forced
to engage legal representation in the Philippines to protect its rights and to assert
lack of jurisdiction of the courts over its person by virtue of the improper service of
summons upon it. Hence, the cause of action of petitioners counterclaim is not
eliminated by the mere dismissal of respondents complaint.[53] (Underscoring
supplied)
To the Court, the amount of P250,000 prayed for by petitioner in its Counterclaim is
just and equitable, given the nature and extent of legal services employed in
controverting respondents unfounded claim.
WHEREFORE, the petition for review is GRANTED. The challenged Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. Civil Case No.
92-62106 lodged before the Regional Trial Court of Manila, Branch 16, is
DISMISSED for lack of merit.
Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal
Commercial Banking Corporation, P250,000 as and for attorneys fees.
No costs.
SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice
G.R. No. L-29587 November 28, 1975
PHILIPPINE NATIONAL BANK, petitioner,
vs.
LUZON SURETY CO., INC. and THE HONORABLE COURT OF APPEALS,
respondent.
Medina and Magtalas for petitioner.
Tolentino, Garcia, Cruz and Reyes for private respondent.
ESGUERRA, J.:
Petitioner Philippine National Bank seeks a review and reversal of the decision dated
June 26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R, absolving
Luzon Surety Co., Inc. of its liability to said petitioner and thus reversing the decision
of the Court of First Instance of Negros Occidental, the dispositive portion of which
reads as follows:
IN VIEW THEREOF, judgment is hereby rendered ordering defendant Augusto R.
Villarosa to pay plaintiff PHILIPPINE NATIONAL BANK the sum of P81,200.00 plus
accrued interest of 5% per annum on P63,222.78 from August 31, 1959; to pay 10%
of said amount as attorney's fees and to pay the costs. Defendant Luzon Surety Co.,
Inc. is hereby ordered to pay jointly and severally with defendant Villarosa to the
plaintiff the sum of P10,000.00; defendant Central Surety and Insurance Company
jointly and severally with defendant Villarosa the sum of P20,000 to the plaintiff, and
Associated Surety And Insurance Co. jointly and severally with defendant Villarosa
the sum of P15,000.00 to the plaintiff, with the understanding that should said
bonding companies pay the aforementioned amounts of their respective bonds to the
plaintiff, said amounts should be deducted from the total outstanding obligation of
defendant Villarosa in favor of the plaintiff.
Above-quoted decision was modified in an order of the Court of First Instance dated
June 5, 1961, granting petitioner Philippine National Bank (PNB) the right to recover
accrued interest at the rate of 5% per annum from December 24, 1953, from the
defendants bonding companies.
The facts as found by the Court of Appeals are as follows:
... sometime prior to 27 November 1951, defendant Augusto R. Villarosa, a sugar
planter adhered to the Lopez Sugar Central Milling Company, Inc. applied for a crop
loan with the plaintiff, Philippine National Bank, Exhibit A; this application was
approved on 6 March, 1952 in the amount of P32,400, according to the complaint;
but the document of approval has not been exhibited; at any rate, the planter
Villarosa executed a Chattel Mortgage on standing crops to guarantee the crop loan,
Exhibit B and as shown in Exhibits C to C-30 on various dates from 28 January,
1952 to 9 January, 1953, in consideration of periodical sums of money by him
received from PNB, planter Villarosa executed these promissory notes from which
will be seen that the credit line was that the original amount of P32,400 and was thus
maintained up to the promissory note Exhibit C-9 dated 30 May, 1952 but afterwards
it was increased and promissory notes Exhibits C-10 to C-30 were based on the
increased credit line; and as of 27 September, 1953 as shown in the accounts,
Exhibits D and D-1, there was a balance of P63,222.78 but as of the date when the
complaint was filed on 8 June, 1960, because of the interest accrued, it had reached
a much higher sum; that was why due to its non-payment, plaintiff filed this
complaint, as has been said, on 8 June, 1960; now the complaint sought relief not
only against the planter but also against the three (3) bondsmen, Luzon Surety,
Central Surety and Associated Surety because Luzon Surety had filed the bond
Exhibit E dated 18 February, 1952 in the sum of P10,000; Central Surety Exhibit F
dated 24 February, 1952 in the sum of P20,000 and Associated Surety the bond
Exhibit G dated 11 September, 1952 in the sum of P15,000; in gist, the obligation of
each of the bondsmen being to guarantee the faithful performance of the obligation
of the planter with PNB; now each of the defendants in their answers raised various
defenses but as far as principal defendant Augusto R. Villarosa and other defendants
Central Surety and Associated Surety are concerned, their liability is no longer
material because they have not appealed; and in the trial of the case, plaintiff
submitted Exhibits A to J-1 and witness Romanito Brillantes; but the defense of
Luzon Surety thru its witness Jose Arroyo and Exhibits 1 to 3 being 1st that the
evidence of the plaintiff did not establish a cause of action to make Luzon Surety
liable and 2ndly, in any case that there had been material alteration in the principal
obligation, if any, guaranteed by it; ... .
Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to
this Court and alleged the following errors.
1. The Court of Appeals erred in the application of the law involved by invoking
Article 2055 of the New Civil Code, which properly should have been the law on
suretyship which are covered by Section 4, Chapter 3, Title 1, Book IV of the New
Civil Code;
2. Consequently, when the Court of Appeals released the surety from liability, it
committed a grave or gross misappreciation of facts amounting to an error of law;
3. The Court of Appeals erred when it held that there must have been a
principal crop loan contract, guaranteed by the surety bonds;
4. The Court of Appeals erred when it released the surety from liability. The
above assigned errors boil down to the single question of whether or not the Court of
Appeals was justified in absolving Luzon Surety Co., Inc., from liability to petitioner
Philippine National Bank. We have examined the record thoroughly and found the
appealed decision to be erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly
provided as follows:
xxx xxx xxx
1. That the Mortgagor does by these presents grant, cede and convey unto the
Mortgagee by way of First Mortgage free from any encumbrances, all the crops of
the absolute property of the Mortgagor, corresponding to the 1952-53 and
subsequent yearly sugar crops agricultural season at present growing in the Hda.
known as San Antonio, Washington (P) Audit 24-124 and 24-16 la and Hda.
Aliwanay (non-quota land); milling with LSMC and CAD Municipality of Sagay, and
Escalante, Province of Negros Occidental covered by cadastral lots no. Various of
the Cadastral Survey at the Municipality of Sagay, Escalante particularly bounded
and described in Transfer Certificate of Title No. Various issued by the Register of
Deeds of said province. The said mortgage crops consist of all the Mortgagor's first
available entire net share of the 1952-53 and subsequent yearly sugar crops
thereafter conservatively estimated at but not less than Three Thousand Four
Hundred Twenty and 14/00 (3,420.14) piculs of export and domestic sugar, including
whatever addition thereto, and such aids, subsidies, indemnity payments and other
benefits as maybe awarded to the Mortgagor, coming from any source,
governmental or otherwise.
xxx xxx xxx
4. This Mortgage is executed to secure payment by the Mortgagor to the
Mortgagee at the latter's office of a loan herein granted to the Mortgagor in the sum
of Thirty Two Thousand Four Hundred (P32,400.00) Pesos, Philippine Currency, with
interest at the rate of five per cent per annum, which loan shall be given to the
Mortgagor either in lump sum or in installments as the mortgagee may determine.
The Mortgagee may increase or decrease the amount of the loan as well as the
installments as it may deem convenient and the Mortgagor shall submit such
periodical reports on the crops mortgaged as the Mortgagee may require. In the
event that the loan is increased such increase shall likewise be secured by
Mortgage. This Mortgage shall also secure any other loans or advances that the
Mortgagee may extend to the Mortgagor, including interest and expenses or any
other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the account books and records of the Mortgagee.
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and between the PNB on one
hand and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the
other, is hereby reproduced, viz:
That we Augusto Villarosa of Bacolod City, as principal and Luzon Surety Company,
Inc. a corporation duly organized and existing under and by virtue of the laws of the
Philippines, as surety, are held firmly bound unto Philippine National Bank, Bacolod
City, Philippines, in the sum of Ten Thousand Pesos (P10,000.00) Philippine
Currency, for the payment of which sum, well and truly to be made, we bind
ourselves, our heirs, executors, administrators, successors, and assigns jointly and
severally, firmly by these presents:
The condition of the obligation are as follows:
WHEREAS, the above bounden principal, on the day of February, 1952, entered
into a crop loan contract with obligee Philippine National Bank, Bacolod Branch of
Bacolod City, Philippines to fully and faithfully
Comply with all the terms and condition stipulated in said crop loan contract which
are hereby incorporated as essential parts hereof, and principally to meet and pay
from the proceeds of the sugar produced from his Hda. Antonio and Hda. Aliwanay,
Escalante, Occidental Negros credit advances made by the Philippine National Bank
Bacolod Branch not to exceed P32,800 as stated in said contract. Provided further
that the liability under this bond shall not exceed the amount of P10,000.00
WHEREAS, said Philippine National Bank Bacolod Branch requires said principal to
give a good and sufficient bond in the above stated sum to secure the full and faithful
performance on his part of said crop loan contract.
NOW, THEREFORE, if the principal shall well and truly perform and fulfill all the
undertakings, covenants, terms and conditions and agreement stipulated in said crop
loan contract then, this obligation shall be null and void, otherwise it shall remain in
full force and effect.
xxx xxx xxx

The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine
National Bank not merely as a guarantor but as surety-liable as a regular party to the
undertaking (Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals,
however, in absolving the bonding company ratiocinates that the Surety Bond
executed on February 18, 1952, made specific references to a crop loan contract
executed by Augusto Villarosa sometime in February 1952. And, therefore, the
Chattel Mortgage, Exhibit B dated March 6, 1952, could not have been the
obligations guaranteed by the surety bond. Thus the Court of Appeals stated:
... one is really at a loss to impose any liability upon Luzon Surety in the absence of
the principal obligation which was a crop loan contract executed in February, 1952,
and to which there was made an express reference in the surety bond, Exhibit E; let
it not be overlooked further that one can secure a crop loan without executing a
Chattel Mortgage on his crops because the crop loan is the principal obligation while
the Chattel Mortgage is only an ancillary and secondary contract to guarantee
fulfillment of a crop loan; stated otherwise and as Luzon Surety never intervened in
the execution of the Chattel Mortgage, Exhibit B, there is no way under the evidence
from which it can be made to answer for liability to Augusto Villarosa under Exhibit E;
... "
The Court of Appeals, to Our mind did not give credence to an otherwise significant
and unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B
was the only chattel mortgage executed by Augusto Villarosa evidencing the crop
loan contract and upon which Luzon Surety agreed to assume liability up to the
amount of P10,000 by posting the said surety bond. Moreover Article 1354 of our
New Civil Code which provides:
Art. 1354. Although the cause is not stated in the contract., it is presumed that it
exist and is lawful, unless the debtor proves the contrary.
bolster petitioner's stand. Considering too that Luzon Surety company is engaged in
the business of furnishing guarantees, for a consideration, there is no reason that it
should be entitled to a rule of strictissimi juris or a strained and over-strict
interpretation of its undertaking. The presumption indulged in by the law in favor of
guarantors was premised on the fact that guarantees were originally gratuitous
obligations, which is not true at present, at least in the great majority of cases.
(Aurelio Montinola vs. Alejo Gatila, et al, G.R. No L-7558, October 31, 1955).
We have likewise gone over the answer of Luzon Surety Company dated June 17,
1960 (p. 73 Record on Appeal) and noted the following:
xxx xxx xxx
3. Defendant LUZON admits the portion of paragraph 3 referring to the grant of
P32,400 secured by a Chattel Mortgage dated March 6, 1952, copy of which is
attached as Annex "A" of the complaint.
xxx xxx xxx
As special defenses:
8. The terms and conditions of the surety bond as well as the contract it
guaranteed was materially altered and or novated without the knowledge and
consent of the surety thereby releasing the latter from liability.
11. The maximum liability, if any, of defendant LUZON is P10.000.00.
The principal obligation, therefore, has never been put in issue by then defendant
now respondent Luzon Surety Co., Inc. On the other hand it raised as its defense the
alleged material alteration of the terms and conditions of the contract as the basis of
its prayer for release. Even this defense of respondent Luzon Surety Co., Inc. is
untenable under the facts obtaining. As a surety, said bonding company is charged
as an original promissory and is an insurer of the debt. While it is an accepted rule in
our jurisdiction that an alteration of the contract is a ground for release, this
alteration, We stress must be material. A cursory examination of the record shows
that the alterations in the form of increases were made with the full consent of Luzon
Surety Co., Inc. Paragraph 4 of the Chattel Mortgage explicitly provided for this
increase(s), viz:
... the Mortgagee may increase or decrease the amount of the loan as well as the
installment as it may deem convenient ...
and this contract, Exhibit "B", was precisely referred to and mentioned in the Surety
Bond itself. In the case of Lim Julian vs. Tiburcio Lutero, et al No. 25235, 49 Phil.
703, 717, 718, this Court held:
It has been decided in many cases that the consideration named in a mortgage for
future advancements does not limit the amount for which such contract may stand as
security, if from the four corners of the document, the intent to secure future
indebtedness is apparent. Where, by the plain terms of the contract, such an intent is
evident, it will control. ...
The next question to take up is the liability of Luzon Surety Co. for interest which, it
contends, would increase its liability to more than P10,000 which is the maximum of
its bond. We cannot agree to this reasoning. In the cases of Tagawa vs. Aldanese,
43 Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100
Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p.
772, it was held:

If a surety upon demand fails to pay, he can be held liable for interest, even if in thus
paying, the liability becomes more than that in the principal obligation. The increased
liability is not because of the contract but because of the default and the necessity of
judicial collection. It should be noted, however, that the interest runs from the time
the complaint is filed, not from the time the debt becomes due and demandable.

PREMISES CONSIDERED, the judgment appealed from is reversed and set aside.
In lieu thereof another is rendered reinstating the judgment of the Court of First
Instance of Negros Occidental, 12th Judicial District, dated March 29, 1961, holding
Luzon Surety liable for the amount of P10,000.00 with the modification that interest
thereon shall be computed at the legal rate from June 8, 1960 when the complaint
was filed.

SO ORDERED.

Teehankee, Makasiar, Muoz Palma and Martin , JJ., concur.

Castro (Chairman), J., took no part.