1

G.R. No. 107554 February 13, 1997

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS, ROBERTO ONG AND ANG TAY, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to set aside
the decision of the Court of Appeals in CA-G.R C.V. No. 26257 dated 2 July 1992 which affirmed the decision of
the Regional Trial Court in Civil Case No. CEB-6919, declaring the chattel mortgage void and ordering petitioner
and private respondent Robert Ong to pay damages to private respondent Ang Tay. The Court of Appeals'
resolution dated 30 September 1992 is similarly impugned for denying petitioner's motion for reconsideration.

Gleaned from the records are the following facts:

On 4 March 1987, Jacinto Dy executed a Special Power of Attorney 1 in favor of private respondent Ang Tay,
authorizing the latter to sell the cargo vessel Owned by Dy and christened LCT "Asiatic."

On 28 April 1987, through a Deed of Absolute Sale,2 Ang Tay sold the subject vessel to private respondent
Robert Ong (Ong) for P900,000.00. Ong paid the purchase price by issuing three (3) checks in the following
amounts: P150,000.000, P600,000.00 and P150,000.00. However, since the payment was not made in cash, it was
specifically stipulated in the deed of sale that the "LCT Asiatic shall not be registered or transferred to Robert
Ong until complete payment." 3 Thereafter, Ong obtained possession of the subject vessel so he could begin
deriving economic benefits therefrom. He, likewise, obtained copies of the unnotarized deed of sale allegedly
to be shown to the banks to enable him to acquire a loan to replenish his (Ong's) capital. The aforequoted
condition, however,which was handwritten on the original deed of sale does not appear on Ong's copies.

Contrary to the aforementioned agreements and without the knowledge of Ang Tay, Ong had his copies of
the deed of sale (on which the aforementioned prohibition does not appear) notarized on 18 May 1987.4 Ong
presented the notarized deed to the Philippine Coast Guard which subsequently issued him a Certificate of
Ownership5 and a Certificate of Philippine Register6 over the subject vessel on 27 May 1987. Ong also
succeeded in having the name of the vessel changed to LCT "Orient Hope."

On 29 October 1987, Ong acquired a loan from petitioner in the amount of P496,008.00 to be paid in
installments as evidenced by a promissory note of even date.7

As security for the loan, Ong executed a chattel mortgage over the subject vessel, 8 which mortgage was
registered with the Philippine Coast Guard and annotated on the Certificate of Ownership. 9 In paragraph 3 of
the Deed of Chattel Mortgage, it was stated that:

3. The said sum of FOUR HUNDRED NINETY SIX THOUSAND EIGHT ONLY (496,008.00) represents the
balance due on of MORTGAGOR(S) from the MORTGAGEE and is payable in the office of the
MORTGAGEE at Cebu City or in the office of the latter's assignee, in case the rights and interests
of the MORTGAGEE in the foregoing mortgage are assigned to a third person, under the terms of
said promissory note, as follows: (a) TWENTY THOUSAND SIX HUNDRED SIXTY SEVEN ONLY** Pesos
(P20,667.00) on or before . . . . . . and (b) the balance in Twenty Four (24) equal successive
monthly installments on the . . . . . . day of each and every succeeding month thereafter until the
amount is fully paid. The interest on the foregoing installments shall be paid on the same date
that the installments become payable and additional interest at the rate of fourteen (14%) per
cent per annum will be charged on all amounts, principal and interest, not paid on due
date. 10 (Emphasis ours.)

Ong defaulted in the payment of the monthly installments. Consequently, on 11 May 1988, petitioner sent him a
letter 11 demanding delivery of the mortgaged vessel for foreclosure or in the alternative to pay the balance of
P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage. 12

Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by Ong to Ang Tay for the purchase of
the subject vessel bounced. Ang Tay's search for the elusive Ong and all attempts to confer with him proved to
be futile. A subsequent investigation and inquiry with the Office of the Coast Guard revealed that the subject
vessel was already in the name of Ong, in violation of the express undertaking contained in the original deed of
sale.
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As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a civil case for rescission and replevin with
damages against Ong and his wife (docketed as Civil Case No. CEB-6565) with the Regional Trial Court of Cebu
. City, Branch 10. The trial court issued a writ of replevin and the subject vessel was seized and subsequently
delivered to Ang Tay.

On 9 March 1988, petitioner filed a motion for intervention but withdrew the same on 29 April 1988. Instead, on
26 May 1988, petitioner filed a separate case for replevin and damages against Ong and "John Doe" (Ang Tay)
with the same trial court, docketed as Civil Case No. CEB-6919.

The trial court granted petitioner's prayer for replevin. The vessel was seized and placed in the custody of the
trial court. However, Ang Tay posted a counterbond and the vessel was returned to his possession.

On 3 October 1990 in CEB-6565, the trial court rendered a decision in favor of Ang Tay and Jacinto Dy. The sale
of the subject vessel was rescinded, the registration of the vessel with the Office of the Coast Guard and other
government agencies in Ong's name nullified and the vessel's registration in Dy's name revived. Ong was,
likewise, ordered to pay Jacinto Dy and Ang Tay actual damages for lost income, moral damages, attorney's
fees and litigation
expenses.13

The Court of Appeals affirmed the trial court's decision and Ong's petition for review before this Court was
dismissed for lack of merit in a resolution dated 15 March 1993,

On the other hand, in CEB-6919, the subject of the present appeal, the trial court in a decision dated 14
February 1990, declared the chattel mortgage on the subject vessel null and void and ordered petitioner and
Ong to pay Ang Tay damages. The dispositive portion states, thus:

WHEREFORE, in view of all the foregoing, the chattel mortgage on the vessel LCT ORIENT HOPE is
declared null and void, rendering its annotation and registration at the back of the Certificate of
Ownership and Certificate of Philippine Registry respectively, to be of no force and effect.

Plaintiff CIFC and defendant Robert Ong are hereby ordered to pay jointly and severally to
defendant Ang Tay the following amounts: P50,000.00 as unrealized income during the five-day
period when the vessel was take from Ang Tay's possession; P100,000.00, representing the
premiums Ang Tay paid for the redelivery of the vessel to him and other expenses; P10,000.00 as
actual expenses for the recovery of the vessel; P100,000.00 as moral damages; P50,000.00 as
exemplary damages; P40,000.00 as actual expenses in attending trials and litigation expenses;
and P30,000.00 as attorney's fees.

SO ORDERED. 14

On 2 July 1992, the Court of Appeals affirmed in toto the above mentioned decision. 15 Hence, the present
petition for review on certiorari.

Petitioner enumerates the alleged errors oft he Court of Appeals as follows:

THE COURT OF APPEALS ERRED IN BASING ITS DECISION ON SPECULATION, CONJECTURE, AND
SURMISE, WHEN IT DECLARED THAT THE CONTRACT BETWEEN CIFC AND ROBERT ONG WAS ONE
OF SALE, AND NOT LOAN (MUTUUM) WITH MORTGAGE.

II

THE RULING OF THE COURT OF APPEALS IS CONTRARY TO EXISTING AND WELL-SETTLED

JURISPRUDENCE THAT A MORTGAGEE HAS THE RIGHT TO RELY ON WHAT APPEARS IN THE
CERTIFICATE OF OWNERSHIP (TITLE).

III

THE DECISION OF THE COURT OF APPEALS IS REPUGNANT TO THE CLEAR RULING OF THE
HONORABLE COURT THAT BETWEEN TWO INNOCENT

PERSONS, THE ONE WHO MADE THE DAMAGE POSSIBLE BY HIS ACT OF CONFIDENCE MUST BEAR
THE LOSS. 16
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We grant the petition.

In upholding the nullity of the chattel mortgage on the subject vessel, the Court of Appeals declared thus:

In Par. 3 of the Chattel Mortgage Contract executed between appellants CIFC and Robert
Ong, it was made to appear that the subject vessel was sold by the plaintiff Cebu International
Finance Corporation to Robert Ong on installment. However, there is no showing that appellant
CIFC acquired the vessel in question from either Jacinto Dy or Ang Tay, the owner of such vessel.
Since, CIFC appears to have sold the vessel in question to Ong on installment basis, the said
contract is null and void, because CIFC was never the owner of the vessel.

Moreover, Robert Ong CIFC's mortgagor, did not acquire ownership of the vessel because of an
express stipulation in the Deed of Sale that the vessel "shall not be registered or transferred to
Robert Ong until complete payment." (Exh. "7-C-1".) Since Ong clearly was not the owner of the
vessel at the time of the execution of the mortgage, the said mortgage is null and void on that
ground.

Furthermore, the evidence on record shows the chattel mortgage in question did not comply
with the requirements of P.D. 1521, The Ship Mortgage Decree of 1978. . . . 17

The Court of Appeals nullified the chattel mortgage contract between petitioner and Ong because paragraph
3 of the said contract (where it appeared that petitioner sold the subject vessel to Ong on installment basis and
that the amount supposedly loaned to Ong represented the balance due on the purchase price) seemed to
indicate that the owner of the vessel mortgaged was petitioner although it had been duly established that
another party (Jacinto Dy) was the true owner thereof. 18

We disagree with the aforequoted ruling of the Court of Appeals. The chattel mortgage contract should not be
viewed in such a myopic context. The key lies in the certificate of ownership issued in Ong's name (which,
along with the deed of sale, he submitted to petitioner as proof that he is the owner of the ship he gave as
security for his loan). It was plainly stated therein that the ship LCT "Orient Hope" ex "Asiatic," by means of a
Deed of Absolute Sale dated 28 April 1987, was "sold and transferred by Jacinto Dy to Robert Ong." 19 There
can be no dispute then that it was Dy who was the seller and Ong the buyer of the subject vessel. Coupled
with the fact that there is no evidence euphony transaction between Jacinto Dy or Ang Tay and petitioner, it
follows, therefore, that petitioner's role in the picture is properly and logically that of a creditor-mortgagee and
not owner-seller. It is paragraph 2 of the mortgage contract 20 which accurately expresses the true nature of
the transaction between petitioner and Ong--that it is a simple loan with chattel mortgage. The amount
petitioner loaned to Ong does not represent the balance of any purchase price since, as we have previously
discussed, the aforementioned documents state that Ong is already the absolute owner of the subject vessel.
Obviously, therefore, paragraph 3 of the said contract was filled up by mistake. Considering that petitioner
used a form contract, it is not improbable that such an oversight may have been committed--negligently but
unintentionally and without malice. As testified to by Mr. Benjamin C. Alfaro, petitioner's Senior Vice President for
Operations they only use one form for several kinds of transaction:

ATTY. UY: (TO WITNESS)

Q: Mr. Alfaro, as a financing institution, Cebu International finance Corporation, how many kinds of
lending transaction do you have in a firm? Do you have financial leasing, discounting or whatever? Can
you explain briefly to the Honorable Court?

WITNESS:

A: We have direct loan transaction. We have financing transaction and we have leasing transaction.
Now, in the leasing transaction, the document will show that we are the owner of the equipment and
we leased it out. In the financing transaction, where we used the same Chattel Mortgage instrument,
there are three parties involved, the seller of the equipment. And then, the seller of the equipment
would sell or assign the contract with the financing company. That is the financing transaction. And in
the simple loan transaction, there appears only two parties involved, the borrower and the lender.

ATTY. UY: (TO WITNESS)

Q: Now, Mr. Alfaro, the same document, Chattel Mortgage will apply also to financing transaction,
leasing transaction and simple loan transaction?

WITNESS:

A: Simple loan and financing transactions.

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ATTY. UY (TO WITNESS)

Q: Now, Mr. Alfaro, this paragraph 2 of Chattel Mortgage, can this apply to a financing transaction?

WITNESS:

A: No, the paragraph 3 will be the one that is applicable to a financing transaction. (Witness reading
the document and after reading continued) Paragraph 2 applies to both financing and simple loan
transaction.

ATTY. UY:

Q: And paragraph 3?

WITNESS:

A: Paragraph 3 applies to both financing and lending transactions but paragraph 3 does not apply to
Simple lending transaction.

xxx xxx xxx 21

ATTY. LOGRONIO: (TO WITNESS)

Q: You do not affirm the assertion made by your counsel that paragraph 3 arise only in case that your
rights to a mortgage were assigned by you to a third person, do you agree that also?

WITNESS:

A: This form of chattel mortgage, in fact, you will notice that the portion for mortgagor and mortgagee
are all blank because this is the same form which is used by the company, used for the parties when
there is a dealer involved, when there is installment buyer involved and when we come in as third party
purchaser of the document because as practiced by the different dealer, this is the same form used
between the buyer and the dealer of the motor vehicle. After this is being consummated already, it is
assigned to a finance company and these are the same documents used. Now, in this particular case,
this becomes already . . . this is a direct transaction between the finance company and the borrower.
We, the finance company becomes the direct lender and Mr. Ong became the direct borrower. As I
explained earlier, this document is also the form used between a dealer of a motor vehicle and an
installment buyer wherein after paying the down payment, the unpaid balance which is secured by the
chattel mortgage, the promissory note, and the disclosure statement and this document is sold to a
third party and that is the finance company by the dealer.

ATTY. LOGRONIO:

Q: Up to this point, when you had the transaction with Mr. Ong, this form that you executed, the Chattel
Mortgage was in what kind of form that was already used by the company?

WITNESS:

A: These are forms available to us.

ATTY. LOGRONIO:

Q: This is a form used when there is a buyer and a ...

WITNESS:

A: Third party or direct borrowing lender.

ATTY. LOGRONIO:

Q: And this refers to a direct borrower or lending transaction.

WITNESS:
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A: Yes.

ATTY. LOGRONIO:

Q: No third party assignment has been involved so far?

WITNESS:

A: No.

xxx xxx xxx 22

Accordingly, the chattel mortgage contract between petitioner and Ong is valid and subsisting.

The next issue for our determination is whether or not petitioner is a mortgagee in good faith whose lien over the
mortgaged vessel should be respected.

The prevailing jurisprudence is that a mortgagee has a right to rely in good faith on the certificate of title of the
mortgagor to the property given as security and in the absence of any sign that might arouse suspicion, has no
obligation to undertake further investigation. Hence, even if the mortgagor is not the rightful owner of or does
not have a valid title to the mortgaged property, the mortgagee or transferee in good faith is nonetheless
entitled to protection. 23 Although this rule generally pertains to real property, particularly registered land, it may
also be applied by analogy to personal property, in this case specifically, since shipowners are, likewise,
required by law to register their vessels with the Philippine Coast Guard.

Private respondent Ang Tay, however, contends that the aforementioned rule does not apply in the case at
bar in the face of the numerous "badges of bad faith" on the part of petitioner.

Capitalizing on paragraph 3 of the chattel mortgage contract, Ang Tay argues as follows:

. . . The fraud and conspiracy by Robert Ong and some responsible employees of CIFC against
Jacinto Dy and Ang Tay are thus brought to the open by this stipulation. Since CIFC appears in
the registered chattel mortgage to have sold the vessel in question to Robert Ong, the said
contract is null and void because CIFC never for a second or a moment became the owner of
the vessel. CIFC was the one who prepared the chattel mortgage and the one who registered
the same without contemporaneous or subsequent correction or modification; it cannot, after it
notified the public by means of registration that it acquired the vessel and became its owner,
now shy away from a stipulation which is the heart and nerve-center of the contract and which
it made and registered. This is both the essence and consequence of estoppel. Applicable is
Article 1459 of the Civil Code which provides inter-alia: ". . . the vendor must have a right to
transfer the ownership thereof (the thing sold) at the time it is delivered."

2. Robert Ong, CIFC's mortgagor, did not acquire ownership of the vessel because of an express
stipulation which he signed that the vessel "shall not be registered or transferred to Robert Ong
until complete payment." (Exh. "7-C-1".) This stipulation is expressly covered by Article 1478 of the
Civil Code: "The parties may stipulate that ownership in the thing shall not pass to the purchaser
until he has fully paid the price." Since Ong clearly was not the owner of the vessel at the time of
the execution of the mortgage, the said mortgage is null and void on that ground. 24

Ang Tay's contentions are unmeritorious. As previously discussed, paragraph 3 of the chattel mortgage
contract was erroneously but unintentionally filled up. The failure of petitioner to exercise due care in filling up
the necessary provisions in the chattel mortgage contract does not, however, amount to bad faith. It was a
mere oversight and not a deliberate and malicious act.

Petitioner's bad faith is further demonstrated, Ang Tay avers, by its failure to comply with the following
requirements of P.D. No. 1521 or the Ship Mortgage Decree of 1978:

1) The loan secured by the mortgaged vessel was not for any of purposes specified in Sec. 2 of
P.D. No. 1521, i.e., "financing the construction, acquisition, purchase of vessels or initial operation
of vessels" 25 and that petitioner failed to furnish the Central Bank a copy of the mortgage; 26

2) The special affidavit of good faith required in Sec. 4 of P.D. No. 1521 was lacking; and

3) Ong failed to disclose his creditors and lienors as provided in Sec. 6 of P.D. No. 1521.
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There is no merit in private respondent's allegations. In the 9 November 1989 hearing, Ang Tay confirmed his
statement in his affidavit, executed in Civil Case No. CEB-6565, that Ong wanted to obtain a loan to replenish
his capital because he had used up his money in the purchase of the subject vessel 27 and that the ship was
delivered to Ong so that he could begin deriving economic benefits therefrom. 28 Mr. Randolph Veloso
petitioner's collector, processing clerk, credit investigator and appraiser, further testified as follows:

xxx xxx xxx

Q: Do you know the purpose for that loan

A: Yes.

Q: What was his purpose?

A: He was going to mortgage the vessel to us.

Q: What was the purpose of the loan?

A: We don't usually ask our client what they will do with it.

Q: You don't ask the purpose?

A: It is understood that whenever a client approach the institution he usually has a purpose for the
money.

Q: Did not the corporation was what need has he for the money?

A: He is going to use it for his business in the boat.

Q: And that is his only statement? What was his specific statement?

ATTY. UY:

Already answered. He will use it in the business of his boat.

ATTY. LOGRONIO:

What was the purpose.

ATTY. UY:

Already answered Your Honor and besides it is immaterial.

ATTY. LOGRONIO:

Very material and it is important Your Honor as there is a violation of the law. I am entitled to insist for the
answer.

COURT:

Witness may answer, if he knows.

(TO WITNESS)

Q: Did he tell you what was the purpose?

A: For the business of the boat.

ATTY. LOGRONIO: (TO WITNESS)

Q: That's all, that he is going to use the money for the business of the boat?

A: Yes.
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xxx xxx xxx 29

From the foregoing, therefore, it can be readily deduced that the loan was for the initial operation of the
subject vessel and thus falls under the purposes laid down in the Ship Mortgage Decree.

The special affidavit of good faith, on the other hand, is required only for the purpose of transforming an
already valid mortgage into a "preferred mortgage." 30 Thus, the abovementioned affidavit is not necessary for
the validity of the chattel mortgage itself but only to give it a preferred status.

As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree, 31 it was intentional on Ong's part not to
inform petitioner that he had yet to pay in full the purchase price of the subject vessel. Ong presented himself
to petitioner as the absolute owner of the LCT "Orient Hope" ex "Asiatic." The Certificate of Ownership in Ong's
name showed that the ship was conveyed to him by means of a Deed of Absolute Sale which gave the idea
that the purchase price had been fully paid and the sale completed.

Petitioner had every right to rely on the Certificate of Ownership and Certificate of Philippine Register duly
issued by the Philippine Coast Guard in Ong's name. Petitioner had no reason to doubt Ong's ownership over
the subject vessel. The documents presented by Ong, upon petitioner's insistence before accepting the said
vessel as loan security, were all in order and properly issued by the duly constituted authorities. There was no
circumstance that might have aroused petitioner's suspicion or alerted it to any infirmity committed by Ong. It
had no participation in and was not privy to the sale transaction between Jacinto Dy (through Ang Tay) and
Ong. Petitioner, thus, had no obligation to undertake further investigation since it had the necessary documents
to prove Ong's ownership. In addition petitioner even took pains to inspect the subject vessel which was in
Ong's possession. Mr. Benjamin C. Alfaro testified thus: . . .

xxx xxx xxx

ATTY. LOGRONIO:

Q: In your credit investigation of Mr. Robert Ong did you have a chance yourself or any of your
employees to verify the condition and the location of the vessel at the very time?

WITNESS:

A: Yes.

ATTY. LOGRONIO:

Q: Will you tell the Court where was the vessel at the time that he applied for a loan with your bank?

WITNESS:

A: It was under finishing touches in the drydock in . . . think in Lapulapu or Mandaue.

ATTY. LOGRONIO:

Q: So, more or less, you are sure that at the time that he applied for a loan and you approved the
same, this vessel was still at the drydock?

WITNESS:

A: Yes finishing touches. In fact, it had pictures to support the application. I don't know if we have it
now.

ATTY. UY:

We have. (Counsel producing a picture of a vessel and handing it to the witness).

WITNESS: (Cont)

This is the picture of the vessel because we required him to submit.

ATTY. LOGRONIO:

Q: You are referring to the picture which you asked the Court to mark as Exhibit . . . .
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ATTY. UY:

No, we are requesting now Your Honor. This has not been marked yet. We asked that the picture
showing the back portion of the vessel, Orient Hope be marked as Exhibit "I" and the picture showing
the front portion of the vessel as Exhibit "I-1".

COURT: (TO INTERPRETER)

Mark it.

ATTY. LOGRONIO: (TO WITNESS)

Q: So, at the time that the vessel was submitted to you as collateral for the loan, the condition of the
vessel was as it is reflected in this exhibit? (Cross- examiner referring to the picture).

WITNESS:

A: Yes.

xxx xxx xxx 32

Anent the last issue, although Ang Tay may also be an innocent person, a similar victim of Ong's fraudulent
machinations, it was his act of confidence which led to the present fiasco. Ang Tay readily agreed to execute
a deed of absolute sale in Ong's favor even though Ong had yet to make a complete payment of the
purchase price. It is true that in the copy of the said deed submitted by Ang Tay there was an undertaking that
ownership will not vest in Ong until full payment.33 However, Ong was able to obtain several copies of the
deed 34 with Ang Tay's signature and had these notarized without the aforementioned undertaking as
evidenced by the copy of the deed of sale presented by petitioner. 35 The Deed of Absolute Sale consisted of
two (2) pages. The signatures of Ang Tay and Ong appeared only on the first page of the deed. The Second
page contained the continuation of the acknowledgment and the undertaking. Ong could have easily
reproduced the second page without the undertaking since this page was not signed by the contracting
parties. To complete the deception, Ang Tay unwittingly allowed Ong to have possession of the ship. Hence, in
consonance with our ruling that:

. . . as between two innocent persons, the mortgagee and the owner of the mortgaged
property, one of whom must suffer the consequence of a breach of trust, the one who made it
possible by his act of confidence must bear the loss. 36

it is Ang Tay and his principal Jacinto Dy who must, unfortunately, suffer the consequences thereof. They
are considered bound by the chattel mortgage on the subject vessel.

WHEREFORE, this Court GRANTS the Petition for Review and REVERSES the questioned decision and resolution of
the Court of Appeals. The validity of the chattel mortgage on the vessel LCT ORIENT HOPE is hereby upheld
without prejudice to whatever legal remedies private respondent Ang Tay may have against private1
respondent Robert Ong in the premises.

SO ORDERED.

Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.

[ GR No. L-11466, May 23, 1958 ]

LUIS G. ABLAZA v. GABRIEL A. IGNACIO +

DECISION

BAUTISTA ANGELO, J.:

This is an action for deficiency arising from a foreclosure of a chattel mortgage instituted when the new Civil
Code has already taken effect.

Defendant, after having been served with the summons and the complaint, failed to answer within the
reglementary period. Upon motion of plaintiff, defendant was declared in default. Then plaintiff presented his
evidence and submitted the case for decision.
 9

On August 30, 1956, the court rendered decision dismissing the complaint on the ground that, under the
provisions of Articles 2141 and 2115 of the new civil Code, "plaintiff is not entitled to deficiency judgment
notwithstanding defendant being declared in default for the reason that it is manifestly against the law." Hence
the present appeal.

It appears that defendant borrowed from plaintiff the amount of 52,250, payable after sixty days, with interest
at 12% per annum, and to secure the loan, he executed a chattel mortgage on an Oldsmobile car. Defendant
failed to pay the indebtedness on its date of maturity, thereby violating one of the conditions of the mortgage.
Thereupon, plaintiff proceeded to foreclose the mortgage extrajudicially and the mortgaged chattel was sold
at public auction for the amount of P700.00. Deducting this amount from, the total obligation, in addition to the
interest and liquidated damages agreed upon, the remaining balance was P2,675. To collect this balance,
plaintiff instituted the present action.

The lower court dismissed this case in spite of the fact that defendant was declared in default and plaintiff
presented enough evidence to support his claim because, being an action for deficiency oh a chattel
mortgage, it opined that the mortgage creditor is no longer entitled to it under the provisions of the new Civil
Code. Said the lower court:

"It is clear from the evidence presented that plaintiff in the instant case seeks deficiency judgment on a chattel
mortgage.

"The Civil Code provides:

'Art. 2141. The provisions of this Code on pledge insofar as they are not in conflict with the Chattel Mortgage
Law, shall be applicable to chattel mortgages.'

"Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the proceeds of
the 3ale are equal to the amount of the principal obligation, interest and expenses in a proper case. If the
price of the sale is more than said amount, the debtor shall not be entitled to the excess, unless it is otherwise
agreed, if the price of the sale is less neither shall the creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the contrary.'

"With the above-quoted provisions of the Civil Code, this Court is of the opinion that plaintiff is not entitled to
deficiency judgment notwithstanding defendant being declared in default for the reason that it is manifestly
against the law."

We are of the opinion that the trial court is in error. It is clear from Article 2141 that the provisions of the new Civil
Code on pledge shall apply to a chattel mortgage only in so far as they are not in conflict with the Chattel
Mortgage Law. In other words, the provisions of the new Civil Code on pledge can only apply if they do not run
counter to any provision of the Chattel Mortgage Law, otherwise, the provisions of the latter law shall apply.
Here we find tint the provisions of the Chattel Mortgage Law with regard to the effects of the foreclosure of a
chattel mortgage are precisely contrary to the provisions of Article 2115 which were applied by the trial court.
This can be seen from a perusal of Section 14 of said law, which we quote:

"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 assign, shall notify the
mortgagor or person holding under him and the person holding subsequent mortgages of the time and place
of sale, either by notice in writing direct 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 sale.

"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 officer's 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 the 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." (Underlining supplied)

Interpreting the nature of a chattel mortgage and the effects of its foreclosure in case of non-payment of the
obligation, this Court made the following pronouncement:
 10

"While it is true that section 3 of Act no. 1506 provides that 'a chattel mortgage is a conditional sale,1 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 a 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 the 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
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 er action for the deficiency, if any should occur.1 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." (Manila Trading and Supply Go. vs. Tamaraw Plantation Co., 47 Phil.,
513; Underlining supplied)

Considering that the provisions of the Chattel Mortgage law regarding the effects of the foreclosure of a
chattel mortgage are contrary to the provisions of Article 2115 of the new Civil Code, we find no plausible
reason why the latter should apply to the present case.

Wherefore, the decision appealed from is reversed. Judgment is hereby rendered ordering defendant to pay
to plaintiff the amount of P2,675, with interest thereon from January 3, 1955, and the costs of action.

Paras, C. J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Comcepcion, Reyes, J. B. L.,
Edencia, and Felix, JJ., concur.

[G.R. No. 107846. April 18, 1997]

LEOVILLO C. AGUSTIN, petitioner, vs. COURT OF APPEALS and FILINVEST FINANCE CORP., respondents.

RESOLUTION
FRANCISCO, J.:

This is an appeal by certiorari from the decision of respondent Court of Appeals in CA-G.R. No.
24684[1] which affirmed the order of Regional Trial Court, Branch 40, Manila, in Civil Case No. 84804. [2]
The dispute stemmed from an unpaid promissory note dated October 28, 1970, executed by petitioner
Leovillo C. Agustin in favor of ERM Commercial for the amount of P43,480.80. The note was payable in monthly
installments[3] and secured by a chattel mortgage over an Isuzu diesel truck,[4] both of which were subsequently
assigned to private respondent Filinvest Finance Corporation.[5] When petitioner defaulted in paying the
installments, private respondent demanded from him the payment of the entire balance or, in lieu thereof, the
possession of the mortgaged vehicle. Neither payment nor surrender was made. Aggrieved, private
respondent filed a complaint with the Regional Trial Court of Manila, Branch 26 (RTC Branch 26) against
petitioner praying for the issuance of a writ of replevin or, in the alternative, for the payment of P32,723.97 plus
interest at the rate of 14% per annum from due date until fully paid.[6] Trial ensued and, thereafter, a writ of
replevin was issued by RTC Branch 26. By virtue thereof, private respondent acquired possession of the
vehicle. Upon repossession, the latter discovered that the vehicle was no longer in running condition and that
several parts were missing which private respondent replaced. The vehicle was then foreclosed and sold at
public auction.
Private respondent subsequently filed a supplemental complaint claiming additional reimbursement
worth P8,852.76 as value of replacement parts[7] and for expenses incurred in transporting the mortgaged
vehicle from Cagayan to Manila. In response, petitioner moved to dismiss the supplemental complaint arguing
that RTC Branch 26 had already lost jurisdiction over the case because of the earlier extra-judicial foreclosure of
the mortgage. The lower court granted the motion and the case was dismissed.[8] Private respondent elevated
the matter to the appellate court, docketed as CA-G.R. No. 56718-R, which set aside the order of dismissal and
ruled that repossession expenses incurred by private respondent should be reimbursed. [9] This decision became
final and executory, hence the case was accordingly remanded to the Regional Trial Court of Manila, Branch
 11

40 (RTC Branch 40) for reception of evidence to determine the amount due from petitioner. [10] After trial, RTC
Branch 40 found petitioner liable for the repossession expenses, attorney's fees, liquidated damages, bonding
fees and other expenses in the seizure of the vehicle in the aggregate sum of P18,547.38. Petitioner moved for
reconsideration. Acting thereon, RTC Branch 40 modified its decision by lowering the monetary award
to P8,852.76, the amount originally prayed for in the supplemental complaint. [11] Private respondent appealed
the case with respect to the reduction of the amount awarded. Petitioner, likewise, appealed impugning the
trial courts order for him to pay private respondent P8,852.76, an amount over and above the value received
from the foreclosure sale. Both appeals were consolidated and in CA- G.R. No. 24684, the modified order of
RTC Branch 40 was affirmed. Petitioner filed a motion for reconsideration, but to no avail[12] Hence, this petition
for review on certiorari.
Petitioner contends that the award of repossession expenses to private respondent as mortgagee is
"contrary to the letter, intent and spirit of Article 1484 [13] of the Civil Code".[14] He asserts that private respondents
repossession expenses have been amply covered by the foreclosure of the chattel mortgage, hence he could
no longer be held liable. The arguments are devoid of merit.
Petitioners contentions, we note, were previously rejected by respondent court in its decision in CA-G.R.
No. 56718-R the dispositive portion of which provides as follows:

"WHEREFORE, the order dismissing the case is hereby set aside and the case is remanded to the lower court for
reception of evidence of `expenses properly incurred in effecting seizure of the chattel (and) of recoverable
attorney's fees in prosecuting the action for replevin' as `repossession expenses' prayed for in the supplemental
complaint, without pronouncement as to costs."[15]

which ruling has long acquired finality. It is clear, therefore, that the appellate court had already settled the
propriety of awarding repossession expenses in favor of private respondent. The remand of the case to RTC
Branch 40 was for the sole purpose of threshing out the correct amount of expenses and not for relitigating the
accuracy of the award. Thus, the findings of RTC Branch 40, as affirmed by the appellate court in CA-G.R. No.
24684, was confined to the appreciation of evidence relative to the repossession expenses for the query or
issue passed upon by the respondent court in CA-G.R. No. 56718-R (propriety of the award for repossession
expenses) has become the law of the case. This principle is defined as a term applied to an established rule
that when an appellate court passes on a question and remands the cause to the lower court for further
proceedings, the question there settled becomes the law of the case upon subsequent appeal.[16] Having
exactly the same parties and issues, the decision in the former appeal (CA-G.R. No. 56718-R) is now the
established and controlling rule. Petitioner may not therefore be allowed in a subsequent appeal (CA-G.R. No.
24684) and in this petition to resuscitate and revive formerly settled issues. Judgment of courts should attain
finality at some point in time, as in this case, otherwise, there will be no end to litigation.
At any rate, even if we were to brush aside the law of the case doctrine we find the award for repossession
expenses still proper. In Filipinas Investment & Finance Corporation v. Ridad,[17] the Court recognized an
exception to the rule stated under Article 1484(3) upon which petitioner relies. Thus:

x x x Where the mortgagor plainly refuses to deliver the chattel subject of the mortgage upon his failure to pay
two or more installments, or if he conceals the chattel to place it beyond the reach of the mortgagee, what
then is the mortgagee expected to do? x x x It logically follows as a matter of common sense, that the
necessary expenses incurred in the prosecution by the mortgagee of the action for replevin so that he can
regain possession of the chattel, should be borne by the mortgagor. Recoverable expenses would, in our view,
include expenses properly incurred in effecting seizure of the chattel and reasonable attorneys fees in
prosecuting the action for replevin.[18]

Anent the denial of the award for attorneys fees, we find the same in order. The trial court, as well as
respondent court, found no evidence to support the claim for attorney's fees which factual finding is binding on
us.[19] We find no compelling reason, and none was presented, to set aside this ruling.
ACCORDINGLY, the petition is DENIED for lack of merit, and the decision of the Court of Appeals is hereby
AFFIRMED in toto.
SO ORDERED.
Narvasa, C.J. (Chairman), Davide, Jr., Melo, and Panganiban, JJ., concur.

[ GR No. 10630, Dec 21, 1915 ]

US v. EUGENIO KILAYKO +

DECISION

32 Phil. 619
 12

CARSON, J.:

The information in this case charges the defendant and appellee with a violation of the penal provisions of
section 12 of the Chattel Mortgage Law (Act No. 1508), in that, as it is alleged, he sold certain property,
mortgaged by him under the provisions of that Act, without the consent of the mortgagee, and
notwithstanding the fact that the debt secured by the chattel mortgage had not been paid in full.

After the defendant had been arraigned and pleaded not guilty, and before any of the witnesses were called
to the witness stand, counsel for the accused interposed what he called a demurrer to. the information,
wherein; after admitting the truth of the facts alleged in the information, he insisted, that the information should
be dismissed, because, as he urged, certain facts within the knowledge of the court made it clear that the
pending criminal action could not be successfully maintained.

After some discussion by counsel, the so-called demurrer, which was in truth a motion to dismiss the information,
was submitted with the understanding that both parties admitted and agreed upon the following statement of
facts: First, that the defendant did in fact sell the. mortgaged property described in the information without the
consent of the mortgagee, and without having first paid the mortgage debt in full. Second, that at the time
when the mortgaged properly was sold a substantial part of the indebtedness secured by the mortgage still
remained unpaid. Third, that at the time of the institution of this action the total amount of the indebtedness
had been discharged either by payment direct to the creditor, or by the deposit of the total amount of the
unpaid balance of the mortgage debt in the hands of the clerk of the court, after formal tender of the creditor
and his refusal to accept the amount thus tendered in settlement of the indebtedness.

The contention of counsel for the defendant in the court below was based on the erroneous assumption that
the penal provisions of section 12, of Act No. 1508, do not authorize the enforcement of the penalties therein
prescribed, in any case wherein it appears that the mortgage indebtedness has been discharged in full at the
time of the institution of criminal proceedings. In support of this contention, counsel assumes that the protection
of the mortgagee, in any case in which criminal proceedings are instituted, is the sole purpose and object of
the penal provisions of the statute. The argument would seem to be that since the statute prescribes that the
fine which the courts are authorized to impose on conviction of a wrongful sale of mortgaged property must be
equal in amount to double the value of the property sold, one-half of which1 is to go to the mortgagee, it
could not have been the intention of the legislator to permit the mortgagee to recover such a fine in any case
in which he had already recovered the amount of the indebtedness secured by the mortgage. Thus, in the
case at bar, in which the mortgage debt of P10,200 had been paid in full when the criminal action was
instituted, it is urged that it would be unjust and unreasonable to impose a fine of P20,400, and turn over one-
half of that amount, to the mortgage creditor, thereby permitting him to recover double the amount of the
original indebtedness.

To these contentions of counsel we answer: First, that we know of no limitation on the power of the legislator to
prescribe lawful penalties for wrongful acts such as that with which the accused was charged in the case at
bar; and that on principle, and in accordance with a like usage in cases of robbery, theft, embezzlement and
estafa, the mere fact that the indebtedness secured by the mortgage has been paid in whole or in part, after
a wrongful sale of the mortgaged property, does not necessarily relieve the wrongdoer of criminal liability for
the offense committed by him: Second, that the penalty prescribed by the statute is either a fine, or
imprisonment for not more than six months, or both; so that it is left to the sound discretion of the courts whether
or not a fine will be imposed in case of conviction; and in any case wherein the imposition of the prescribed
fine would seem to be excessive or to work an undue hardship on the debtor, the courts are empowered to
limit the penalty imposed to imprisonment for a period which may not exceed six months and may be of as
short duration as the court may deem proper under all the circumstances of the case: and third, that the
object of the penal provisions of the Chattel Mortgage Law is not merely to protect the mortgagee in particular
cases in which criminal actions are instituted, and to secure the payment of the mortgage indebtedness in
such cases (although they may, and should have that effect in many instances), but also to give the necessary
sanction to the provision of the statute in the interest of the public at large, so that in all cases wherein loans are
made and secured under the terms of the statute, the mortgage debtors may be deterred from the violation of
its provisions and the mortgage creditors may be protected against loss or inconvenience resulting from the
wrongful removal or sale of the mortgaged property.
 13

The trial judge granted the motion by counsel for the accused and dismissed the complaint, relying, as it would
appear from his opinion, on the fallacious contentions of counsel for the accused.

The parties seem to have treated the action of the judge merely as a ruling on a demurrer and not as a
decision of the cause on the merits; and the provincial fiscal brought the case here on appeal without
objection.

In dismissing the complaint the trial judge refers to the motion of counsel for the accused as a "so-called
demurrer;" but it does not clearly appear whether he regarded the entry of his order dismissing the complaint
as a decision of the case on the merits, or a ruling sustaining a demurrer.

We are of opinion, however, that the ruling of the trial judge on the motion of counsel for the accused was in
truth and in effect a final judgment on the merits from which no appeal lay on behalf of the Government. The
accused had been arraigned and pleaded "not guilty," and the judgment of the court was entered upon an
agreed statement of facts. The agreed statement of facts disclosed everything which the prosecution and the
accused were prepared to prove by the testimony of their respective witnesses. After the submission of the
agreed statement of facts, the trial was regularly terminated, and it only remained for the trial judge to enter his
judgment convicting and sentencing the accused, or acquitting him and dismissing the information upon
which the proceedings had been instituted. Manifestly, the accused was in jeopardy of conviction from the
moment the case was submitted on the agreed statement of facts until judgment was entered dismissing the
information. Indeed, there can be no doubt that but for the erroneous view of the trial judge as to the nature
and effect of the penal provision of section 12 of the Chattel Mortgage Law, a judgment of conviction would
have been lawfully entered upon the agreed statement of facts, followed by the imposition of the prescribed
penalty.

The judgment entered in the court below was not a mere order sustaining a demurrer, but a final judgment
disposing of the case on the merits; so that were we to reverse the judgment and direct the court below to
proceed with the trial, the accused would be entitled to have the information dismissed on the plea of double
jeopardy.

The provincial fiscal perfected an appeal from the judgment on the erroneous theory that the judgment of
dismissal was an order sustaining a demurrer to the information; and without objection on the part of the
accused, the record was brought here, and the case argued and submitted on that theory. Clearly the
Government had no right of appeal from the judgment entered in the court below, and the appeal must be
dismissed with the costs de oficio. We have, however, deemed it proper to discuss the questions actually
submitted with relation to the construction which should be placed upon the statute, partly, in order to make
clear the grounds upon which we base our ruling as to the nature and character of the proceedings had in the
court below, and partly, to avoid any possible misapprehension which might arise as a result of the fact that our
dismissal of the appeal leaves the judgment of the court below, dismissing the information, in full force and
effect.

Ten days hereafter let judgment be entered dismissing the appeal in this case with costs de oficio, and ten days
thereafter let the record be returned to the court wherein it originated. So ordered.

Arellano, C.J., Torres, Johnson, Trent, and Araullo, JJ., concur.

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.

GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in C.A. G.R. C.V. No. 27861,
promulgated on April 23, 1992, 1 affirming in toto the decision of the Regional Trial Court of Makati 2 to a award
respondent bank's deficiency claim, arising from a loan secured by chattel mortgage.

The antecedents of the case are as follows:

 14

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 PAMECA's
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 PAMECA's 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 PAMECA's 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 corporation's 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
bank's 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 courtr. 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
 15

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 court's 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 foreclosire 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.

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

xxx xxx 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 officer's 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
 16

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 vendee's 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 DBP's borrowing rate for these
funds. Before the date of maturity, we hereby bind ourselves, jointly and severally, to make partial
payments as follows:

xxx xxx xxx

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

xxx xxx xxx

We further bind ourselves to pay additional interest and penalty charges on loan amortizations or
portion thereof in arrears as follows:
 17

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

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

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

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

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

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES 22

From the foregoing, it is clear that private petitioners intended to bind themselves solidarily with petitioner
PAMECA in the loan. As correctly submitted by respondent bank, private petitioners are not made to answer for
the corporate act of petitioner PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court of Appeals dated April 23,
1992 in CA G.R. CV No. 27861 is hereby AFFIRMED. Costs against petitioners.

SO ORDERED.

Romero, Vitug Pananganiban and Purisima, JJ., concur.