G.R. No. 190901               November 12, 2014
7 Consequently, Tax
AMADA COTONER-ZACARIAS, Petitioner,
vs.
SPOUSES ALFREDO AND THE HEIRS REVILLA OF PAZ REVILLA, Respondents.
DECISION
LEONEN, J.:
Well-settled is the rule that "conveyances by virtue of a forged signature ...
are void ab initio [as] [t]he absence of the essential [requisites] of consent
and cause or consideration in these cases rendered the contract
inexistent[.]"1
Before us is a petition for review2 filed by Amada Cotoner-Zacarias against
respondent spouses Alfredo Revilla and Paz Castillo-Revilla, praying that this
court render a decision "reversing the Decision of the Regional Trial Court
and Court of Appeals and declaring the transfer of title to the Petitioner and
then to her successors-in-interest as valid and binding as against the
respondents."3
The Court of Appeals summarized the facts as follows.
Alfredo Revilla and Paz Castillo-Revilla (Revilla spouses) are the owners in
fee simple of a 15,000-square-meter unregistered parcel of land in Silang,
Cavite, covered by Tax Declaration No. 7971.4
In 1983, the Revilla spouses faced financial difficulties in raising funds for
Alfredo Revilla’s travel to Saudi Arabia, so Paz Castillo-Revilla borrowed
money from Amada Cotoner-Zacarias (Amada). By way of security, the
parties verbally agreed that Amada would take physical possession of the
property, cultivate it, then use the earnings from the cultivation to pay the
loan and realty taxes.5 Upon full payment of the loan, Amada would return
the property to the Revilla spouses.6
Unknown to the Revilla spouses, Amada presented a fictitious document
entitled "Kasulatan ng Bilihanng Lupa" before the Provincial Assessor of
Cavite. This document was executed on March 19, 1979 with the Revilla
spouses as sellers and Amada as buyer of the property.
Declaration No. 7971 in the name of the Revilla spouses was cancelled, and
Tax Declaration No. 19773 in the name of Amada was issued.
On August 25, 1984, Amada sold the property to the spouses Adolfo and
Elvira Casorla (Casorla spouses) by "Deed of Absolute SaleUnregistered
Land." Tax Declaration No. 30411-A was later issued in the name of the
Casorla spouses.8
In turn, the Casorla spouses executed a deed of absolute sale dated
December 16, 1991 in favor of the spouses Rodolfo and Yolanda Sun (Sun
spouses). Tax Declaration Nos. 30852-A and 18584 were issued in favor of
the Sun spouses.9
In December 1994, Alfredo Revilla returned from Saudi Arabia. He asked
Amada why she had not returnedtheir tax declaration considering their full
payment of the loan. He then discovered that the property’s tax declaration
was already in the name of the Sun spouses.10
On February 15, 1995, the Revilla spouses were served a copy of the
answer11 in the land registration case filed by the Sun spouses for the
property.12 The Revilla spouses then saw a copy of the "Kasulatan ng Bilihan
ng Lupa" and noticed that their signatures as sellers were forged.13
They then demanded the cancellation of the "Kasulatan ng Bilihan ng Lupa"
from Amada and all subsequent transfers of the property, its reconveyance,
and the restoration of its tax declaration in their name.14 Amada failed to
take action.
On November 17, 1995, the Revillaspouses filed a complaint before the
Tagaytay Regional Trial Court for the annulment of sales and transfers of
title and reconveyance of the property with damages against Amada, the
Casorla spouses, the Sun spouses, and the Provincial Assessor of Cavite.15
In her answer, Amada denied that the property was used as a security for
the Revilla spouses’ loan.16 Instead, she claimed that the Revilla spouses
voluntarily executed the "Kasulatan ng Bilihan ng Lupa" in her favor on
March 19, 1979. She added that the Revilla spouses’ cause of action already
prescribed.17
For their part, the Sun spouses argued good faith belief that Amada was the
real owner of the property asAmada showed them a tax declaration in her
name and the "Kasulatan ng Bilihan ng Lupa" allegedly executed by the
Revilla spouses.18 When the Sun spouses discovered there was another sale
with the Casorla spouses, they were assured by Amada that she had already
bought back the property from the Casorla spouses.19 Subsequently, the
Casorla spouses executed a deed ofabsolute sale dated December 16, 1991
in favor of the Sun spouses.20 They also argued prescription against the
Revilla spouses, and prayed for damages against Amada by way of
crossclaim.21
On August 3, 2006, the Regional Trial Court22 found the "Kasulatan ng
Bilihan ng Lupa" to be a fictitious document, and ruled in favor of the Revilla
spouses:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Declaring the sales/transfers from Tax Declaration No. 7971, s.
1980 to Tax Declaration No. 18584, s. 1994 as NULL and VOID,
without valid transmission of title and interest from the original
owners, plaintiffs herein and consequently, entitling plaintiffs to
reinstatement and reconveyance of their title/taxdeclaration as well
as possession of the subject property;
2. Ordering defendant Zacariasto pay the following:
2.1 To the Plaintiffs:
a. ₱50,000.00 for moral damages;
b. ₱20,000.00 for exemplary damages; and
c. ₱80,000.00 for attorney’s fees.
2.2 To Defendant-Spouses Sun:
a. ₱467,350.00 for actual damages;
b. ₱50,000.00 for moral damages;
c. ₱20,000.00 for exemplary damages; and
d. ₱100,000.00 for attorney’s fees.
SO ORDERED.23
Amada appealed the trial court’s decision, while the Sun spouses partially
appealed the decision as to interest and damages.
On August 13, 2009, the Court of Appeals 24 dismissed the appeal of Amada,
and partially granted the appeal of the Sun spouses. The dispositive portion
reads:
WHEREFORE, in view of the foregoing premises, judgment is hereby
rendered by us DISMISSING the appeal filed by defendant appellant Amada
C. Zacarias in this case, and PARTIALLY GRANTING the appeal filed by the
Spouses Rodolfo and Yolanda Sun. The Decision dated August 3, 2006
rendered by Branch 18 of the Regional Trial Court of the Fourth Judicial
Region stationed in Tagaytay City, Cavite in Civil Case No. TG-1543 is
MODIFIED in that defendant-appellant Amada C. Zacarias is ordered to pay
interest at 6% per annum on the principal obligation in the amount of
₱467,350.00 from February 3, 1995, the date of the first judicial demand by
the Spouses Sun, until said decision on the principal obligation became final
and executory, and interest at 12% per annum on the principal obligation,
moral and exemplary damages, as well as attorney’s fees, from the time said
decision became final and executory until full payment of said amounts.
SO ORDERED.25
The Court of Appeals denied Amada’s motion for reconsideration; hence,
she filed this petition. Petitioner argues that the antichresisclaim of the
Revilla spouses was not reduced into writing, thus, it is void under Article
2134 of the Civil Code.26 She submits that the allegation of antichresis was
only an excuse by the Revilla spouses for their failure to impugn possession
of the property by Amada and her successors-in-interest for over 16 years.27
Petitioner contends that the sale inher favor was established by the
"Kasulatan ng Bilihan ng Lupa," the delivery of the tax declaration, and the
testimony of one Mrs. Rosita Castillo (Rosita).28 Rosita was the second wife
of Felimon Castillo, the previous owner of the property. She testified that
respondent Paz Castillo-Revilla admitted toher father, Felimon, that she and
Alfredo Revilla sold the property to Amada.29
On the alleged forgery, petitioner submits that the court misapplied the
principle that "he who alleges not he who denies must prove" when it
stated that she had the burden of proving the due execution of the deed of
absolute sale. Since the Revilla spouses alleged that the deedwas a forged
document, they had the burden of proving the forgery.30 She then cites the
trial court in that "[a]ccordingly, the National Bureauof Investigation was
not able to ascertain the genuineness of the signatureof plaintiff Paz Revilla
because of lack of sufficient sample signatures. . . ."31
On the prescription argument, the parties live in a very small barangay.
While Alfredo Revilla worked in Saudi Arabia, he admitted returning to the
Philippines twice a year, while his wife never left Silang, Cavite,32 and yet the
Revilla spouses never questioned the activities on the property for more
than 16 years.33
On the proper docket fees, petitioner contends that the Revilla spouses paid
docket fees based on their prayer for actual damages of ₱50,000.00, moral
damages of ₱50,000.00, and attorney’s fee of ₱80,000.00, when they should
have based it on ₱12,000,000.00, the value of the property they alleged in
their supplemental pre-trial brief.34
Lastly, petitioner argues that the property is conjugal in nature, but the
court never declared that respondent Paz Castillo-Revilla’s signature was
falsified. Thus, the sale over her half of the property cannot be declared
void.35 She adds that the Sun spouses are buyers in good faith for value,
making reinstatement of the property impossible.36
Respondents Revilla spouses counter that the factual issue of whether the
"Kasulatan ng Bilihan ng Lupa" isa falsified document was already
conclusively resolved by the lower courts and, generally, factual findings are
beyond this court’s power of review.37
On the prescription issue, respondents Revilla spouses argue that an action
or defense to declare a document null is imprescriptible.38 Laches also does
not apply since they immediately questioned the fraudulent transfers by
filing a complaint in November 1995 upon learning of the questionable
documents in February 1995, after Alfredo had returned from Saudi Arabia
in December 1994.39
Respondents Revilla spouses contend that they paid the proper docket fees.
The ₱12,000,000.00 mentioned during pre-trial that petitioner insists should
have been the basis of the fees was neither stated in the complaint nor
awarded by the court.40
Respondents Revilla spouses argue that the court did not err in ordering
reinstatement of the property tothem. First, the defense that the Sun
spouses were buyers in good faith is a personal defense that cannot be
raised by petitioner who was not privy to the sale between the Casorla
spouses and the Sun spouses.41 Second, an alternative prayer for damages
cannot be interpreted as an admission that the relief for reinstatement is
not viable.42 Third, the transaction happened prior to the effectivity of the
Family Code; thus, Article 172 of the Civil Code applies such that "[t]he wife
cannot bind the conjugal partnership without the husband’s consent, except
in cases provided by law."43 Consequently, the result is the same even if
respondent Paz Castillo-Revilla did not testify that the signature is not hers,
as she cannot bind the entire property without her husband’s
consent.44 Lastly, no unjust enrichment exists since they were deprived of
their property for so long.45
The issues for this court’s resolution are as follows:
First, whether respondents Revilla spouses’ cause of action is barred by
prescription or laches; Second, whether the trial court acquired jurisdiction
when respondents Revilla spouses paid filing fees based on the ₱50,000.00
claim for damages in the complaint but stated in their supplemental pre-
trial brief that the property is valued at ₱12,000,000.00; and
Third, whether the Court of Appeals erred in upholding the reinstatement
and reconveyance of the property in favor of respondents Revilla spouses.
I.
On the first issue, petitioner argues that respondents Revilla spouses’ claim
is barred by laches since theyallowed 16 years to lapse, with petitioner
having possession of the property, before filing suit.46
Laches has been defined as "the failure or neglect, for an unreasonable and
unexplained length of time, to do that which — by the exercise of due
diligence — could or should have been done earlier."47
The elements that need to be present and proven before an action is
considered barred by laches are the following:
The four basic elements of laches are: (1) conduct on the part of the
defendant, or of one under whom he claims, giving rise to the situation of
which complaint is made and for which the complaint seeks a remedy; (2)
delay in asserting the complainant's rights, the complainant having had
knowledge or notice of the defendant’s conduct and having been afforded
an opportunity to institute suit; (3) lack of knowledge or notice on the part
of the defendant that the complainant would assert the right on which he
bases his suit; and, (4) injury or prejudice to the defendant in the event
relief is accorded to the complainant or the suit is not held to be barred.48
There was no delay by respondents Revilla spouses in asserting their rights
over the property. The lower courts found that respondents Revilla spouses
first learned of the existence of the "Kasulatan ng Bilihan ng Lupa" in
February 1995 when they were serveda copy of the pleading in the land
registration case instituted by the Sun spouses.49 They filed their complaint
within the same year, specifically, on November 17, 1995. The lapse of only
nine (9) months from the time they learned of the questionable transfers on
the property cannot be considered as sleeping on their rights.
In any case, doctrines of equity such as laches apply only in the absence of
statutory law. The Civil Code clearly provides that "[t]he action or defense
for the declaration of the inexistence of a contract does not
prescribe."50 This court has discussed:
Lachesis a doctrine in equity and our courts are basically courts of law and
not courts of equity. Equity, which has been aptly described as "justice
outside legality," should be applied only in the absence of, and never
against, statutory law. Aequetas nunguam contravenit legis. The positive
mandate of Art. 1410 of the New Civil Code conferring imprescriptibility to
actions for declaration of the inexistence of a contract should pre-empt and
prevail over all abstract arguments based only on equity. Certainly, laches
cannot be set up to resist the enforcement of an imprescriptible legal right,
and petitioners can validly vindicate their inheritance despite the lapse of
time.51
II.
On the second issue, petitioner argues that respondents Revilla spouses did
not pay the correct docket fees. She submits that docket fees paid were
based on the prayer for actual damages of ₱50,000.00, moral damages of
₱50,000.00, and attorney’s fee of ₱80,000.00, when the spouses Revilla
should have based it on ₱12,000,000.00, the value of the property they
alleged in their supplemental pre-trial brief.52 Petitioner cites Supreme Court
Circular No. 7 and jurisprudence holding that the payment of proper docket
fees is crucial in vesting courts with jurisdiction over the subject matter.53
This court finds that respondents Revilla spouses paid the proper docket
fees, thus, the trial court acquired jurisdiction.
It is true that "[i]t is not simply the filing of the complaint or appropriate
initiatory pleading, but the payment of the prescribed docket fee, that vests
a trial court with jurisdiction over the subject matter or nature of the
action."54
In Manchester Development Corporation v. Court of Appeals,55 this court
"condemned the practice of counsel who in filing the original complaint
omitted from the prayer any specification of the amount of damages
although the amount of over 78 million is alleged in the body of the
complaint."56 The court gave the following warning against this unethical
practice that serves no other purpose than to avoid paying the correct filing
fees:
The Court serves warning that itwill take drastic action upon a repetition of
this unethical practice. To put a stop to this irregularity, henceforth all
complaints, petitions, answers and other similar pleadings should specify
the amount of damages being prayed for not only inthe body of the
pleading but also in the prayer, and said damages shall be considered in the
assessment of the filing fees in any case. Any pleading that fails to comply
with this requirement shall not be accepted nor admitted, or shall otherwise
be expunged from the record.
The Court acquires jurisdiction over any case only upon the payment of the
prescribed docket fee. An amendment of the complaint or similar pleading
will not thereby vest jurisdiction in the Court, much less the payment of the
docket fee based on the amounts sought in the amended pleading. The
ruling in the Magaspi case in sofar as it is inconsistent with this
pronouncement is overturned and reversed.57 (Emphasis supplied)
This ruling was circularized through Supreme Court Circular No.
758 addressed to all lower court judges and the Integrated Bar of the
Philippines for dissemination to and guidance for all its members.
The facts of this case differ from Manchester and similar situations
envisioned under the circular. The complaint filed by respondents Revilla
spouses included in its prayer the amount of ₱50,000.00 as actual damages,
without mention of any other amount in the body of the complaint. No
amended complaint was filed to increase this amount in the prayer. Thus,
the Court of Appeals found as follows:
In the case at bench, the complaint filed by the Spouses Revilla only asked
for actual damages in the amount of ₱50,000.00. While the Spouses Revilla
mentioned the amount of ₱12,000,000.00 as actual damages in the pre-
trial, said amount was not stated in the complaint and neither was it
awarded by the lower court in its judgment. Hence, said amount was not
even considered by the court a quo when it awarded damages in favor of
the Spouses Revilla. Considering that the complaint was not formally
amended by the spouses to increase the amount of actual damages being
sought, the trial court was not stripped of its jurisdiction to try the case
since the Spouses Revilla correctly paid the docket fees based merely on
what was prayed for in the complaint.Indeed, the mere mentioning by the
Spouses Revilla of the amount of ₱12,000,000.00 during the pre-trial is
inconsequential, as the trial court properly acquired jurisdiction over the
action when the Spouses Revilla filed the complaint and paid the requisite
filing fees based on the amount as prayed for in the complaint.59 (Emphasis
supplied)
In Padlan v. Dinglasan,60 this court reiterated that "[w]hat determines the
jurisdiction of the court is the nature of the action pleaded as appearing
from the allegations in the complaint [and] [t]he averments therein and the
character of the relief sought are the ones to be consulted."61
Petitioner attached copies of the tax declarations and deeds of sale over the
property to the petition. Tax Declaration No. 7971 in the name of
respondents Revilla spouses provides that the land had a market value of
₱13,500.00, while the mango trees had a market value of
₱3,500.00.62 Petitioner alleged in her petition that respondents Revilla
spouses offered to sell the property to her for ₱50,000.00, 63 while the trial
court found that the "Kasulatan ng Bilihan ng Lupa" reflected the amount of
₱20,000.00.64 Subsequent tax declarations in the name of petitioner, the
Casorla spouses, and the Sun spouses all provided for land market values
lower than ₱50,000.00.65 The deed of sale in favor of the Casorla spouses
states that the assessed value of the property was ₱1,400.00, and the
consideration for the sale was ₱50,000.00.66 The subsequent deed of sale in
favor of the Sun spouses provides for the same amount as consideration.67
None of these documents submitted by petitioner indicate an amount in
excess of the ₱50,000.00 prayed for by respondents Revilla spouses as
actual damages in their complaint. Thus, the basis for the ₱12,000,000.00
value raised during pre-trial is unclear. Based on the complaint, respondents
Revilla spouses paid the correct docket fees computed from the amounts in
their prayer.
III.
The third issue involves the reinstatement of respondents Revilla spouses in
the property and reconveyance of its tax declaration in their favor.
Petitioner argues that antichresis is a formal contract that must be in writing
in order to be valid.68 Respondents Revilla spouses were not able to prove
the existence of the alleged antichresis contract. On the other hand, the sale
of the property to petitioner was established by the "Kasulatan ng Bilihan ng
Lupa" and the testimony of Rosita Castillo, the second wife of the previous
owner, Felimon Castillo.69
We affirm the lower courts’ order of reinstatement and reconveyance of the
property in favor of respondents Revilla spouses.
Respondents Revilla spouses’ complaint sought "to annul the sales and
transfers of title emanating from Tax Declaration No. 7971 registered in
their name involving a 15,000-square[-]meter unregistered land . . . with
prayer for reconveyance and claims for damages."70 There was no prayer to
declare the purported contract of sale as antichresis. 71 Thus, respondents
Revilla spouses neither discussed nor used the term "antichresis" in their
comment and memorandum before this court. They focused on the nature
of their complaint as one for annulment of titles on the ground of
forgery.72 At most, the trial court’s summary of respondents Revilla spouses’
evidence described the parties’ agreements as follows:
Plaintiffs’ evidence and the testimony of plaintiff Alfredo Revilla tend to
indicate that plaintiffs are the owners in fee simple of a 15,000-
square[-]meter unregistered land, located at Brgy. Adlas, Silang, Cavite.
Their ownership being evidenced by Tax Declaration No. 7971, s. 1980 (Exh.
"A"). Sometime in 1981, plaintiffs needed money for the travel and
deployment of plaintiff Alfredo to Saudi Arabia. Plaintiff Paz Revilla sought
financial help from defendant Cotoner-Zacarias from whom she was able to
obtain a loan but secured with and by way of mortgage of the subject
property. The parties further agreed that defendant Cotoner Zacarias would
take possession of the subject property and cultivate it with the earnings
therefrom to be used to pay-off the loan and the annual realty taxes on the
land.It was their agreement with defendant Cotoner Zacarias that the latter
will rent the subject property and with that agreement, the lease started
sometime in 1981 and plantiffs got from defendant Cotoner-Zacarias the
amount of Php3,000.00 as rental for the first year, 1981, with no specific
agreement as to the period covered by such rental[.]73 (Emphasis supplied)
Article 2132 of the Civil Code provides that "[b]y the contract of antichresis
the creditor acquires the right to receive the fruits of an immovable of his
debtor, with the obligation to apply them to the payment of the interest, if
owing, and thereafter to the principal of his credit."
Thus, antichresis involves an express agreement between parties such that
the creditor will have possession of the debtor’s real property given as
security, and such creditor will apply the fruits of the property to the
interest owed by the debtor, if any, then to the principal amount.74
The term, antichresis, has a Greek origin with "‘anti’ (against) and ‘chresis’
(use) denoting the action of giving a credit ‘against’ the ‘use’ of a
property."75
Historically, 15th century B.C. tablets revealed that "antichresis contracts
were commonly employed in the Sumerian and Akkadian Mesopotamian
cultures."76 Antichresis contracts were incorporated in Babylonian law,
modifying and combining it with that of mortgage pledge. 77 Nearing the end
of the classical period, antichresis contracts entered Roman law that
"adopted the convention that the tenant usufruct had to be exactly
compensated by the interest on the lump sum payment."78 During the
middle ages, canon law banned antichresis contracts for being a form of
usury.79 These contracts only reappeared in the 1804 Napoleonic Code that
influenced the laws of most countries today.80 It had been observed that
"antichresis contracts coexist with periodic rent contracts in many property
markets."81
In the Civil Code, antichresis provisions may be found under Title XVI,
together with other security contracts such as pledge and mortgage.
Antichresis requires delivery of the property to the antichretic creditor, but
the latter cannot ordinarily acquire this immovable property in his or her
possession by prescription.82
Similar to the prohibition against pactum commissorium83 since creditors
cannot "appropriate the thingsgiven by way of pledge or mortgage, or
dispose of them,"84 an antichretic creditor also cannot appropriate the real
property in his or her favor upon the non-payment of the debt.85
Antichresis also requires that the amount of the principal and the interest
be in writing for the contract to be valid.86
However, the issue before us does not concern the nature of the
relationship between the parties, but the validity of the documents that
caused the subsequent transfers of the property involved.
The reinstatement of the propertyin favor of respondents Revilla spouses
was anchored on the lower courts’ finding that their signatures as sellers in
the "Kasulatan ng Bilihan ng Lupa" were forged.
This court has held that the "question of forgery is one of fact." 87 Well-
settled is the rule that "[f]actual findings of the lower courts are entitled
great weight and respect on appeal, and in fact accorded finality when
supported by substantial evidence on the record."88
The Court of Appeals agreed with the finding of the trial court that the
signature of Alfredo Revilla in the "Kasulatan ng Bilihan ng Lupa" was
forged:
It was convincingly found by the court a quo that the Kasulatan ng Bilihan ng
Lupaor Deed of Sale covering the subject property allegedly executed by the
Spouses Revilla in favorof Zacarias was spurious, as the trial court, after
relying on the report of the handwriting experts of the National Bureau of
Investigation (NBI) saying that "there exist significant differences in
handwriting characteristics/habits between the questioned and the
standard/sample signatures ‘ALFREDO REVILLA’ such as in the manner of
execution of strokes, structural pattern of letters/elements, and minute
identifying details", as well as the trial court’s own visual analysis of the
document and the sample signatures of plaintiff-appellee Alfredo, clearly
showed that his signature on the said Kasulatan ng Bilihan ng Lupawas
indeed forged.89
Petitioner contends that the lower courts never declared as falsified the
signature of Alfredo’s wife, Paz Castillo-Revilla. Since the property is
conjugal in nature, the sale as to the one-half share ofPaz Castillo-Revilla
should not be declared as void.90
The transaction took place before the effectivity of the Family Code in 2004.
Generally, civil laws have no retroactive effect.91 Article 256 of the Family
Code provides that "[it] shall have retroactive effect insofar as it does not
prejudice or impair vested or acquired rights in accordance with the Civil
Code or other laws."
Article 165 of the Civil Code states that "[t]he husband is the administrator
of the conjugal partnership." Article 172 of the Civil Code provides that
"[t]he wife cannot bind the conjugal partnership without the husband’s
consent, except incases provided by law."92 In any case, the Family Code
also provides as follows:
Art. 96. The administration and enjoyment of the community property shall
belong to both spouses jointly. In case of disagreement, the husband’s
decision shall prevail, subject to recourse to the court by the wife for proper
remedy, which must be availed of within five years from the date of the
contract implementing such decision.
In the event that one spouse is incapacitated or otherwise unable to
participate in the administration of the common properties, the other
spouse may assume sole powers of administration. These powers do not
include disposition or encumbrance without authority of the court or the
written consent of the other spouse. In the absence of such authority or
consent, the disposition or encumbrance shall be void. However, the
transaction shall be construed as a continuing offer on the part of the
consenting spouse and the third person, and may be perfected as a binding
contract upon the acceptance by the other spouse or authorization by the
court before the offer iswithdrawn by either or both offerors. (Emphasis
supplied)
Thus, as correctly found by the Court of Appeals, "assuming arguendo that
the signature of plaintiff-appellee Paz on the Kasulatan ng Bilihan ng
Lupawas not forged, her signature alone would still not bind the subject
property, it being already established that the said transaction was made
without the consent of her husband plaintiff-appellee Alfredo."93
Lastly, petitioner argues that she has no obligation to prove the genuineness
and due execution of the "Kasulatan ng Bilihan ng Lupa" considering it is a
public document.94
The trial court found otherwise. Atty. Diosdado de Mesa, who allegedly
notarized the "Kasulatanng Bilihan ng Lupa," was not a commissioned
notary public. The trial court discussed as follows:
Furthermore, it was discovered that the notary public who purportedly
notarized the "Kasulatanng Bilihan ng Lupa" has not been registered notary
public in the province of Cavite in 1979 nor at present. The record bears out
various Certifications to prove there is no available record on file with the
Office of the Clerk of Court, Regional Trial Court, Cavite City of a
Commission/Order appointing Atty. Diosdado de Mesa, the lawyer who
notarized the subject document, as Notary Public for the Province and City
of Cavite (Exh. "Y" to "Y-2"); Certification from the Records Management
and Archives Office, Manila that no copy is on file with the said office of the
Deed of Sale allegedly executed by plaintiffs before Notary Public Diosdado
de Mesa, for and within Imus, Cavite, acknowledged as Doc. No. 432, Page
No. 45, Book No. VIII, Series of 1979 (Exh. "Z" to "Z-1"); Certification issued
by Clerk of Court, Atty. Ana Liza M. Luna, Regional Trial Court, Tagaytay City
that there is no available record on file of a Commission/Order appointing
Atty. Diosdado de Mesa as Notary Public for the Province and Cities of
Tagaytay, Cavite and Trece Martires in 1979 (Exh. "AA" to"AA-2");
Certification issued by Clerk of Court, Atty. Jose O, Lagao, Jr., Regional Trial
Court, Multiple Sala, Bacoor, Cavite that there isno available record on file
of a Commission/Order appointing Atty. Diosdado de Mesa as Notary Public
for the Province and City of Cavite (Exh. "BB" to "BB-2"); and Certification
issued by Clerk of Court, Atty. Regalado E. Eusebio, Regional Trial Court,
Multiple Sala, Imus, Cavite that there is no available record on file of a
Commission/Order appointing Atty. Diosdado de Mesa as Notary Public for
the Province of Cavite (Exh. "CC" to "CC-2").95 (Emphasis supplied).
Necessarily, those who rely in good faith on a clean title issued under the
Torrens system for registered lands must be protected.1âwphi1 On the
other hand, those who purchase unregistered lands do so at their own
peril.99
This good faith argument cannot be considered as this case involves
unregistered land. In any case, as explained by respondents Revilla spouses
in their memorandum, this is a defense personal to the Sun spouses and
cannot be borrowed by petitioner.100 The Sun spouses no longer raised this
argument on appeal, but only made a partial appeal regarding legal interest
on the award.101
WHEREFORE, this petition is DENIED for lack of merit. The decision of the
Court of Appeals dated August 13, 2009 is AFFIRMED.
SO ORDERED.
MARVIC M.V.F. LEONEN
Associate Justice

Petitioner contends that the Sun spouses were buyers in good faith for
value, thus, the court erred in ordering reinstatement of the property in
favor of respondents Revilla spouses.96

This court has held that "the rule in land registration law that the issue of
whether the buyer of realty is in good or bad faith is relevant only where the
subject of the sale is registeredland and the purchase was made from the
registered owner whose title to the land is clean[.]"97 Our laws have adopted
the Torrens system to strengthen public confidence in land transactions:
[T]he Torrens system was adopted in this country because it was believed to
be the most effective measure to guarantee the integrity of land titles and
to insure their indefeasibility once the claim of ownership is established and
recognized. If a person purchases a piece of land on the assurance that the
seller’s title thereto is valid, he should not run the risk of losing his
acquisition. If this were permitted, public confidence in the system would be
eroded and land transactions would have to be attended by complicated
and not necessarily conclusive investigations and proof of ownership.98

G.R. No. 169211               March 6, 2013
STAR TWO (SPV-AMC), INC.,1 Petitioner,
vs.
PAPER CITY CORPORATION OF THE PHILIPPINES, Respondent.
DECISION
PEREZ, J.:
For review before this Court is a Petition for Review on Certiorari filed by
Rizal Commercial Banking Corporation now substituted by Star Two (SPV-
AMC), Inc. by virtue of Republic Act No. 91822 otherwise known as the
"Special Purpose Vehicle Act of 2002," assailing the 8 March 2005 Decision
and 8 August 2005 Resolution of the Special Fourth Division of the Court of
Appeals (CA) in CA-G.R. SP No. 82022 upholding the 15 August 2003 and 1
December 2003 Orders of the Valenzuela Regional Trial Court (RTC) ruling
that the subject machineries and equipments of Paper City Corporation
(Paper City) are movable properties by agreement of the parties and cannot
be considered as included in the extrajudicial foreclosure sale of the
mortgaged land and building of Paper City.3
The facts as we gathered from the records are:
Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust
Co. (Metrobank) and Union Bank of the Philippines (Union Bank) are
banking corporations duly organized and existing under the laws of the
Philippines.
On the other hand, respondent Paper City is a domestic corporation
engaged in the manufacture of paper products particularly cartons,
newsprint and clay-coated paper.4
From 1990-1991, Paper City applied for and was granted the following loans
and credit accommodations in peso and dollar denominations by RCBC:
₱10,000,000.00 on 8 January 1990,5 ₱14,000,000.00 on 19 July
1990,6 ₱10,000,000.00 on 28 June 1991,7 and ₱16,615,000.00 on 28
November 1991.8 The loans were secured by four (4) Deeds of Continuing
Chattel Mortgages on its machineries and equipments found inside its paper
plants.
On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel
Mortgage on Inventory of Merchandise/Stocks-in-Trade was executed by
RCBC through its Branch Operation Head Joey P. Singh and Asst. Vice
President Anita O. Abad over the merchandise and stocks-in-trade covered
by the continuing chattel mortgages.9
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with
RCBC instituted as the trustee bank) entered into a Mortgage Trust
Indenture (MTI) with Paper City. In the said MTI, Paper City acquired an
additional loan of One Hundred Seventy Million Pesos (₱170,000,000.00)
from the creditor banks in addition to the previous loan from RCBC
amounting to ₱110,000,000.00 thereby increasing the entire loan to a total
of ₱280,000,000.00. The old loan of ₱110,000,000.00 was partly secured by
various parcels of land covered by TCT Nos. T-157743, V-13515, V-1184, V-
1485, V-13518 and V-13516 situated in Valenzuela City pursuant to five (5)
Deeds of Real Estate Mortgage dated 8 January 1990, 27 February 1990, 19
July 1990, 20 February 1992 and 12 March 1992.10 The new loan obligation
of ₱170,000,000.00 would be secured by the same five (5) Deeds of Real
Estate Mortgage and additional real and personal properties described in an
annex to MTI, Annex "B."11 Annex "B" of the said MTI covered the
machineries and equipments of Paper City.12
The MTI was later amended on 20 November 1992 to increase the
contributions of the RCBC and Union Bank to ₱80,000,000.00 and
₱70,000,000.00, respectively. As a consequence, they executed a Deed of
Amendment to MTI13 but still included as part of the mortgaged properties
by way of a first mortgage the various machineries and equipments located
in and bolted to and/or forming part of buildings generally described as:
Annex "A"
A. Office Building
Building 1, 2, 3, 4, and 5
 Boiler House
Workers’ Quarter/Restroom
Canteen
Guardhouse, Parking Shed, Elevated Guard
Post and other amenities
B. Pollution Tank Nos. 1 and 2.
Reserve Water Tank and Swimming Pool
Waste Water Treatment Tank
Elevated Concrete Water Tank
And other Improvements listed in Annex "A"
C. Power Plants Nos. 1 and 2
Fabrication Building
Various Fuel, Water Tanks and Pumps
Transformers. Annex "B"
D. D. Material Handling Equipment
Paper Plant No. 3
A Second Supplemental Indenture to the 26 August 1992 MTI was executed
on 7 June 1994 to increase the amount of the loan from ₱280,000,000.00 to
₱408,900,000.00 secured against the existing properties composed of land,
building, machineries and equipments and inventories described in Annexes
"A" and "B."14
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was
executed on 24 January 1995 to increase the existing loan obligation of
₱408,900,000.00 to ₱555,000,000.00 with an additional security composed
of a newly constructed two-storey building and other improvements,
machineries and equipments located in the existing plant site.15
Paper City was able to comply with its loan obligations until July 1997. But
economic crisis ensued which made it difficult for Paper City to meet the
terms of its obligations leading to payment defaults.16 Consequently, RCBC
filed a Petition for Extrajudicial Foreclosure Under Act No. 3135 Against the
Real Estate Mortgage executed by Paper City on 21 October 1998.17 This
petition was for the extra-judicial foreclosure of eight (8) parcels of land
including all improvements thereon enumerated as TCT Nos. V-9763, V-
13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663 included in
the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI
dated 7 June 1994 and Third Supplemental Indenture on the MTI dated 24
January 1995.18 Paper City then had an outstanding obligation with the
creditor banks adding up to Nine Hundred One Million Eight Hundred One
Thousand Four Hundred Eighty-Four and 10/100 Pesos (₱901,801,484.10),
inclusive of interest and penalty charges.19
A Certificate of Sale was executed on 8 February 1999 certifying that the
eight (8) parcels of land with improvements thereon were sold on 27
November 1998 in the amount of Seven Hundred Two Million Three
Hundred Fifty-One Thousand Seven Hundred Ninety-Six Pesos and 28/100
(₱702,351,796.28) in favor of the creditor banks RCBC, Union Bank and
Metrobank as the highest bidders.20
This foreclosure sale prompted Paper City to file a Complaint21 docketed as
Civil Case No. 164-V-99 on 15 June 1999 against the creditor banks alleging
that the extra-judicial sale of the properties and plants was null and void
due to lack of prior notice and attendance of gross and evident bad faith on
the part of the creditor banks. In the alternative, it prayed that in case the
sale is declared valid, to render the whole obligation of Paper City as fully
paid and extinguished. Also prayed for was the return of ₱5,000,000.00 as
excessive penalty and the payment of damages and attorney’s fees.
In the meantime, Paper City and Union Bank entered into a Compromise
Agreement which was later approved by the trial court on 19 November
2001. It was agreed that the share of Union Bank in the proceeds of the
foreclosure shall be up to 34.23% of the price and the remaining possible
liabilities of Paper City shall be condoned by the bank. Paper City likewise
waived all its claim and counter charges against Union Bank and agreed to
turn-over its proportionate share over the property within 120 days from
the date of agreement.22
On the other hand, the negotiations between the other creditor banks and
Paper City remained pending. During the interim, Paper City filed with the
trial court a Manifestation with Motion to Remove and/or Dispose
Machinery on 18 December 2002 reasoning that the machineries located
inside the foreclosed land and building were deteriorating. It posited that
since the machineries were not included in the foreclosure of the real estate
mortgage, it is appropriate that it be removed from the building and sold to
a third party.23
Acting on the said motion, the trial court, on 28 February 2003 issued an
Order denying the prayer and ruled that the machineries and equipments
were included in the annexes and form part of the MTI dated 26 August
1992 as well as its subsequent amendments. Further, the machineries and
equipments are covered by the Certificate of Sale issued as a consequence
of foreclosure, the certificate stating that the properties described therein
with improvements thereon were sold to creditor banks to the defendants
at public auction.24
Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was
favorably granted by the trial court in its Order dated 15 August 2003. The
court justified the reversal of its order on the finding that the disputed
machineries and equipments are chattels by agreement of the parties
through their inclusion in the four (4) Deeds of Chattel Mortgage dated 28
January 1990, 19 July 1990, 28 June 1991 and 28 November 1991. It further
ruled that the deed of cancellation executed by RCBC on 25 August 1992
was not valid because it was done unilaterally and without the consent of
Paper City and the cancellation only refers to the merchandise/stocks-in-
trade and not to machineries and equipments.26
RCBC in turn filed its Motion for Reconsideration to persuade the court to
reverse its 15 August 2003 Order. However, the same was denied by the
trial court through its 1 December 2003 Order reiterating the finding and
conclusion of the previous Order.27
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to
annul the Orders dated 15 August 2003 and 1 December 2003 of the trial
court,28 for the reasons that:
I. Paper City gave its conformity to consider the subject machineries
and equipment as real properties when the president and Executive
Vice President of Paper City signed the Mortgage Trust Indenture as
well as its subsequent amendments and all pages of the annexes
thereto which itemized all properties that were mortgaged.29
II. Under Section 8 of Act No. 1508, otherwise known as "The
Chattel Mortgage Law" the consent of the mortgagor (Paper City) is
not required in order to cancel a chattel mortgage. Thus the
"Cancellation of Deed of Continuing Chattel Mortgage on Inventory
of Merchandise/Stocks-in-Trade" dated August 25, 1992 is valid and
binding on the Paper City even assuming that it was executed
unilaterally by petitioner RCBC.30
III. The four (4) Deeds of Chattel Mortgage that were attached as
Annexes "A" to "D" to the December 18, 2003 "Manifestation with
Motion to Remove and/or Dispose of Machinery" were executed
from January 8, 1990 until November 28, 1991. On the other hand,
the "Cancellation of Deed of Continuing Chattel Mortgage" was
executed on August 25, 1992 while the MTI and the subsequent
supplemental amendments thereto were executed from August 26,
1992 until January 24, 1995. It is of the contention of RCBC that
Paper City’s unreasonable delay of ten
(10) years in assailing that the disputed machineries and
equipments were personal amounted to estoppel and ratification of
the characterization that the same were real properties.31
IV. The removal of the subject machineries or equipment is not
among the reliefs prayed for by the Paper City in its June 11, 1999
Complaint. The Paper City sought the removal of the subject
machineries and equipment only when it filed its December 18,
2002 Manifestation with Motion to Remove and/or Dispose of
Machinery.32
V. Paper City did not specify in its various motions filed with the
respondent judge the subject machineries and equipment that are
allegedly excluded from the extrajudicial foreclosure sale.33
VI. The machineries and equipments mentioned in the four (4)
Deeds of Chattel Mortgage that were attached on the Manifestation
with Motion to Remove and/or Dispose of Machinery are the same
machineries and equipments included in the MTI and supplemental
amendments, hence, are treated by agreement of the parties as real
properties.34
In its Comment,35 Paper City refuted the claim of RCBC that it gave its
consent to consider the machineries and equipments as real properties. It
alleged that the disputed properties remained within the purview of the
existing chattel mortgages which in fact were acknowledged by RCBC in the
MTI particularly in Section 11.07 which reads:
Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS
in the additional amount not exceeding TWO HUNDRED TWENTY MILLION
SIX HUNDRED FIFTEEN THOUSAND PESOS (₱220,615,000.00) shall be
registered with the Register of Deeds of Valenzuela, Metro Manila,
apportioned based on the corresponding loanable value of the
MORTGAGED PROPERTIES, viz:
a. Real Estate Mortgage – ₱206,815,000.00
b. Chattel Mortgage – ₱13,800,000.0036
Paper City argued further that the subject machineries and equipments
were not included in the foreclosure of the mortgage on real properties
particularly the eight (8) parcels of land. Further, the Certificate of Sale of
the Foreclosed Property referred only to "lands and improvements" without
any specification and made no mention of the inclusion of the subject
properties.37
In its Reply,38 RCBC admitted that there was indeed a provision in the MTI
mentioning a chattel mortgage in the amount of ₱13,800,000.00. However,
it justified that its inclusion in the MTI was merely for the purpose of
ascertaining the amount of the loan to be extended to Paper City.39 It
reiterated its position that the machineries and equipments were no longer
treated as chattels but already as real properties following the MTI.40
On 8 March 2005, the CA affirmed41 the challenged orders of the trial court.
The dispositive portion reads:
WHEREFORE, finding no grave abuse of discretion committed by public
respondent, the instant petition is hereby DISMISSED for lack of merit. The
assailed Orders dated 15 August and 2 December 2003, issued by Hon.
Judge Floro P. Alejo are hereby AFFIRMED. No costs at this instance.42
The CA relied on the "plain language of the MTIs:
Undoubtedly, nowhere from any of the MTIs executed by the parties can we
find the alleged "express" agreement adverted to by petitioner. There is no
provision in any of the parties’ MTI, which expressly states to the effect that
the parties shall treat the equipments and machineries as real property. On
the contrary, the plain and unambiguous language of the aforecited MTIs,
which described the same as personal properties, contradicts petitioner’s
claims.43
It was also ruled that the subject machineries and equipments were not
included in the extrajudicial foreclosure sale. The claim of inclusion was
contradicted by the very caption of the petition itself, "Petition for Extra-
Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As
Amended." It opined further that this inclusion was further stressed in the
Certificate of Sale which enumerated only the mortgaged real properties
bought by RCBC without the subject properties.44
RCBC sought reconsideration but its motion was denied in the CA’s
Resolution dated 8 August 2005.
RCBC before this Court reiterated all the issues presented before the
appellate court:
1. Whether the unreasonable delay of ten (10) years in assailing that
the disputed machineries and equipments were personal properties
amounted to estoppel on the part of Paper City;
2. Whether the Cancellation of Deed of Continuing Mortgage dated
25 August 1992 is valid despite the fact that it was executed without
the consent of the mortgagor Paper City;
3. Whether the subsequent contracts of the parties such as
Mortgage Trust Indenture dated 26 August 1992 as well as the
subsequent supplementary amendments dated 20 November 1992,
7 June 1992, and 24 January 1995 included in its coverage of
mortgaged properties the subject machineries and equipment; and
 4. Whether the subject machineries and equipments were included
in the extrajudicial foreclosure dated 21 October 1998 which in turn
were sold to the creditor banks as evidenced by the Certificate of
Sale dated 8 February 1999.
We grant the petition.
By contracts, all uncontested in this case, machineries and equipments are
included in the mortgage in favor of RCBC, in the foreclosure of the
mortgage and in the consequent sale on foreclosure also in favor of
petitioner.
The mortgage contracts are the original MTI of 26 August 1992 and its
amendments and supplements on 20 November 1992, 7 June 1994, and 24
January 1995. The clear agreements between RCBC and Paper City follow:
The original MTI dated 26 August 1992 states that:
MORTGAGE TRUST INDENTURE
This MORTGAGE TRUST INDENTURE, executed on this day of August 26,
1992, by and between:
PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to
as the "MORTGAGOR");
-and-
RIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to
as the "TRUSTEE").
xxxx
WHEREAS, against the same mortgaged properties and additional real and
personal properties more particularly described in ANNEX "B" hereof, the
MORTGAGOR desires to increase their borrowings to TWO HUNDRED
EIGHTY MILLION PESOS (₱280,000,000.00) or an increase of ONE HUNDRED
SEVENTY MILLION PESOS (₱170,000,000.00) xxx from various
banks/financial institutions;
xxxx
GRANTING CLAUSE
NOW, THEREFORE, this INDENTURE witnesseth:
THAT the MORTGAGOR in consideration of the premises and of the
acceptance by the TRUSTEE of the trust hereby created, and in order to
secure the payment of the MORTGAGE OBLIGATIONS which shall be
incurred by the MORTGAGOR pursuant to the terms hereof xxx hereby
states that with the execution of this INDENTURE it will assign, transfer and
convey as it has hereby ASSIGNED, TRANSFERRED and CONVEYED by way of
a registered first mortgage unto RCBC x x x the various parcels of land
covered by several Transfer Certificates of Title issued by the Registry of
Deeds, including the buildings and existing improvements thereon, as well
as of the machinery and equipment more particularly described and listed
that is to say, the real and personal properties listed in Annexes "A" and "B"
hereof of which the MORTGAGOR is the lawful and registered
owner.45 (Emphasis and underlining ours)
The Deed of Amendment to MTI dated 20 November 1992 expressly
provides:
NOW, THEREFORE, premises considered, the parties considered have
amended and by these presents do further amend the Mortgage Trust
Indenture dated August 26, 1992 including the Real Estate Mortgage as
follows:
xxxx
2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby
amended to include as part of the Mortgage Properties, by way of a first
mortgage and for pari-passu and pro-rata benefit of the existing and new
creditors, various machineries and equipment owned by the Paper City,
located in and bolted to and forming part of the following, generally
describes as x x x more particularly described and listed in Annexes "A" and
"B" which are attached and made integral parts of this Amendment. The
machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the
Mortgage Trust Indenture and the Real Estate Mortgage.46 (Emphasis and
underlining ours)
A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7
June 1994 to increase the amount of loan from ₱280,000,000.00 to
₱408,900,000.00 also contains a similar provision in this regard:
WHEREAS, the Paper City desires to increase its borrowings to be secured by
the INDENTURE from PESOS: TWO HUNDRED EIGHTY MILLION
(₱280,000,000.00) to PESOS: FOUR HUNDRED EIGHT MILLION NINE
HUNDRED THOUSAND (₱408,900,000.00) or an increase of PESOS: ONE
HUNDRED TWENTY EIGHT MILLION NINE HUNDRED THOUSAND
(₱128,900,000.00) x x x which represents additional loan/s granted to the
Paper City to be secured against the existing properties composed of land,
building, machineries and equipment and inventories more particularly
described in Annexes "A" and "B" of the INDENTURE x x x.47
(Emphasis and underlining ours)
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed
on 24 January 1995 contains a similar provision:
WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under
the Indenture, there shall be added to the collateral pool subject of the
Indenture properties of the Paper City composed of newly constructed two
(2)-storey building, other land improvements and machinery and equipment
all of which are located at the existing Plant Site in Valenzuela, Metro
Manila and more particularly described in Annex "A" hereof x x
x.48 (Emphasis and underlining ours)
Repeatedly, the parties stipulated that the properties mortgaged by Paper
City to RCBC are various parcels of land including the buildings and existing
improvements thereon as well as the machineries and equipments, which as
stated in the granting clause of the original mortgage, are "more particularly
described and listed that is to say, the real and personal properties listed in
Annexes ‘A’ and ‘B’ x x x of which the Paper City is the lawful and registered
owner." Significantly, Annexes "A" and "B" are itemized listings of the
buildings, machineries and equipments typed single spaced in twenty-seven
pages of the document made part of the records.
As held in Gateway Electronics Corp. v. Land Bank of the Philippines,49 the
rule in this jurisdiction is that the contracting parties may establish any
agreement, term, and condition they may deem advisable, provided they
are not contrary to law, morals or public policy. The right to enter into
lawful contracts constitutes one of the liberties guaranteed by the
Constitution.
It has been explained by the Supreme Court in Norton Resources and
Development Corporation v. All Asia Bank Corporation50 in reiteration of the
ruling in Benguet Corporation v. Cabildo51 that:
x x x A court's purpose in examining a contract is to interpret the intent of
the contracting parties, as objectively manifested by them. The process of
interpreting a contract requires the court to make a preliminary inquiry as
to whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations.
Where the written terms of the contract are not ambiguous and can only be
read one way, the court will interpret the contract as a matter of law. x x x
Then till now the pronouncement has been that if the language used is as
clear as day and readily understandable by any ordinary reader, there is no
need for construction.52
The case at bar is covered by the rule.
The plain language and literal interpretation of the MTIs must be applied.
The petitioner, other creditor banks and Paper City intended from the very
first execution of the indentures that the machineries and equipments
enumerated in Annexes "A" and "B" are included. Obviously, with the
continued increase in the amount of the loan, totaling hundreds of millions
of pesos, Paper City had to offer all valuable properties acceptable to the
creditor banks.
The plain and obvious inclusion in the mortgage of the machineries and
equipments of Paper City escaped the attention of the CA which, instead,
turned to another "plain language of the MTI" that "described the same as
personal properties." It was error for the CA to deduce from the
"description" exclusion from the mortgage.
1. The MTIs did not describe the equipments and machineries as personal
property. Had the CA looked into Annexes "A" and "B" which were referred
to by the phrase "real and personal properties," it could have easily noted
that the captions describing the listed properties were "Buildings,"
"Machineries and Equipments," "Yard and Outside," and "Additional
Machinery and Equipment." No mention in any manner was made in the
annexes about "personal property." Notably, while "personal" appeared in
the granting clause of the original MTI, the subsequent Deed of Amendment
specifically stated that:
x x x The machineries and equipment listed in Annexes "A" and "B" form
part of the improvements listed above and located on the parcels of land
subject of the Mortgage Trust Indenture and the Real Estate Mortgage.
The word "personal" was deleted in the corresponding granting clauses in
the Deed of Amendment and in the First, Second and Third Supplemental
Indentures.
2. Law and jurisprudence provide and guide that even if not expressly so
stated, the mortgage extends to the improvements.
Article 2127 of the Civil Code provides:
Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the
estate remains in the possession of the mortgagor, or it passes into the
hands of a third person. (Underlining ours)
In the early case of Bischoff v. Pomar and Cia. General de Tabacos,53 the
Court ruled that even if the machinery in question was not included in the
mortgage expressly, Article 111 of the old Mortgage Law provides that
chattels permanently located in a building, either useful or ornamental, or
for the service of some industry even though they were placed there after
the creation of the mortgage shall be considered as mortgaged with the
estate, provided they belong to the owner of said estate. The provision of
the old Civil Code was cited. Thus:
Article 1877 provides that a mortgage includes the natural accessions,
improvements, growing fruits, and rents not collected when the obligation
is due, and the amount of the indemnities granted or due the owner by the
underwriters of the property mortgaged or by virtue of the exercise of
eminent domain by reason of public utility, with the declarations,
amplifications, and limitations established by law, in case the estate
continues in the possession of the person who mortgaged it, as well as
when it passes into the hands of a third person.54
The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.55 relied on this
provision. The issue was whether the machineries and accessories were
included in the mortgage and the subsequent sale during public auction.
This was answered in the affirmative by the Court when it ruled that the
machineries were integral parts of said sugar central hence included
following the principle of law that the accessory follows the principal.
Further, in the case of Manahan v. Hon. Cruz, 56 this Court denied the prayer
of Manahan to nullify the order of the trial court including the building in
question in the writ of possession following the public auction of the parcels
of land mortgaged to the bank. It upheld the inclusion by relying on the
principles laid upon in Bischoff v. Pomar and Cia. General de Tabacos57 and
Cu Unjieng e Hijos v. Mabalacat Sugar Co.58
In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu
Unjieng e Hijos ruling and approved the inclusion of machineries and
accessories installed at the time the mortgage, as well as all the buildings,
machinery and accessories belonging to the mortgagor, installed after the
constitution thereof.
3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of
Mortgage includes the machineries and equipments of respondent. While
captioned as a "Petition for Extra-Judicial Foreclosure of Real Estate
Mortgage Under Act No. 3135 As Amended," the averments state that the
petition is based on "x x x the Mortgage Trust Indenture, the Deed of
Amendment to the Mortgage Trust Indenture, the Second Supplemental
Indenture to the Mortgage Trust Indenture, and the Third Supplemental
Indenture to the Mortgage Trust Indenture (hereinafter collectively referred
to as the Indenture) duly notarized and entered as x x x."60 Noting that
herein respondent has an outstanding obligation in the total amount of Nine
Hundred One Million Eight Hundred One Thousand Four Hundred Eighty
Four and 10/100 Pesos (₱901,801,484.10), the petition for foreclosure
prayed that a foreclosure proceedings "x x x on the aforesaid real
properties, including all improvements thereon covered by the real estate
mortgage be undertaken and the appropriate auction sale be conducted x x
x."61
a building or on a piece of land, and which tend directly to meet the needs
of the said industry or works;
WHEREFORE, the petition is GRANTED. Accordingly, the Decision and
Resolution of the Court of Appeals dated 8 March 2005 and 8 August 2005
upholding the 15 August 2003 and 1 December 2003 Orders of the
Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE and the
original Order of the trial court dated 28 February 2003 denying the motion
of respondent to remove or dispose of machinery is hereby REINSTATED.

Considering that the Indenture which is the instrument of the mortgage that SO ORDERED.
was foreclosed exactly states through the Deed of Amendment that the
machineries and equipments listed in Annexes "A" and "B" form part of the JOSE PORTUGAL PEREZ
improvements listed and located on the parcels of land subject of the Associate Justice
mortgage, such machineries and equipments are surely part of the
foreclosure of the "real estate properties, including all improvements
thereon" as prayed for in the petition.

Indeed, the lower courts ought to have noticed the fact that the chattel
mortgages adverted to were dated 8 January 1990, 19 July 1990, 28 June
1991 and 28 November 1991. The real estate mortgages which specifically
included the machineries and equipments were subsequent to the chattel
mortgages dated 26 August 1992, 20 November 1992, 7 June 1994 and 24
January 1995. Without doubt, the real estate mortgages superseded the
earlier chattel mortgages.1âwphi1

The real estate mortgage over the machineries and equipments is even in
full accord with the classification of such properties by the Civil Code of the
Philippines as immovable property. Thus:

Article 415. The following are immovable property:

(1) Land, buildings, roads and constructions of all kinds adhered to the soil;

xxxx

(5) Machinery, receptacles, instruments or implements intended by the

owner of the tenement for an industry or works which may be carried on in
 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]
[ G.R. No. 179756, October 02, 2009 ]
Respondent later filed on July 30, 1992 a petition before the RTC of Manila,
RIZAL COMMERCIAL BANKING CORPORATION, PETITIONER, VS. ROYAL docketed as Civil Case No. 92-62106, against the Provincial Sheriff of the
CARGO CORPORATION, RESPONDENT. 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
DECISION 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
CARPIO MORALES, J.: of Act No. 1508 or the Chattel Mortgage Law which reads:

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 Sec. 14. The mortgagee, his executor, administrator or assign, may, after
its creditors was Rizal Commercial Banking Corporation (petitioner) with thirty days, from the time of condition broken, cause the mortgaged
which it had an obligation of P3 Million that was secured by property, or any part thereof, to be sold at public auction by a public officer
a chattel mortgage executed on February 16, 1989. The chattel mortgage at a public place in the municipality where the mortgagor resides, or where
was duly recorded in the notarial register of Amado Castano, a notary public the property is situated, provided at least ten days notice of the time, place,
for and in the Province of Bataan.[3] and purpose of such sale has been posted at two or more public places in
such municipality, and the mortgagee, his executor, administrator or
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed assignee shall notify the mortgagor or person holding under him and the
an action before the RTC of Manila for collection of sum of money and persons holding subsequent mortgages of the time and place of sale,
preliminarily attached "some" of Terrymanila's personal properties on either by notice in writing directed to him or left at his abode, if within the
March 5, 1991 to secure the satisfaction of a judgment award of municipality, or sent by mail if he does not reside in such municipality, at
P296,662.16, exclusive of interests and attorney's fees.[4] least ten days previous to the date. (Emphasis and underscoring supplied),

On April 12, 1991, the Bataan RTC declared Terrymanila insolvent. it claiming that its counsel received a notice only on the day of the sale. [10]

On June 11, 1991,[5] the Manila RTC, by Decision of even date, rendered Petitioner, alleging that the annulment of sale case filed by
judgment in the collection case in favor of respondent. 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] respondent's by increasing to P50,000 the attorney's fees awarded to it and
additionally awarding it exemplary damages and imposing interest on the
Petitioner appealed the denial of the Motion to Dismiss via certiorari to the principal amount payable to it. Thus it disposed:
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
respondent's petition for annulment "prima facie states a sufficient cause of WHEREFORE, the foregoing considered, the appeal instituted by appellant
action and that the [trial court] in denying [herein petitioner RCBC's] motion RCBC is hereby DENIED for lack of merit while the appeal of appellant Royal
to dismiss, had acted advisedly and well within its powers and authority."[13] Cargo is PARTLY GRANTED in that the amount of attorney's fees awarded
by the RTC is increased to P50,000.00.
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 In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00
Counterclaim by seeking P1 Million for moral damages, P500,000 for as exemplary damages. The principal amount of P296,662.18 [sic] to be
exemplary damages, and P250,000 for attorney's fees. It thereafter elevated paid by RCBC to Royal Cargo shall likewise earn 12% interest per
the case to this Court via petition for review on certiorari, docketed as G.R. annum from the time the petition was filed in the court a quo until fully
115662. This Court by minute Resolution of November 7, 1994,[15] denied paid. The rest of the decision is AFFIRMED.
the petition for failure to show that a reversible error was committed by the
appellate court.[16] SO ORDERED. (Emphasis and underscoring supplied)

Trial on the merits of the annulment of sale case thereupon ensued. By In partly granting respondent's appeal from the Decision of Br. 16 of RTC
Decision[17] of October 15, 1997, Branch 16 of the Manila RTC rendered Manila, the appellate court ratiocinated that respondent had a right to be
judgment in favor of respondent, disposing as follows: "timely informed" of the foreclosure sale.

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 attorney's
fees.
2. No pronouncement as to costs.
3. DISMISSING the petition as to respondents Provincial Sheriff of
Balanga, Bataan RTC;
RCBC's 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.

SO ORDERED.
Both parties appealed to the Court of Appeals which, by Decision[18] of April
17, 2007, denied herein petitioner's appeal and partly granted herein
xxxx
Moreover, Section 14 of the Chattel Mortgage Law pertaining to the
procedure in the foreclosure of chattel mortgages provides, to wit:
xxxx
Petitioner faults the appellate court in applying res judicata by holding that
The above-quoted provision clearly requires that the mortgagee respondent's entitlement to notice of the auction sale had already been
should notify in writing the mortgagor or person holding under him of the settled in its Decision in CA G.R. SP No. 31125 and in this Court's Decision in
time and place of the sale by personal delivery of the notice. Thus, RCBC's G.R. No. 115662. For, so it contends, the decisions in these cases dealt
failure to comply with this requirement warranted a ruling against it by the on interlocutory issues, viz: the issue of whether respondent's petition for
RTC. (Italics in the original; emphasis partly in the original; underscoring annulment of the sale stated a cause of action, and the issue of whether
supplied) petitioner's motion to dismiss was properly denied.[21]

Its motion for reconsideration having been denied by the appellate court, Arguing against respondent's position that it was entitled to notice of the
[19]
 petitioner lodged the present petition for review which raises the auction sale, petitioner cites the Chattel Mortgage Law which enumerates
following issues: 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
I stated therein, since in the preceding section, Section 13, it already
mentioned that a subsequent attaching creditor may redeem."[22]
WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A TEN(10)-DAY
PRIOR NOTICE OF THE JUNE 16, 1992 FORECLOSURE SALE 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
II 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
WHETHER OR NOT THE TRIAL COURT AND THE COURT OF APPEALS GRAVELY notified of the foreclosure sale ten days before it is held." [24]
ERRED IN DECLARING PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN
FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY PRIOR NOTICE OF THE Petitioner likewise posits that Section 13 permits a subsequent attaching
FORECLOSURE SALE. 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
III silent thereon.[26]

WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD LIABLE TO PAY Even assuming arguendo, petitioner contends, that there exists an
RESPONDENT P296,662.[16] PLUS INTEREST THEREON, EXEMPLARY obligation to furnish respondent a notice of the auction sale 10 days prior
DAMAGES AND ATTORNEY'S FEES. thereto, "respondent's 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 attorney's fees is very much less than the P1.5
IV [m]illion bid of petitioner..."[27]

WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF ATTORNEY'S As for the issue of constructive fraud-basis of the award of damages to
FEES.[20] (Underscoring supplied) respondent, petitioner maintains that both the trial and appellate courts
erred in concluding that it (petitioner) was the one which sent the notice of
sheriff's sale to, which was received on the day of the sale by, the counsel merely involved therein.
for respondent for, so it contends, it had absolutely no participation in the
preparation and sending of such notice.[28] The Court of Appeals, in CA G.R. SP No. 31125, resolved only
the interlocutory issue of whether the trial court's Order of April 12, 1993
In its Comment,[29] respondent reiterates that the respective decisions of the denying petitioner's motion to dismiss respondent's petition for annulment
appellate court and this Court in CA G.R. SP No. 31125 and G.R. No. was attended by grave abuse of discretion. The appellate court did not rule
115662 are conclusive between the parties, hence, "the right of on the merits of the petition as to establish a controlling legal rule which has
[respondent] to a [ten-day] notice has a binding effect and must be adopted to be subsequently followed by the parties in the same case. It merely held
in any other controversy between the same parties in which the very same that respondent's petition in the trial court stated a sufficient cause of
question is raised."[30] action. Its determination of respondent's entitlement to notice of the public
auction sale was at best prima facie. Thus, the appellate court held:
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. In view of the above, We are of the considered view that the private
respondent's petition in the court a quo prima facie states a sufficient
The petition is MERITORIOUS. cause of action and that the public respondent in denying the petitioner's
motion to dismiss, had acted advisedly and well within its powers and
The respective decisions of the appellate court in CA G.R. SP No. 31125 and authority. We, therefore, find no cause to annul the
this Court in G.R. No. 115662 did not conclusively settle the issue on the challenged order issued by the respondent court in Civil Case No. 92-
need to give a 10-day notice to respondent of the holding of the public 62106. (Underscoring in the original; emphasis and italics supplied)[34]
auction sale of the chattels.
An order denying a motion to dismiss is merely interlocutory and cannot
The elements of res judicata are: (1) the judgment sought to bar the new give rise to res judicata, hence, it is subject to amendments until the
action must be final; (2) the decision must have been rendered by a court rendition of the final judgment.[35]
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 On respondent's contention that petitioner, as mortgagee, had the duty to
must be as between the first and second action, identity of parties, subject notify it of the public auction sale, the Court finds the same immaterial to
matter, and causes of action.[31] the case.

Res judicata has two concepts: (1) bar by prior judgment as enunciated in Section 13 of the Chattel Mortgage Law allows the would-be redemptioner
Rule 39, Section 47 (b) of the Rules of Civil Procedure; and thereunder to redeem the mortgaged property only before its sale.
(2) conclusiveness of judgment in Rule 39, Section 47 (c).[32] Consider the following pronouncement in Paray: [36]

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, [T]here is no law in our statute books which vests the right of redemption
there is identity of parties, subject matter, and causes of action. Where over personal property. Act No. 1508, or the Chattel Mortgage Law,
there is identity of parties and subject matter in the first and second cases, ostensibly could have served as the vehicle for any legislative intent to
but no identity of causes of action, there is conclusiveness of judgment. bestow a right of redemption over personal property, since that law governs
[33]
 The first judgment is conclusive only as to those the extrajudicial sale of mortgaged personal property, but the statute is
matters actually and directly controverted and determined, not as to matters 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 Terrymanila's assets to secure the
satisfaction of a P296,662.16 judgment rendered in another case, what it
effectively attached was Terrymanila's equity of redemption. That
respondent's claim is much lower than the P1.5 million actual bid of
petitioner at the auction sale does not defeat respondent's 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 Terrymanila's 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 court's 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. Respondent's 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 respondent's.[45]
In any event, even if respondent would have participated in the auction sale
and matched petitioner's bid, the superiority of petitioner's 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 Terrymanila's 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 court's 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 court's award of exemplary damages and attorney's fees for
respondent, given petitioner's good faith, is thus not warranted.
As for petitioner's prayer for attorney's fees in its Compulsory Counterclaim,
the same is in order, the dismissal of respondent's Complaint
nowithstanding.[50] Perkin Elmer Singapore v. Dakila Trading, [51] citing Pinga
v. Heirs of German Santiago, [52] enlightens:
It bears to emphasize that petitioner's counterclaim against respondent is
for damages and attorney's fees arising from the unfounded suit. While
respondent's Complaint against petitioner is already dismissed, petitioner
may have very well incurred damages and litigation expenses such as
attorney's 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 petitioner's counterclaim is not eliminated
by the mere dismissal of respondent's 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 respondent's 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 attorney's fees.
No costs.
SO ORDERED.

G.R. No. 176381               December 15, 2010
PCI LEASING AND FINANCE, INC., Petitioner,
vs.
TROJAN METAL INDUSTRIES INCORPORATED, WALFRIDO DIZON,
ELIZABETH DIZON, and JOHN DOE, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 with application for the immediate issuance of a
temporary restraining order and writ of preliminary injunction assailing the
5 October 2006 Decision2 and the 23 January 2007 Resolution3 of the Court
of Appeals in CA-G.R. CV No. 75855. The 5 October 2006 Decision set aside
the 23 July 2002 Decision4 of the Regional Trial Court (Branch 79) of Quezon
City in Civil Case No. Q-99-37559, which granted petitioner’s complaint for
recovery of sum of money and personal property with prayer for the
issuance of a writ of replevin. The 23 January 2007 Resolution denied
petitioner’s motion for reconsideration.
The Facts
Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to
petitioner PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of
extending a loan, PCILF offered to buy various equipment TMI owned,
namely: a Verson double action hydraulic press with cushion, a Hinohara
powerpress 75-tons capacity, a USI-clearing powerpress 60-tons capacity, a
Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-tons
capacity, a YMGP powerpress 15-tons capacity, a lathe machine, a vertical
milling machine, and a radial drill. Hard-pressed for money, TMI agreed.
PCILF and TMI immediately executed deeds of sale5 evidencing TMI’s sale to
PCILF of the various equipment in consideration of the total amount of ₱
2,865,070.00.
PCILF and TMI then entered into a lease agreement,6 dated 8 April 1997,
whereby the latter leased from the former the various equipment it
previously owned. Pursuant to the lease agreement, TMI issued postdated
checks representing 24 monthly installments. The monthly rental for the
Verson double action hydraulic press with cushion was in the amount of
₱62,328.00; for the Hinohara powerpress 75-tons capacity, the USI-clearing
powerpress 60-tons capacity, the Watanabe powerpress 60-tons capacity,
the YMGP powerpress 30-tons capacity, and the YMGP powerpress 15-tons
capacity, the monthly rental was in the amount of ₱49,259.00; and for the
lathe machine, the vertical milling machine, and the radial drill, the monthly
rental was in the amount of ₱22,205.00.
The lease agreement required TMI to give PCILF a guaranty deposit of
₱1,030,350.00,7 which would serve as security for the timely performance of
TMI’s obligations under the lease agreement, to be automatically forfeited
should TMI return the leased equipment before the expiration of the lease
agreement.
Further, spouses Walfrido and Elizabeth Dizon, as TMI’s President and Vice-
President, respectively executed in favor of PCILF a Continuing Guaranty of
Lease Obligations.8 Under the continuing guaranty, the Dizon spouses
agreed to immediately pay whatever obligations would be due PCILF in case
TMI failed to meet its obligations under the lease agreement.
To obtain additional loan from another financing company,9 TMI used the
leased equipment as temporary collateral.10 PCILF considered the second
mortgage a violation of the lease agreement. At this time, TMI’s partial
payments had reached ₱1,717,091.00.11 On 8 December 1998, PCILF sent
TMI a demand letter12 for the payment of the latter’s outstanding obligation.
PCILF’s demand remained unheeded.
On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon
City a complaint13 against TMI, spouses Dizon, and John Doe (collectively
referred to as "respondents" hereon) for recovery of sum of money and
personal property with prayer for the issuance of a writ of replevin,
docketed as Civil Case No. Q-99-37559.
14
On 7 September 1999, the RTC issued the writ of replevin  PCILF prayed for,
directing the sheriff to take custody of the leased equipment. Not long after,
PCILF sold the leased equipment to a third party and collected the proceeds
amounting to ₱1,025,000.00.15
In their answer,16 respondents claimed that the sale with lease agreement
was a mere scheme to facilitate the financial lease between PCILF and TMI.
Respondents explained that in a simulated financial lease, property of the
debtor would be sold to the creditor to be repaid through rentals; at the
end of the lease period, the property sold would revert back to the debtor.
Respondents prayed that they be allowed to reform the lease agreement to
show the true agreement between the parties, which was a loan secured by
a chattel mortgage.
The Ruling of the RTC
In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its
complaint. The RTC ruled that the lease agreement must be presumed valid
as the law between the parties even if some of its provisions constituted
unjust enrichment on the part of PCILF. The dispositive portion of its
Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI
Leasing and Finance, Inc. and against defendants Trojan Metal, Walfrido
Dizon, and Elizabeth Dizon, as follows:
1. Ordering the plaintiff to be entitled to the possession of herein
machineries.
2. Ordering the defendants to pay the remaining rental obligation in
the amount of Php 888,434.48 plus legal interest from the date of
filing of the complaint;
3. Ordering defendant to pay an attorneys fees in the amount of
Php 50,000.00;
4. Ordering the defendant to pay the cost of suit.
SO ORDERED.17
Respondents appealed to the Court of Appeals alleging that the RTC erred in
ruling that PCILF was entitled to the possession of TMI’s equipment and that
respondents still owed PCILF the balance of ₱888,423.48.
The Ruling of the Court of Appeals
The Court of Appeals ruled that the sale with lease agreement was in fact a
loan secured by chattel mortgage. The Court of Appeals held that since
PCILF sold the equipment to a third party for ₱1,025,000.00 and TMI paid
PCILF a guaranty deposit of ₱1,030,000.00, PCILF had in its hands the sum of
₱2,055,250.00, as against TMI’s remaining obligation of ₱888,423.48, or an
excess of ₱1,166,826.52, which should be returned to TMI in accordance
with Section 14 of the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the
Decision of the RTC. The Court of Appeals entered a new one dismissing
PCILF’s complaint and directing PCILF to pay TMI, by way of refund, the
amount of ₱1,166,826.52. The decretal part of its Decision reads:
WHEREFORE, premises considered, the July 23, 2002 Decision of the
Regional Trial Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559,
is hereby REVERSED and SET ASIDE, and a new one entered DISMISSING the
complaint and DIRECTING the plaintiff-appellee PCI Leasing and Finance, Inc.
to PAY, by way of REFUND, to the defendant-appellant Trojan Metal
Industries, Inc., the net amount of Php 1,166,826.52.
SO ORDERED.18
The Issues
The issues for resolution are (1) whether the sale with lease agreement the
parties entered into was a financial lease or a loan secured by chattel
mortgage; and (2) whether PCILF should pay TMI, by way of refund, the
amount of ₱1,166,826.52.
The Court’s Ruling
The petition lacks merit.
PCILF contends that the transaction between the parties was a sale and
leaseback financing arrangement where the client sells movable property to
a financing company, which then leases the same back to the client. PCILF
insists the transaction is not financial leasing, which contemplates extension
of credit to assist a buyer in acquiring movable property which the buyer
can use and eventually own. PCILF claims that the sale and leaseback
financing arrangement is not contrary to law, morals, good customs, public
order, or public policy. PCILF stresses that the guaranty deposit should be
forfeited in its favor, as provided in the lease agreement. PCILF points out
that this case does not involve mere failure to pay rentals, it deals with a
flagrant violation of the lease agreement.
Respondents counter that from the very beginning, transfer to PCILF of
ownership over the subject equipment was never the intention of the
parties. Respondents claim that under the lease agreement, the guaranty
deposit would be forfeited if TMI returned the leased equipment to PCILF
before the expiration of the lease agreement; thus, since TMI never
returned the leased equipment voluntarily, but through a writ of replevin
ordered by the RTC, the guaranty deposit should not be forfeited.
Since the lease agreement in this case was executed on 8 April 1997,
Republic Act No. 5980 (RA 5980), otherwise known as the Financing
Company Act, governs as to what constitutes financial leasing. Section 1,
paragraph (j) of the New Rules and Regulations to Implement RA
598019 defines financial leasing as follows:
LEASING shall refer to financial leasing which is a mode of extending credit
through a non-cancelable contract under which the lessor purchases or
acquires at the instance of the lessee heavy equipment, motor vehicles,
industrial machinery, appliances, business and office machines, and other
movable property in consideration of the periodic payment by the lessee of
a fixed amount of money sufficient to amortize at least 70% of the purchase
price or acquisition cost, including any incidental expenses and a margin of
profit, over the lease period. The contract shall extend over an obligatory
period during which the lessee has the right to hold and use the leased
property and shall bear the cost of repairs, maintenance, insurance, and
preservation thereof, but with no obligation or option on the part of the
lessee to purchase the leased property at the end of the lease contract.
The above definition of financial leasing gained statutory recognition with
the enactment of Republic Act No. 8556 (RA 8556), otherwise known as the
Financing Company Act of 1998.20 Section 3(d) of RA 8556 defines financial
leasing as:
a mode of extending credit through a non-cancelable lease contract under
which the lessor purchases or acquires, at the instance of the lessee,
machinery, equipment, motor vehicles, appliances, business and office
machines, and other movable or immovable property in consideration of
the periodic payment by the lessee of a fixed amount of money sufficient to
amortize at least seventy (70%) of the purchase price or acquisition cost,
including any incidental expenses and a margin of profit over an obligatory
period of not less than two (2) years during which the lessee has the right to
hold and use the leased property with the right to expense the lease rentals
paid to the lessor and bears the cost of repairs, maintenance, insurance and
preservation thereof, but with no obligation or option on his part to
purchase the leased property from the owner-lessor at the end of the lease
contract.
Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a
finance company purchases on behalf of a cash-strapped lessee the
equipment the latter wants to buy but, due to financial limitations, is
incapable of doing so. The finance company then leases the equipment to
the lessee in exchange for the latter’s periodic payment of a fixed amount of
rental.
In this case, however, TMI already owned the subject equipment before it
transacted with PCILF. Therefore, the transaction between the parties in this
case cannot be deemed to be in the nature of a financial leasing as defined
by law.
The facts in the instant case are analogous to those in Cebu Contractors
Consortium Co. v. Court of Appeals. 21 There, Cebu Contractors Consortium
Co. (CCCC) approached Makati Leasing and Finance Corporation (MLFC) to
obtain a loan. MLFC agreed to extend financial assistance to CCCC but,
instead of a loan with collateral, MLFC induced CCCC to adopt a sale and
leaseback scheme. Under the scheme, several of CCCC’s equipment were
made to appear as sold to MLFC and then leased back to CCCC, which in
turn paid lease rentals to MLFC. The rentals were treated as installment
payments to repurchase the equipment.
The Court held in Cebu Contractors Consortium Co. v. Court of Appeals 22 that
the transaction between CCCC and MLFC was not one of financial leasing as
defined by law, but simply a loan secured by a chattel mortgage over CCCC’s
equipment. The Court went on to explain that where the client already
owned the equipment but needed additional working capital and the
finance company purchased such equipment with the intention of leasing it
back to him, the lease agreement was simulated to disguise the true
transaction that was a loan with security. In that instance, continued the
Court, the intention of the parties was not to enable the client to acquire
and use the equipment, but to extend to him a loan.
Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower
came to Investors Finance Corporation (IFC) to secure a loan with his heavy
equipment and machinery as collateral. The parties executed documents
where IFC was made to appear as the owner of the equipment and the
borrower as the lessee. As consideration for the lease, the borrower-lessee
was to pay monthly amortizations over a period of 36 months. The parties
executed a lease agreement covering various equipment described in the
lease schedules attached to the lease agreement. As security, the borrower-
lessee also executed a continuing guaranty.
The Court in Investors Finance Corporation v. Court of Appeals 24 held that
the transaction between the parties was not a true financial leasing because
the intention of the parties was not to enable the borrower-lessee to
acquire and use the heavy equipment and machinery, which already
belonged to him, but to extend to him a loan to use as capital for his
construction and logging businesses. The Court held that the lease
agreement was simulated to disguise the true transaction between the
parties, which was a simple loan secured by heavy equipment and
machinery owned by the borrower-lessee. The Court differentiated
between a true financial leasing and a loan with mortgage in the guise of a
lease. The Court said that financial leasing contemplates the extension of
credit to assist a buyer in acquiring movable property which he can use and
eventually own. If the movable property already belonged to the borrower-
lessee, the transaction between the parties, according to the Court, was a
loan with mortgage in the guise of a lease.
In the present case, since the transaction between PCILF and TMI involved
equipment already owned by TMI, it cannot be considered as one of
financial leasing, as defined by law, but simply a loan secured by the various
equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties to
a contract, their true intention is not expressed in the instrument purporting
to embody the agreement, by reason of mistake, fraud, inequitable conduct,
or accident, one of the parties may ask for the reformation of the
instrument to the end that such true intention may be expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.
Under Article 1144 of the Civil Code, the prescriptive period for actions
based upon a written contract and for reformation of an instrument is ten
years.25 The right of action for reformation accrued from the date of
execution of the lease agreement on 8 April 1997. TMI timely exercised its
right of action when it filed an answer26 on 14 February 2000 asking for the
reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a
proper instrument, it would have been a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing. Thus, upon TMI’s default,
PCILF was entitled to seize the mortgaged equipment, not as owner but as
creditor-mortgagee for the purpose of foreclosing the chattel mortgage.
PCILF’s sale to a third party of the mortgaged equipment and collection of
the proceeds of the sale can be deemed in the exercise of its right to
foreclose the chattel mortgage as creditor-mortgagee.
The Court of Appeals correctly ruled that the transaction between the
parties was simply a loan secured by a chattel mortgage. However, in
reckoning the amount of the principal obligation, the Court of Appeals
should have taken into account the proceeds of the sale to PCILF less the
guaranty deposit paid by TMI. After deducting payments made by TMI to
PCILF, the balance plus applicable interest should then be applied against
the aggregate cash already in PCILF’s hands.
Records show that PCILF paid TMI ₱2,865,070.0027 as consideration for
acquiring the mortgaged equipment. In turn, TMI gave PCILF a guaranty
deposit of ₱1,030,350.00.28 Thus, the amount of the principal loan was
₱1,834,720.00, which was the net amount actually received by TMI
(proceeds of the sale of the equipment to PCILF minus the guaranty
deposit). Against the principal loan of ₱1,834,720.00 plus the applicable
interest should be deducted loan payments, totaling ₱1,717,091.00. 29 Since
PCILF sold the mortgaged equipment to a third party for
₱1,025,000.00,30 the proceeds of the said sale should be applied to offset
the remaining balance on the principal loan plus applicable interest.
However, the exact date of the sale of the mortgaged equipment, which is
needed to compute the interest on the remaining balance of the principal
loan, cannot be gleaned from the facts on record. We thus remand the case
to the RTC for the computation of the total amount due from the date of
demand on 8 December 1998 until the date of sale of the mortgaged
equipment to a third party, which amount due shall be offset against the
proceeds of the sale.
In the absence of stipulation, the applicable interest due on the remaining
balance of the loan is the legal rate of 12% per annum, computed from the
date PCILF sent a demand letter to TMI on 8 December 1998. No interest
can be charged prior to this date because TMI was not yet in default prior to
8 December 1998. The interest due shall also earn legal interest from the
time it is judicially demanded, pursuant to Article 2212 of the Civil Code,
which provides:
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
The foregoing provision has been incorporated in the comprehensive
summary of existing rules on the computation of legal interest laid down by
the Court in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:
1. When an obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be
that which may have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty,
the interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit. (Emphasis supplied)
Applying the rules in the computation of interest, the remaining balance of
the principal loan subject of the chattel mortgage must earn the legal
interest of 12% per annum, which interest, as long as unpaid, also earns
legal interest of 12% per annum, computed from the filing of the complaint
on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v.
Court of Appeals,32 we derive the following formula for the RTC’s guidance:
TOTAL AMOUNT DUE = [principal – partial payments made] + [interest +
interest on interest], where
Interest = remaining balance x 12% per annum x no. of years from due date
(8 December 1998 when demand was made) until date of sale to a third
party
Interest on interest = interest computed as of the filing of the complaint on
7 May 1999 x 12% x no. of years until date of sale to a third party
principal loan plus applicable interest, no interest applies on the amount of
refund due. Nonetheless, in accord with prevailing jurisprudence,34 the
excess amount PCILF must refund to TMI is subject to interest at 12% per
annum from finality of this Decision until fully paid.
WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5
October 2006 Decision and the 23 January 2007 Resolution of the Court of
Appeals in CA-G.R. CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of
refund, the excess amount to be computed by the Regional Trial Court
based on the formula specified above, with interest at 12% per annum from
finality of this Decision until fully paid.

From the computed total amount should be deducted ₱1,025,000.00 Costs against petitioner.
representing the proceeds of the sale already in PCILF’s hands. The
difference represents overpayment by TMI, which the law requires PCILF to SO ORDERED.
refund to TMI.1avvphi1
ANTONIO T. CARPIO
Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, Associate Justice
provides:

Section 14. Sale of property at public auction; officer’s return; fees;

disposition of proceeds. x x x The proceeds of such sale shall be applied to
the payment, first, of the costs and expenses of keeping and sale, and then
to the payment of the demand or obligation secured by such mortgage, and
the residue shall be paid to persons holding subsequent mortgages in their
order, and the balance, after paying the mortgages, shall be paid to the
mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-

mortgagor to the balance of the proceeds, upon satisfaction of the principal
loan and costs. Prevailing jurisprudence33 also holds that the Chattel
Mortgage Law bars the creditor-mortgagee from retaining the excess of the
sale proceeds.

TMI’s right to the refund accrued from the time PCILF received the proceeds
of the sale of the mortgaged equipment. However, since TMI never made a
counterclaim or demand for refund due on the resulting overpayment after
offsetting the proceeds of the sale against the remaining balance on the