mortgage (Exhibit "A").

After the execution of the deed, possession of the mortgaged

properties were turned over to the mortgagee.
EN BANC
[G.R. No. L-15128. August 25, 1960.]
CECILIO DIEGO, plaintiff-appellee, vs. SEGUNDO
FERNANDO, defendant-appellant.

Espinosa Law Offices for appellant.

N. L. Dasig and C. L. Francisco for appellee.

SYLLABUS
1.CONTRACTS; MORTGAGE NOT ANTICHRESIS; LOAN WITHOUT
INTEREST; POSSESSION TRANSFERRED TO MORTGAGEE; CASE AT BAR. If
a contract of loan with security does not stipulate the payment of interest like in the case
at bar, and possession of the mortgaged property is delivered to the mortgagee in order
that the latter may gather its fruits, but without stating that said fruits are to be applied to
the payment of interest, if any, and afterwards that of the principal, the contract is a
mortgage and not antichresis (Legaspi and Salcedo vs. Celestial, 66 Phil., 372).
2.ID.; ID.; LEGAL INTEREST; PAYMENT OF. The court did not err in so
holding that appellant is liable to pay legal interest to appellee from the filing of the
complaint, because appellant has not up to the present discharged his indebtedness, and
the law (Art. 2209, New Civil Code; Art. 1108, old) allows a creditor, in the absence of
stipulation as to payment of interest, to collect legal interest from the time of the debtor's
default.

DECISION

REYES, J. B. L., J p:
Appeal by defendant Segundo Fernando from the judgment of the Court of First
Instance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of mortgage. The
appeal was originally brought to the Court of Appeals, but was certified to us by that
tribunal because it raises only questions of law.
The facts are not disputed. On May 26, 1950, the defendant Segundo Fernando executed a deed
of mortgage in favor of plaintiff Cecilio Diego over two parcels of land registered in his name,
to secure a loan of P2,000, without interest, payable within four years from the date of the

The debtor having failed to pay the loan after four years, the mortgagee Diego made several
demands upon him for payment; and as the demands were unheeded, Diego filed this action for
foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction between him and plaintiff was one
of antichresis and not of mortgage; and that as plaintiff had allegedly received a total of 120
cavans of palay from the properties given as security, which, at the rate of P10 a cavan,
represented a value of P5,200, his debt had already been paid, with plaintiff still owing him a
refund of some P2,720.00.
The Court below, however, found that there was nothing in the deed of mortgage Exhibit "A"
to show that it was not a true contract of mortgage, and that the fact that possession of the
mortgaged properties were turned over to the mortgagee did not alter the transaction; that the
parties must have intended that the mortgagee would collect the fruits of the mortgaged
properties as interest on his loan, which agreement is not uncommon; and that the evidence
showed that plaintiff had already received 55 cavans of palay from the properties during the
period of his possession. Whereupon, judgment was rendered for plaintiff in the amount of
P2,000, the loan he gave the defendant, with legal interest from the filing of the action until full
payment, plus P500 as attorney's fees and the costs; and in case of default in payment, for the
foreclosure of the mortgage. From this judgment, defendant took the present appeal.
The main issue raised is whether the contract between the parties is one of mortgage or of
antichresis. Appellant, while admitting that the contract Exhibit "A" shows a deed of mortgage,
contends that the admitted fact that the loan was without interest, coupled with the transfer of
the possession of the properties mortgaged to the mortgagee, reveals that the true transaction
between him and appellee was one of antichresis. As correctly pointed out by appellee and the
lower court, however, it is not an essential requisite of a mortgage that possession of the
mortgaged premises be retained by the mortgagor (Legaspi and Salcedo vs. Celestial, 66 Phil.,
372). To be antichresis, it must be expressly agreed between creditor and debtor that the
former, having been given possession of the properties given as security, is to apply their fruits
to the payment of the interest, if owing, and thereafter to the principal of his credit (Art. 2132,
Civil Code, Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De Mendezona, 48 Phil., 666); so that
if a contract of loan with security does not stipulate the payment of interest but provides for the
delivery to the creditor by the debtor of the property given as security, in order that the latter
may gather its fruits, without stating that said fruits are to be applied to the payment of interest,
if any, and afterwards that of the principal, the contract is a mortgage and not antichresis
(Legaspi vs. Celestial, supra). The court below, therefore, did not err in holding that the
contract Exhibit "A" is a true mortgage and not an antichresis.
The above conclusion does not mean, however, that appellee, having received the fruits of the
properties mortgaged, will be allowed to appropriate them for himself and not be required to
account for them to the appellant. For the contract of mortgage Exhibit "A" clearly provides
that the loan of P2,000 was "without interest within four (4) years from date of this
instrument"; and there being no evidence to show that the parties had intended to supersede
such stipulation when the possession of the mortgaged properties were turned over to the
appellee by another allowing the latter to collect, the fruits thereof as interest on the loan, the
trial court is not authorized to infer from this transfer of possession alone that the parties had
verbally modified their written agreement that the loan was to be without interest for four

years, and substituted another giving appellee the right to receive the fruits of the mortgaged
properties as interests.
The true position of appellee herein under his contract with appellant is a "mortgage in
possession" as that term is understood in American equity jurisprudence; that is, "one who has
lawfully acquired actual or constructive possession of the premises mortgaged to him, standing
upon his rights as mortgagee and not claiming under another title, for the purpose of enforcing
his security upon such property or making its income help to pay his debt" (Diaz vs. De
Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such mortgagee in possession, his rights
and obligations are, as pointed out by this Court in Macapinlac vs. Gutierrez Repide (43 Phil.,
770), similar to those of an antichretic creditor:
"The respective rights and obligations of the parties to a
contract of antichresis, under the Civil Code, appear to be similar and in
many respects identical with those recognized in the equity
jurisprudence of England and America as incident to the position of a
mortgagee in possession, in reference to which the following
propositions may be taken to be established, namely, that if the
mortgagee acquires possession in any lawful manner, he is entitled to
retain such possession until the indebtedness is satisfied and the property
redeemed; that the non-payment of the debt within the term agreed does
not vest the ownership of the property in the creditor; that the general
duty of the mortgagee in possession towards the premises is that of the
ordinary prudent owner; that the mortgagee must account for the rents
and profits of the land, or its value for purposes of use and occupation,
any amount thus realized going towards the discharge on the mortgage
debt; that if the mortgagee remains in possession after the mortgage debt
has been satisfied, he becomes a trustee for the mortgagor as to the
excess of the rents and profits over such debt; and lastly, that the
mortgagor can only enforce his rights to the land by an equitable action
for an account and to redeem. (3 Pom. Eq. Jur. secs. 1215-1218)"

Appellant also claims that the lower court erred in ordering him to pay legal interest on his
indebtedness to plaintiff from the filing of the action, since the latter is, up to the present, still
in the possession of the properties mortgaged and still enjoying its fruits. The court did not err
in so holding, since at the time the action was filed and up to the present, appellant has not
discharged his indebtedness to appellee, and the law allows the latter, in the absence of
stipulation as to payment of interest, legal interest from the time of the debtor's default (Art.
2209, New Civil Code, Art. 1108, old). However, appellee should be made to account for the
fruits he received from the properties mortgaged from the time of the filing of this action until
full payment by appellant, which fruits should be deducted from the total amount due him from
appellant under this judgment.

Wherefore, the judgment of the court below is modified in the sense that the amount of
appellee's principal recovery is reduced to P1,505, with an obligation on the part of appellee to
render an accounting of all the fruits received by him from the properties in question from the
time of the filing of this action until full payment, or in case of appellant's failure to pay, until
foreclosure of the mortgage thereon, the value of which fruits shall be deducted from the total
amount of his recovery. No costs in this instance.
Pars, C.J., Bengzon, Padilla, Bautista Angelo, Labrador, Concepcin,
Barrera, and Gutierrez David, JJ., concur.

Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a lien on
real property who took possession thereof with the consent of the debtor, held it as an
"antichretic creditor with the right to collect the credit with interest from the fruits, returning to
the antichretic debtor the balance, if any, after deducting the expenses", because the fact that
the debtor consented and asked the creditor to take charge of managing his property "does not
entitle the latter to appropriate to itself the fruits thereof unless the former has expressly waived
his right thereto".
In the present case, the parties having agreed that the loan was to be without interest, and the
appellant not having expressly waived his right to the fruits of the properties mortgaged during
the time they were in appellee's possession, the latter, like an antichretic creditor, must account
for the value of the fruits received by him, and deduct it from the loan obtained by appellant.
According to the findings of the trial court, appellee had received a net share of 55 cavans of
palay out of the mortgaged properties up to the time he filed the present action; at the rate of
P9.00 per cavan (a rate admitted by the parties), the total value of the fruits received by
appellee is P495.00. Deducting this amount from the loan of P2,000 received by appellant from
appellee, the former has only P1,505.00 left to pay the latter.

SECOND DIVISION
[G.R. No. L-58469. May 16, 1983.]

MAKATI LEASING and FINANCE

CORPORATION, petitioner, vs. WEAREVER TEXTILE MILLS,
INC., and HONORABLE COURT OF APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.
Jose V. Mancella for respondent.
SYLLABUS
1.REMEDIAL LAW; PETITION FOR REVIEW; NOT RENDERED MOOT AND
ACADEMIC; WHERE RIGHT TO QUESTION DECISION, TIMELY RESERVED.
The contention of private respondent is without merit. When petitioner returned
the subject motor drive, it made itself unequivocably clear that said action was
without prejudice to a motion for reconsideration of the Court of Appeals' decision,
as shown by the receipt duly signed by respondent's representative. Considering that
petitioner has reserved its right to question the propriety of the Court of Appeals'
decision, the contention of private respondent that this petition has been mooted by
such return may not be sustained.
2.CIVIL LAW; PROPERTY; MACHINERY THOUGH IMMOBILIZED BY
DESTINATION IF TREATED BY THE PARTIES AS A PERSONALTY FOR
PURPOSES OF A CHATTEL MORTGAGE LEGAL, WHERE NO THIRD PARTY
IS PREJUDICED. The next and the more crucial question to be resolved in this
petition is whether the machinery in suit is real or personal property from the point of
view of the parties. Examining the records of the instance case, the Supreme Court
found no logical justification to exclude and rule out, as the appellate court did, the
present case from the application of the pronouncement in the TUMALAD v.
VICENCIO CASE (41 SCRA 143) where a similar, if not identical issue was raised.
If a house of strong materials, like what was involved in the Tumalad case may be
considered as personal property for purposes of executing a chattel mortgage thereon
as long as the parties to the contract so agree and no innocent third party will be
prejudiced thereby, there is absolutely no reason why a machinery, which is movable
in its nature and becomes immobilized only by destination or purpose, may not be
likewise treated as such. This is really because one who has so agreed is estopped
from denying the existence of the chattel mortgage.
3.ID.; ID.; ID.; COURT SHOULD NOT MAKE DISTINCTIONS, WHERE THE
LAW DOES NOT. In rejecting petitioner's assertion on the applicability of the
Tumalad doctrine, the Court of Appeals lays stress on the fact that the house involved
therein was built on a land that did not belong to the owner of such house. But the
law makes no distinction with respect to the ownership of the land on which the

house is built and the Supreme Court should not lay down distinctions not
contemplated by law.
4.ID.; ID.; ID.; CHARACTERIZATION OF PROPERTY, INDICATIVE OF THE
INTENTION OF THE PARTIES. It must be pointed out that the characterization
of the subject machinery as chattel by the private respondent is indicative of intention
and impresses upon the property the character determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature
would be real property, as long as no interest of third parties would be prejudiced
thereby.
5.CIVIL LAW; ESTOPPEL; REPRESENTING OR AGREEING ON THE
CONSTITUTION OF A PROPERTY AS CHATTEL; A CASE THEREOF.
Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit he considered as personal property
but was merely required and dictated on by herein petitioner to sign a printed form of
chattel mortgage which was in a blank format the time of signing. This contention
lacks persuasiveness. As aptly pointed out by petitioner and not denied by the
respondent, the status of the subject machine as movable or immovable was never
placed in issue before the lower court and the Court of Appeals except ins
supplemental memorandum in support of the petition filed in the appellate court.
6.ID.; CONTRACT; TREATING A MACHINERY AS A CHATTEL;
AGREEMENT DEEMED VALID UNLESS ANNULLED OR VOIDED IN A
PROPER ACTION. Moreover, even granting that the charge is true, such fact
alone does not render a contract void ab initio, but can only be a ground for rendering
said contract voidable or annullable pursuant to Article 1390 of the new Civil Code,
by a proper action in court. There is nothing on record to show that the mortgage has
been annulled. Neither is it disclosed that steps were taken to nullify the same.
7.ID.; ID.; UNDUE BENEFIT OVER A CONTRACT AT THE EXPENSE OF
ANOTHER NOT COUNTENANCED BY EQUITY. On the other hand, as
pointed out by petitioner and again not refuted by respondent, the latter has
indubitably benefited from said contract. Equity dictates that one should not benefit at
the expense of another. Private respondent could not now therefore, he allowed to
impugn the efficacy of the chattel mortgage after it has benefited therefrom.

DECISION

DE CASTRO, J p:

Petition for review on certiorari of the decision of the Court of Appeals (now
Intermediate Appellate Court) promulgation August 27, 1981 in CA-G.R. No. SP12731, setting aside certain Orders later specified herein, of Judge Ricardo J.
Francisco, as Presiding Judge of the Court of First Instance of Rizal, Branch VI,
issued in Civil Case No. 36040, as well as the resolution dated September 22, 1981 of
the said appellate court, denying petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from herein petitioner
Makati Leasing and Finance Corporation, the private respondent Wearever Textile
Mills, Inc., discounted and assigned several receivables with the former under a
Receivable Purchase Agreement. To secure the collection of the receivables assigned,
private respondent executed a Chattel Mortgage over certain raw materials inventory
as well as a machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial
foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to
implement the foreclosure failed to gain entry into private respondent's premises and
was not able to effect the seizure of the aforedescribed machinery. Petitioner
thereafter filed a complaint for judicial foreclosure with the Court of First Instance of
Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower
court. LexLib
Acting on petitioner's application for replevin, the lower court issued a writ of
seizure, the enforcement of which was however subsequently restrained upon private
respondent's filing of a motion for reconsideration. After several incidents, the lower
court finally issued on February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the premises of private
respondent to enforce said writ. The lower court reaffirmed its stand upon private
respondent's filing of a further motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by
herein private respondent, set aside the Orders of the lower court and ordered the
return of the drive motor seized by the sheriff pursuant to said Orders, after ruling
that the machinery in suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the new Civil Code,
the same being attached to the ground by means of bolts and the only way to remove
it from respondent's plant would be to drill out or destroy the concrete floor, the
reason why all that the sheriff could do to enforce the writ was to take the main drive
motor of said machinery. The appellate court rejected petitioner's argument that
private respondent is estopped from claiming that the machine is real property by
constituting a chattel mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been
denied, petitioner has brought the case to this Court for review by writ of certiorari. It
is contended by private respondent, however, that the instant petition was rendered
moot and academic by petitioner's act of returning the subject motor drive of
respondent's machinery after the Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself' unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown
by the receipt duly signed by respondent's representative. 1 Considering that
petitioner has reserved its right to question the propriety of the Court of Appeals'
decision, the contention of private respondent that this petition has been mooted by
such return may not be sustained.
The next and the more crucial question to be resolved in this petition is whether the
machinery in suit is real or personal property from the point of view of the parties,
with petitioner arguing that it is a personalty, while the respondent claiming the
contrary, and was sustained by the appellate court, which accordingly held that the
chattel mortgage constituted thereon is null and void, as contended by said
respondent. LLpr
A similar, if not identical issue was raised in Tumalad v. Vicencio, 41 SCRA
143 where this Court, speaking through Justice J.B.L. Reyes, ruled:
"Although there is no specific statement referring to the subject
house as personal property, yet by ceding, selling or transferring
a property by way of chattel mortgage defendants-appellants
could only have meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they should not now be
allowed to make an inconsistent stand by claiming otherwise.
Moreover, the subject house stood on a rented lot to which
defendants-appellants merely had a temporary right as lessee, and
although this can not in itself alone determine the status of the
property, it does so when combined with other factors to sustain
the interpretation that the parties, particularly the mortgagors,
intended to treat the house as Personalty. Finally, unlike in the
Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung
Yee vs. F.L. Strong Machinery & Williamson, wherein third
persons assailed the validity of the chattel mortgage, it is the
defendants-appellants themselves, as debtors mortgagors, who
are attacking the validity of the chattel mortgage in this case. The
doctrine of estoppel therefore applies to the herein defendants
appellants, having treated the subject house as personalty."

Examining the records of the instant case, We find no logical justification to exclude
the rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved
in the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because one
who has so agreed is estopped from denying the existence of the chattel mortgage.

Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case
to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are
hereby reversed and set aside, and the Orders of the lower court are hereby reinstated,
with costs against the private respondent.
SO ORDERED.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the

Court of Appeals lays stress on the fact that the house involved therein was built on a
land that did not belong to the owner of such house. But the law makes no distinction
with respect to the ownership of the land on which the house is built and We should
not lay down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by
the private respondent is indicative of intention and impresses upon the property the
character determined by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as
long as no interest of third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property
but was merely required and dictated on by herein petitioner to sign a printed form of
chattel mortgage which was in a blank form at the time of signing. This contention
lacks persuasiveness. As aptly pointed out by petitioner and not denied by the
respondent, the status of the subject machinery as movable or immovable was never
placed in issue before the lower court and the Court of Appeals except in a
supplemental memorandum in support of the petition filed in the appellate court.
Moreover, even granting that the charge is true, such fact alone does not render a
contract void ab initio, but can only be a ground for rendering said contract voidable,
or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in
court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as
pointed out by petitioner and again not refuted by respondent, the latter has
indubitably benefited from said contract. Equity dictates that one should not benefit at
the expense of another. Private respondent could not now therefore, be allowed to
impugn the efficacy of the chattel mortgage after it has benefited therefrom. LexLib

FIRST DIVISION
[G.R. No. L-13194. January 29, 1960.]
BUENAVENTURA T. SALDAA, plaintiffappellant, vs. PHILIPPINE GUARANTY COMPANY, INC.,
et al., defendants-appellees.
Gatchalin & Padilla for appellant.
Emiliano Tabasondra for appellee Company.

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

Teodoro Padilla for the other appellees.

SYLLABUS

1.CHATTEL MORTGAGES GENERAL DESCRIPTION OF

PROPERTY VALID. Section 7 of Act No. 1508, commonly known as the
Chattel Mortgage Law, does not demand a minute and specific description of
every chattel mortgaged in the deed of mortgage but only requires that the
description of the properties be such "as to enable the parties in the mortgage, or
any other person, after reasonable inquiry and investigation to identity the same".
Gauged by this standard general descriptions have been held valid.
2.ID.; ID.; LIMITATION IN SECTION 7 OF THE CHATTEL
MORTGAGE LAW. The limitation found in the last paragraph of section 7 of
the Chattel Mortgage Law on "like or substituted properties" makes reference to
those ''thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged," not to those already existing and originally
included at the date of the constitution of the chattel mortgage. A contrary view
would unduly impose a more rigid condition than what the law prescribes which
is that the description be only such as to enable identification after a reasonable
inquiry and investigation.

DECISION

REYES, J. B. L., J p:
This case arose from a complaint for damages filed by Buenaventura
Saldaa (docketed as Civil Case No. 32703 of the Court of First Instance of
Manila) that was dismissed by order of the Court dated August 20, 1957, for lack
of sufficient cause of action. In another order of September 30, 1957 of the same
court, plaintiff's motion for reconsideration was denied, and the case was
appealed to this Court.
The facts are that on May 8, 1953, in order to secure an indebtedness of
P15,000.00, Josefina Vda. de Eleazar executed in favor of the plaintiff-appellant
Buenaventura Saldaa a chattel mortgage covering properties described as
follows:
"A building of strong materials, used for restaurant business,
located in front of the San Juan de Dios Hospital at Dewey
Boulevard, Pasay City, and the following personal properties
therein contained:

1Electric range, stateside, 4 burners

1Frigidaire, 8 cubic feet
1G.E. Deepfreezer
8Tables, stateside
32Chromium chairs, stateside
1Sala set upholstered, 6 pieces
1Bedroom set, 6 pieces.
And all other furnitures, fixtures or equipment found in the said
premises."
Subsequent to the execution of said mortgage and while the same was
still in force, the defendant Hospital de San Juan de Dios, Inc. obtained, in Civil
Case No. 1930 of the Municipal Court of Pasay City, a judgment against Josefina
Vda. de Eleazar. A writ of execution was duly issued and, on January 28, 1957,
the same was served on the judgment debtor by the sheriff of Pasay City;
whereupon, the following properties of Josefina Eleazar were levied upon:
8Tables with 4 (upholstered) chairs each
1Table with 4 (wooden) chairs
1Table (large) with 5 chairs
1Radio-phono (Zenith, 8 tubes)
2Showcases (big, with mirrors)
1Rattan sala set with 4 chairs, 1 table and 3 sidetables
1Wooden drawer
1Tocador (brown with mirror)

1Radio, Zenith, cabinet type

1Aparador

1Cooler

2Beds (single type)

1Freezer (deep freeze)

1Gas range (magic chef, with 4 burners)
1Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldaa filed a third-party
claim asserting that the above-described properties levied are subject to his
chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only some
of the property originally included in the levy of January 28, 1957, to wit:
1Radio, Zenith, cabinet type
8Tables, stateside
32Chromium chairs, stateside
1G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties still under levy,
the defendants-appellees Hospital de San Juan de Dios, Inc. and the Philippine
Guaranty Co., Inc. executed an indemnity bond to answer for any damages that
plaintiff might suffer. Accordingly, on February 13, 1957, the said properties
were sold to the defendant hospital as the highest bidder, for P1,500.00.
Appellant claims that the phrase in the chattel mortgage contract
"and all other furnitures, fixtures and equipment found in the said premises",
validly and sufficiently covered within its terms the personal properties disposed
of in the auction sale, as to warrant an action for damages by the plaintiff
mortgagee.
There is merit in appellant's contention. Section 7 of Act No. 1508,
commonly and better known as the Chattel Mortgage Law, does not demand a
minute and specific description of every chattel mortgaged in the deed of
mortgage but only requires that the description of the properties be such "as to
enable the parties in the mortgage, or any other person, after reasonable inquiry
and investigation to identify the same." Gauged by this standard, general
descriptions have been held valid by this Court. (SeeStrochecker vs. Ramirez, 44
Phil., 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).
A similar rule obtains in the United States courts and decisions there
have repeatedly upheld clauses of general import in mortgages of chattels other
than goods for trade, and containing expressions similar to that of the contract
now before us. Thus, "and all other stones belonging to me and all other goods
and chattels" (Russel vs.Winne, 97 Am. Dec. 755); "all of the property of the

said W.W. Allen used or situated upon the leased premises" (Dorman vs. Crooks
State Bank, 64 A.L.R. 614); "all goods in the store where they are doing business
in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods,
wares, stock, iron tools manufactured articles and property of every description,
being situated in or about the shop or building now occupied by me in Howley
Street" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. 368, were held sufficient
description, on the theory that parol evidence could supplement it to render
identification of the chattels mortgaged possible. The prevailing rule is expressed
in Walker vs. Johnson (Mont.) 124 A.L.R. 937:
"The courts and textbook writers have developed several rules for
determination of the sufficiency of the description in a chattel
mortgage. The rules are general in nature and are different where
the controversy is between the parties to the mortgage from the
situation where third parties without actual notice come in. In 11
C.J. 457, it is said: 'As against third persons the description in the
mortgage must point out its subject matter so that such person
may identify the chattels covered, but it is not essential that the
description be so specific that the property may be identified by it
alone, if such description or means of identification which, if
pursued will disclose the property conveyed.' In 5 R.C.L. 423 the
rule is stated that a description which will enable a third person,
aided by inquiries which the instrument itself suggests to identify
the property is sufficiently definite.' In 1 Jones on Chattel
Mortgages and Conditional Sales, Bower's Edition, at page 95 the
writer says: 'As to them (third persons), the description is
sufficient if it points to evidence whereby the precise thing
mortgaged may be ascertained with certainty.' Here there is
nothing in the description '873 head of sheep' from which
anyone, the mortgagee or third persons, could ascertain with any
certainty what chattels were covered by the mortgage.
"In many instances the courts have held the description good
where, though otherwise faulty, the mortgage explicitly states
that the property is in the possession of the mortgagor, and
especially where it is the only property of that kind owned by
him."
The specifications in the chattel mortgage contract in the instant case
are, we believe, in substantial compliance with the "reasonable description
rule" fixed by the chattel Mortgage Act. We may notice in the agreement,
moreover, that the phrase in question is found after an enumeration of other
specific articles. It can thus be reasonably inferred therefrom that the "furnitures,
fixtures and equipment" referred to are properties of like nature, similarly
situated or similarly used in the restaurant of the mortgagor located in front of
the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, which articles
can be definitely pointed out or ascertained by simple inquiry at or about the

premises. Note that the limitation found in the last paragraph of section 7 of the
Chattel Mortgage Law 1 on "like or substituted properties" make reference to
those "thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged", not to those already existing and originally
included at the date of the constitution of the chattel mortgage. A contrary view
would unduly impose a more rigid condition than what the law prescribes, which
is that the description be only such as to enable identification after a reasonable
inquiry and investigation.
The case of Giberson vs. A. N. Jureidini Bros., 44 Phil., 216, 219, cited
by the appellees and the lower court, cannot be likened to the case at bar, for
there, what were sought to be mortgaged included two stores with all its
merchandise, effects, wares, and other bazar goods which were being constantly
disposed of and replaced with new supplies in connection with the business,
thereby making any particular or definite identification either impractical or
impossible under the circumstances. Here, the properties deemed covered were
more or less fixed, or at least permanently situate or used in the premises of the
mortgagor's restaurant.
The rule in the Jureidini case is further weakened by the Court's
observation that (44 Phil., p. 220)
"Moreover, if there should exist any doubts on the questions we
have just discussed, they should be threshed out in the insolvency
proceedings,"

which appears inconsistent with the definitive character of the rulings invoked.
We find that the ground for the appealed order (lack of cause of action)
does not appear so indubitable as to warrant a dismissal of the action without
inquiry into the merits and without submission of evidence, since the latter may
supplement the description in the deed of mortgage (Nico vs. Blanco, 81 Phil.,
213; Zobel vs. Abreau, 52 Off. Gaz., 3592).
Wherefore, the orders appealed from are set aside and the case
remanded to the lower court for further proceedings. Costs against appellees.
Pars, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador,
Concepcin, Endencia, Barrera and Gutirrez David, JJ., concur.

FIRST DIVISION
[G.R. No. 103576. August 22, 1996.]
ACME SHOE, RUBBER & PLASTIC CORPORATION and
CHUA PAC, petitioners, vs. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES and
REGIONAL SHERIFF OF CALOOCAN CITY, respondents.
Sotto & Sotto Law Offices for petitioners.
R. C. Domingo, Jr., & Associates for Producers Bank of the Philippines.
SYLLABUS
1.REMEDIAL LAW; ACTIONS; APPEALS; APPEAL FROM JUDGMENT OF
LOWER COURTS, NOT A MATTER OF RIGHT BUT OF SOUND JUDICIAL
DISCRETION. Except in criminal cases where the penalty of reclusion
perpetua or death is imposed which the Court so reviews as a matter of course, an
appeal from judgments of lower courts is not a matter of right but of sound judicial
discretion. The circulars of the Court prescribing technical and other procedural
requirements are meant to weed out unmeritorious petitions that can unnecessarily
clog the docket and needlessly consume the time of the Court. These technical and
procedural rules, however, are intended to help secure, not suppress, substantial
justice. A deviation from the rigid enforcement of the rules may thus be allowed to
attain the prime objective for, after all, the dispensation of justice is the core reason
for the existence of courts.
2.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF
SECURITY, CONSTRUED. Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a suretyship, the faithful
performance of the obligation by the principal debtor is secured by
the personal commitment of another (the guarantor or surety). In contracts of real
security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by
an encumbrance of property in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real estate mortgage, by the
execution of a public instrument encumbering the real property covered thereby; and
in antichresis, by a written instrument granting to the creditor the right to receive the
fruits of an immovable property with the obligation to apply such fruits to the
payment of interest, if owing, and thereafter to the principal of his credit upon the
essential condition that if the principal obligation becomes due and the debtor
defaults, then the property encumbered can be alienated for the payment of the

obligation, but that should the obligation be duly paid, then the contract is
automatically extinguished proceeding from the accessory character of the
agreement. As the law so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and void.
3.ID.; ID.; CONTRACTS OF SECURITY; CHATTEL MORTGAGE; COVERS
OBLIGATION EXISTING AT TIME MORTGAGE IS CONSTITUTED; EFFECT
OF PROMISE TO INCLUDE DEBTS THAT ARE TO BE CONTRACTED.
While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that
are yet to be contracted can be a binding commitment that can be compelled upon,
the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by
concluding a fresh chattel mortgage or by amending the old contract conformably
with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the
borrower to execute the agreement so as to cover the after-incurred obligation can
constitute an act of default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of foreclosure can only
cover the debts extant at the time of constitution and during the life of the chattel
mortgage sought to be foreclosed. In the chattel mortgage here involved, the only
obligation specified in the chattel mortgage contract was the P3,000,000.00 loan
which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel
Mortgage Law, the payment of the obligation automatically rendered the chattel
mortgage void or terminated. (Belgian Catholic Missionaries, Inc., vs. Magallanes
Press, Inc., et al.) The significance of the ruling to the instant problem would be that
since the 1978 chattel mortgage had ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that
could cover the new loans that were concluded thereafter.
4.ID.; CHATTEL MORTGAGE LAW; EXECUTION OF AFFIDAVIT OF GOOD
FAITH, A CLEAR MANIFESTATION THAT DEBT REFERRED TO IS
CURRENT. A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage Law itself. One of the
requisites, under Section 5 thereof, is an affidavit of good faith. While it is not
doubted that if such an affidavit is not appended to the agreement, the chattel
mortgage would still be valid between the parties (not against third persons acting in
good faith), the fact, however, that the statute has provided that the parties to the
contract must execute an oath makes it obvious that the debt referred to in the law is a
current, not an obligation that is yet merely contemplated.
5.ID.; DAMAGES; MORAL DAMAGES; NOT RECOVERABLE BY A
JURIDICAL PERSON. We find no merit in petitioner corporation's other prayer
that the case should be remanded to the trial court for a specific finding on the
amount of damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." This prayer is not reflected in its complaint which has

merely asked for the amount of P3,000,000.00 by way of moral damages. In LBC
Express, Inc. vs. Court of Appeals, we have said: "Moral damages are granted in
recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. A corporation, being an artificial person and having existence only in
legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot
experience physical suffering and mental anguish. Mental suffering can be
experienced only be one having a nervous system and it flows from real ills, sorrows,
and griefs of life all of which cannot be suffered by respondent bank as an
artificial person." While Chua Pac is included in the case, the complaint, however,
clearly states that he has merely been so named as a party in representation of
petitioner corporation.
6.LEGAL ETHICS; ATTORNEYS; SHOULD BE CIRCUMSPECT IN DEALING
WITH COURTS. Petitioner corporation's counsel could be commended for his
zeal in pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private respondent's
comment on the petition his so-called "One Final Word;" viz: "In simply quoting in
toto the patently erroneous decision of the trial court, respondent Court of Appeals
should be required to justify its decision which completely disregarded the basic laws
on obligations and contracts, as well as the clear provisions of the Chattel Mortgage
Law and well-settled jurisprudence of this Honorable Court; that in the event that its
explanation is wholly unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in ridding our courts of law
of incompetent and dishonest magistrates especially members of a superior court of
appellate jurisdiction. The statement is not called for. The Court invites counsel's
attention to the admonition in Guerrero vs. Villamor; thus: "(L)awyers . . . should
bear in mind their basic duty 'to observe and maintain the respect due to the courts of
justice and judical officers and . . . (to) insist on similar conduct by others.' This
respectful attitude towards the court is to be observed, 'not for the sake of the
temporary incumbent of the judical office, but for the maintenance of its supreme
importance.' And it is 'through a scrupulous preference for respectful language that a
lawyer best demonstrates his observance of the respect due to the courts and judicial
officers . . .'" The virtues of humility and of respect and concern for others must still
live on even in an age of materialism. Atty. Francisco R. Sotto, counsel for
petitioners, is admonished to be circumspect in dealing with the courts.

DECISION

VITUG, J p:

Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? This
question is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the
company, a chattel mortgage in favor of private respondent Producers Bank of the
Philippines. The mortgage stood by way of security for petitioner's corporate loan of
three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement
was to this effect
"(c)If the MORTGAGOR, his heirs, executors or administrators
shall well and truly perform the full obligation or obligations
above-stated according to the terms thereof, then this mortgage
shall be null and void. . . .
"In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit, acceptances
and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the
payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect as
if the said promissory note or notes and/or accommodations were
existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of
the MORTGAGOR to the MORTGAGEE of whatever kind and
nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage." 1

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

Subsequently, in 1981, it obtained from respondent bank additional financial
accommodations totalling P2,700,000.00. 2 These borrowings were on due date also
fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a
loan of one million pesos (P1,000,000.00) covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was not settled at
maturity. 3 Respondent bank thereupon applied for an extrajudicial foreclosure of the
chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a
prayer for a writ of preliminary injunction, before the Regional Trial Court of

Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the
complaint and ordered the foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,
affirmed, "in all respects," the decision of the court a quo. The motion for
reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04
March 1992 by this Court for having been insufficient in form and substance. Private
respondent filed a motion to dismiss the petition while petitioner corporation filed a
compliance and an opposition to private respondent's motion to dismiss. The Court
denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to
comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is
imposed 6 which the Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of sound judicial discretion. The
circulars of the Court prescribing technical and other procedural requirements are
meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress, substantial justice. A deviation
from the rigid enforcement of the rules may thus be allowed to attain the prime
objective for, after all, the dispensation of justice is the core reason for the existence
of courts. In this instance, once again, the Court is constrained to relax the rules in
order to give way to and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security,
such as a guaranty or a suretyship, the faithful performance of the obligation by the
principal debtor is secured by the personal commitment of another (the guarantor or
surety). In contracts of real security, such as a pledge, a mortgage or an antichresis,
that fulfillment is secured by an encumbrance of property in pledge, the placing of
movable property in the possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in
real estate mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable property with the obligation to
apply such fruits to the payment of interest, if owing, and thereafter to the principal of
his credit upon the essential condition that if the principal obligation becomes due
and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation, 7 but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the accessory character 8 of
the agreement. As the law so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and void. 9

While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, 10 a
chattel mortgage, however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel Mortgage
Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover
the after-incurred obligation can constitute an act of default on the part of the
borrower of the financing agreement whereon the promise is written but, of course,
the remedy of foreclosure can only cover the debts extant at the time of constitution
and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the
form prescribed by the Chattel Mortgage Law itself. One of the requisites,
under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if
such an affidavit is not appended to the agreement, the chattel mortgage would still
be valid between the parties (not against third persons acting in good faith 12 ), the
fact, however, that the statute has provided that the parties to the contract must
execute an oath that
". . . (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one
not entered into for the purpose of fraud." 13
makes it obvious that the debt referred to in the law is a current, not an obligation
that is yet merely contemplated. In the chattel mortgage here involved, the only
obligation specified in the chattel mortgage contract was the P3,000,000.00 loan
which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel
Mortgage Law, the payment of the obligation automatically rendered the chattel
mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs.
Magallanes Press, Inc., et al.,14 the Court said
". . . A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date the
same are made and not from the date of the mortgage." 15
The significance of the ruling to the instant problem would be that since the 1978
chattel mortgage had ceased to exist coincidentally with the full payment of the
P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the
new loans that were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a specific finding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against
it." 17 This prayer is not reflected in its complaint which has merely asked for
the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc.
vs. Court of Appeals, 19 we have said:
"Moral damages are granted in recompense for physical
suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation,
and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life all of which cannot
be suffered by respondent bank as an artificial person." 20
While Chua Pac is included in the case, the complaint, however, clearly states
that he has merely been so named as a party in representation of petitioner
corporation.

sake of the temporary incumbent of the judicial office, but for the
maintenance of its supreme importance.' And it is 'through a
scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts and
judicial officers . . ..'" 23

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

Petitioner corporation's counsel could be commended for his zeal in pursuing his
client's cause. It instead turned out to be, however, a source of disappointment for this
Court to read in petitioner's reply to private respondent's comment on the petition his
so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the
trial court, respondent Court of Appeals should be required to
justify its decision which completely disregarded the basic laws
on obligations and contracts, as well as the clear provisions of the
Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction." 21 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the
admonition in Guerrero vs. Villamor; 22 thus:
"(L)awyers . . . should bear in mind their basic duty 'to observe
and maintain the respect due to the courts of justice and judicial
officers and . . . (to) insist on similar conduct by others.' This
respectful attitude towards the court is to be observed, 'not for the

EN BANC
[G.R. No. 34385. September 21, 1931.]
ALEJANDRA TORRES ET AL., plaintiffs-appellees, vs.
FRANCISCO LIMJAP, Special Administrator of the estate
of the deceased Jose B. Henson,defendant-appellant.
[G.R. No. 34386. September 21, 1931.]
SABINA VERGARA VDA, DE TORRES ET AL., plaintiffsappellees, vs. FRANCISCO LIMJAP, Special Administrator
of the estate of the deceased Jose B. Henson, defendantappellant.

Duran, Lim & Tuason, for appellant.

Guevara, Francisco & Recto, for appellees.
SYLLABUS
1.CHATTEL MORTGAGE; PROPERTY COVERED THEREBY;
AFTER-ACQUIRED PROPERTY. A stipulation in the chattel mortgage,
extending its scope and effect to after-acquired property, is valid and binding
where the after- acquired property is in renewal of, or in substitution for, goods
on hand when the mortgage was executed, or is purchased with the proceeds of
the sale of such goods. (11 C. J., p. 436.) A mortgage may, by express
stipulations, be drawn to cover goods to be added to the original stock
mortgaged, but the mortgage must expressly provide that such future acquisitions
shall be held as included in the mortgage. Where a mortgage covering the stock
in trade, furniture, and fixtures in the mortgagor's store provides that "all goods,
stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall
be included in and covered by the mortgage," the mortgage covers all afteracquired property of the classes mentioned, and, upon foreclosure, such property
may be taken and sold by the mortgagee the same as the property may be taken
and sold by the mortgagee the same as the property in possession of the
mortgagor at the time the mortgage was executed. (Vol. I, Cobbey on Chattel
Mortgages, sec. 361, pp. 474, 475.)

DECISION

JOHNSON, J p:
These two actions were commenced in the Court of First Instance of
Manila on April 16, 1930, for the purpose of securing from the defendant the
possession of two drug stores located in the City of Manila, covered by two
chattel mortgages executed by the deceased Jose B. Henson in favor of the
plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his
lifetime, executed in their favor a chattel mortgage (Exhibit A) on his drug store
at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of
P7,000, although it was made to appear in the instrument that the loan was for
P20,000.

In the second case the plaintiffs alleged that they were the heirs of the
late Don Florentino Torres; and that Jose B. Henson, in his lifetime, executed in
favor of Don Florentino Torres a chattel mortgage (also Exhibit A) on his three
drug stores known as Henson's Pharmacy, Farmacia Henson and Botica
Hensonina, to secure a loan of P50,000, which was later reduced to P26,000, and
for which, Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only
security by agreement of the parties.
In both cases the plaintiffs alleged that the defendant violated the terms
of the mortgage and that, in consequence thereof they became entitled to the
possession of the chattels and to foreclose their mortgages thereon. Upon the
petition of the plaintiffs and after the filing of the necessary bonds, the court
issued in each case an order directing the sheriff of the City of Manila to take
immediate possession of said drug stores.
The defendant filed practically the same answer to both complaints. He
denied generally and specifically the plaintiffs' allegations, and set up the
following special defenses:
(1)That the chattel mortgages (Exhibit A, in G. R. No. 34385 and
Exhibit A, in G. R. No. 34386) are null and void for the lack of sufficient
particularly in the description of the property mortgaged; and
(2)That the chattels which the plaintiffs sought to recover were not the
same property described in the mortgage.
The defendant also filed a counterclaim for damages in the sum of
P20,000 in the first case and P100,000 in the second case.
Upon the issue thus raised by the pleadings, the two causes were tried
together by agreement of the parties. After hearing the evidence adduced during
the trial and on July 17, 1930, the Honorable Mariano Albert, judge, in a very
carefully prepared opinion, arrived at the conclusion (a) that the defendant
defaulted in the payment of interest on the loans secured by the mortgages, in
violation of the terms thereof; (b) that by reason of said failure said mortgages
became due, and (c) that the plaintiffs, as mortgagees, were entitled to the
possession of the drug stores Farmacia Henson at Nos. 101-103 Calle Rosario
and Henson's Pharmacy at Nos. 71-73 Escolta. Accordingly, a judgment was
rendered in favor of the plaintiffs and against the defendant, confirming the
attachment of said drug stores by the sheriff of the City of Manila and the
delivery thereof to the plaintiffs. The dispositive part of the decision reads as
follows:
"En virtud de todo lo expuesto, el Juzgado dicta
sentencia confirmando en todas sus partes las ordenes de fechas
16 y 17 de abril del presente ao, dictadas en las causas Nos.

37096 y 37097, respectivamente, y declara definitiva la entrega

hecha a los demandantes por el Sheriff de Manila de las boticas
en cuestion. Se condena en costas al demandado en ambas
causas."
From the judgment the defendant appealed, and now makes the
following assignments of error:
"I.The lower court erred in failing to make a finding on
the question of the sufficiency of the description of the chattels
mortgaged and in failing to hold that the chattel mortgages were
null and void for lack of particularly in the description of the
chattels mortgaged.
"II.The lower court erred in refusing to allow the
defendant to introduce evidence tending to show that the stock of
merchandise found in the two drug stores was not in existence or
owned by the mortgagor at the time of the execution of the
mortgages in question.
"III.The lower court erred in holding that the
administrator of the deceased is now estopped from contesting
the validity of the mortgages in question.
"IV.The lower court erred in failing to make a finding
on the counterclaims of the defendant."
With reference to the first assignment of error, we deem it unnecessary
to discuss the question therein raised, inasmuch as according to our view on the
question of estoppel, as we shall hereinafter set forth in our discussion of the
third assignment of error, the defendant is estopped from questioning the validity
of these chattel mortgages.
In his second assignment of error the appellant attacks the validity of
the stipulation in said mortgages authorizing the mortgagor to sell the goods
covered thereby and to replace them with other goods thereafter acquired. He
insists that a stipulation authorizing the disposal and substitution of the chattels
mortgaged does not operate to extend the mortgage to after-acquired property,
and that such stipulation is in contravention of the express provision of the last
paragraph of section 7 of Act No. 1508, which reads as follows:
"A chattel mortgage shall be deemed to cover only the
property described therein and not like or substituted property
thereafter acquired by the mortgagor and placed in the same
depository as the property originally mortgaged, anything in the
mortgage to the contrary notwithstanding."

In order to give a correct construction to the above-quoted provision of

our Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must
first be ascertained. When said Act was placed on our statute books by the
United States Philippine Commission on July 2, 1906, the primary aim of that
law-making body was undoubtedly to promote business and trade in these
Islands and to give impetus to the economic development of the country. Bearing
this in mind, it could not have been the intention of the Philippine Commission
to apply the provision of section 7 above quoted to stores open to the public for
retail business, where the goods are constantly sold and substituted with new
stock, such as drug stores, grocery stores, dry- goods stores, etc. If said provision
were intended to apply to this class of business, it would be practically
impossible to constitute a mortgage on such stores without closing them,
contrary to the very spirit and purpose of said Act, Such a construction would
bring about a handicap to trade and business, would restrain the circulation of
capital, and would defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.
In the interpretation and construction of a statute the intent of the lawmaker should always be ascertained and given effect, and courts will not follow
the letter of a statute when it leads away from the true intent and purpose of the
Legislature and to conclusions inconsistent with the spirit of the Act. On this
subject, Sutherland, the foremost authority on statutory construction, says:
"The Intent of a Statute is the Law. If a statute is
valid it is to have effect according to the purpose and intent of the
lawmaker. The intent is the vital part, the essence of the law, and
the primary rule of construction is to ascertain and give effect to
that intent. The intention of the legislature in enacting a law is the
law itself, and must be enforced when ascertained, although it
may not be consistent with the strict letter of the statute. Courts
will not follow the letter of the statute. Courts will not follow the
letter of a statute when it leads away from the true intent and
purpose of the legislature and to conclusions inconsistent with
the general purpose of the act. Intent is the spirit which gives life
to a legislative enactment. In construing statutes the proper
course is to start out and follow the true intent of the legislature
and to adopt that sense which harmonized best with the context
and promotes in the fullest manner the apparent policy and
objects of the legislature." (Vol. II Sutherland, Statutory
Construction, pp. 693-695.)

A stipulation in the mortgage, extending its scope and effect to afteracquired property, is valid and binding

". . . where the after-acquired property is in renewal of,

or in substitution for, goods on hand when the mortgage was
executed, or is purchased with the proceeds of the sale of such
goods, etc." (11 C. J., p. 436.)
Cobbey, a well-known authority on Chattel Mortgages, recognizes the
validity of stipulations relating to after-acquired and substituted chattels. His
views are based on the decisions of the supreme courts of several states of the
Union. He says:

court decided both cases in favor of the plaintiffs and confirmed and ratified the
orders directing the sheriff to take possession of the chattels on behalf of the
plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims.
For all of the foregoing, we are of the opinion and so hold that the
judgment appealed from is in accordance with the facts and the law, and the
same should be and is hereby affirmed, with costs. So ordered.

"A mortgage may, by express stipulations, be drawn to

cover goods put in stock in place of others sold out from time to
time. A mortgage may be made to include future acquisitions of
goods to be added to the original stock mortgaged, but the
mortgage must expressly provide that such future acquisitions
shall be held as included in the mortgage. . . . Where a mortgage
covering the stock in trade, furniture, and fixtures in the
mortgagor's store provides that 'all goods, stock in trade,
furniture, and fixtures hereafter purchased by the mortgagor shall
be included in and covered by the mortgage,' the mortgage covers
all after-acquired property of the classes mentioned, and, upon
foreclosure, such property may be taken and sold by the
mortgagee the same as the property in possession of the
mortgagor at the time the mortgage was executed." (Vol. I,
Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.)
In harmony with the foregoing, we are of the opinion (a) that the
provision of the last paragraph of section 7 of Act No. 1508 is not applicable to
drug stores, bazars and all other stores in the nature of a revolving and floating
business; (b) that the stipulation in the chattel mortgages in question, extending
their effect to after- acquired property, is valid and binding; and (c) that the
lower court committed no error in not permitting the defendant-appellant to
introduce evidence tending to show that the goods seized by the sheriff were in
the nature of after-acquired property.
With reference to the third assignment of error, we agree with the lower
court that, from the facts of record, the defendant-appellant is estopped from
contesting the validity of the mortgages in question. This feature of the case has
been very ably and fully discussed by the lower court in its decision, and said
discussion is made, by reference, a part of this opinion.
As to the fourth assignment of error regarding the counterclaims of the
defendant-appellant, it may be said that in view of the conclusions reached by the
lower court, which are sustained by this court, the lower court committed no
error in not making any express finding as to said counterclaims. As a matter of
form, however, the counterclaims should have been dismissed, but as the trial

SECOND DIVISION
[G.R. No. L-48359. March 30, 1993.]

MANOLO P. CERNA, petitioner, vs. THE HONORABLE

COURT OF APPEALS and CONRAD C.
LEVISTE, respondents.
Zosa & Quijano Law Offices for petitioner.

2085 of the Civil Code which states that: "Art. 2085. The following requisites are
essential to the contracts of pledge and mortgage: (3) That the persons constituting
the pledge or mortgage have the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose." In effect, petitioner lent his
car to Delgado so that the latter may mortgage the same to secure his debt. Thus,
from the contract itself, it was clear that only Delgado was the mortgagor regardless
of the fact the he used properties belonging to a third person to secure his debt.

Benjamin H. Aquino for private respondent.

SYLLABUS
1.CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY LIABILITY, NOT
PRESUMED. Only Delgado signed the promissory note and accordingly, he was
the only one bound by the contract of loan. Nowhere did it appear in the promissory
note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only
between the parties . . ." But by some stretch of the imagination, petitioner was held
solidarily liable for the debt allegedly because he was a co-mortgagor of the principal
debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity." The contract of loan, as evidenced by the promissory
note, was signed by Delgado only. Petitioner had no part in the said contract. Thus,
nowhere could it be seen from the agreement that petitioner was solidarily bound
with Delgado for the payment of the loan.
2.ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF LOAN,
PRIMARILY LIABLE; THIRD-PARTY MORTGAGOR NOT SOLIDARILY
BOUND WITH THE PRINCIPAL DEBTOR. There is no legal provision nor
jurisprudence in our jurisdiction which makes a third person who secures the
fulfillment of another's obligation by mortgaging his own property to be solidarily
bound with the principal obligor. A chattel mortgage may be "an accessory contract"
to a contract of loan, but that fact alone does not make a third-party mortgagor
solidarily bound with the principal debtor in fulfilling the principal obligation that is,
to pay the loan. The signatory to the principal contract loan remains to be
primarily bound. It is only upon the default of the latter that the creditor may have
been recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an
action for the recovery of the amount of the loan. And the liability of the third-party
mortgagors extends only to the property mortgaged. Should there be any deficiency,
the creditors has recourse on the principal debtor.

4.REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION SUIT

BARRED THE FORECLOSURE OF MORTGAGE. We agree with petitioner
that the filing of collection suit barred the foreclosure of the mortgage. Thus: "A
mortgage who files a suit for collection abandons the remedy of foreclosure of the
chattel mortgage constituted over the personal property as security for the debt or
value of the promissory note which he seeks to recover in the said collection suit."
The reason for this rule is that: ". . . when, however, the mortgage elects to file a suit
for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he
clearly manifest his lack of desire and interest to go after the mortgaged property as
security for the promissory note . . ."
5.ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS GIVEN TO
CREDITORS UNDER SEC. 7, RULE 86, NEW RULES OF COURT. Leviste,
having chosen to file the collection suit, could not now run after petitioner for the
satisfaction of the debt. This is even more true in this case because of the death of the
principal debtor, Delgado. Leviste was pursuing a money claim against a deceased
person. Section 7, Rule 86 of the Rules of Court provides: "Sec. 7. Mortgage debt due
from estate. A creditor holding a claim against the deceased secured by mortgaged
or other collateral security, may abandon the security and prosecute his claim in the
manner provided in this rule, and share in the general distribution of the assets of the
estate; or he may foreclose his mortgage or realize upon his security, by action in
court, making the executor or administrator a party defendant, and if there is a
judgment for a deficiency, after the sale of the mortgaged premises, or the property
pledged, in the foreclosure or the other proceeding to realize upon security, he may
claim his deficiency judgment in the manner provided in the preceding section; or he
may upon his mortgage or other security alone, and foreclosure the same at any time
within the period of the statue of limitations, and in that event he shall not be
admitted as a creditor, and shall receive no share in the distribution of the other assets
of the estate; . . ."

DECISION
3.ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY AUTHORIZING THE
MORTGAGE OF CERTAIN PROPERTIES DID NOT MAKE THE ATTORNEYIN-FACT A MORTGAGOR. The mortgage contract was also signed only by
Delgado as mortgagor. The Special Power of Attorney did not make petitioner a
mortgagor. All it did was to authorized Delgado to mortgage certain properties
belonging to petitioner. And this is in compliance with the requirement in Article

CAMPOS, JR., J p:

Before us is a Petition for Review on Certiorari of the decision ** of the Court of

Appeals in CA G.R. No. SP-07237, dated March 31, 1978.
The facts of this case are as follows:
On or about October 16, 1972, Celerino Delgado (Delgado) and Conrad Leviste
(Leviste) entered into a loan agreement which was evidenced by a promissory note
worded as follows:
"FOR VALUE RECEIVED, I, CELERINO DELGADO, with
postal address at 98 K-11 St., Kamias Rd., Quezon City, promise
to pay to the order of CONRAD C. LEVISTE, NINETY (90)
DAYS after date, at his office at 215 Buendia Ave., Makati
Rizal, then total sum of SEVENTEEN THOUSAND FIVE
HUNDRED (P17,500.00) PESOS, Philippine Currency without
necessity of demand, with interest at the rate of TWELVE (12%)
PERCENT per annum;" 1
On the same date, Delgado executed a chattel mortgage 2 over a Willy's jeep owned
by him. And acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna
(petitioner), he also mortgage a "Taunus' car owned by the latter.
The period lapsed without Delgado paying the loan. This prompted Leviste to a file a
collection suit docketed as Civil Case No. 17507 3 with the Court of First Instance of
Rizal, Branch XXII against Delgado and petitioner as solidary debtors. Herein
petitioner filed his first Motion to Dismiss 4 on April 4, 1973. The grounds cited in
the Motion were lank of cause of action against petitioner and the death of Delgado.
Anent the latter, petitioner claimed that the claim should be filed in the proceedings
for the settlement of Delgado's estate as the action did not survive Delgado's death.
Moreover, he also stated that since Leviste already opted to collect on the note, he
could no longer foreclose the mortgage. This Motion to Dismiss was denied on
August 15, 1973 by Judge Nicanor S. Sison. Thereafter, petitioner filed with the
Court of Appeals a special civil action for certiorari, mandamus, and prohibition with
preliminary injunction docketed as CA G.R. No. 03088 on the ground that the
respondent judge committed grave abuse of discretion in refusing to dismiss the
complaint. On June 28, 1976, the Court of Appeals 5 denied the petition because
herein petitioner failed to prove the death of Delgado and the consequent settlement
proceedings regarding the latter's estate. Neither did petitioner adequately prove his
claim that the special power of attorney in favor of Delgado was forged.
On February 18, 1977, petitioner filed his second Motion to Dismiss on the ground
that the trial court, now presided by Judge Nelly L. Romero Valdellon, acquired no
jurisdiction over deceased defendant, that the claim did not survive, and that there
was no cause of action against him. On May 13, 1977, the said judge dismissed the
motion in an order hereunder quoted, to wit:

"Considering the second motion to dismiss filed by respondent

Manolo Cerna on March 4, 1977, as well as plaintiff's opposition
thereto reiteration of the same grounds raised in the first motion
to dismiss dated April 4, 1973, this Court hereby reiterates its
resolution found in its order dated August 15, 1973." 6
Petitioner filed a motion to reconsider the said order but this was denied. Then, on
October 17, 1977, he filed another petition for certiorari and prohibition docketed as
CA G.R. No. SP-07237 with the Court of Appeals. This petition was dismissed by the
said court in a decision which stated, thus:
"WHEREFORE, the herein petition insofar as it alleges lack of
cause of action on the part of the herein petitioner is concerned,
is hereby dismissed and/or denied and the writ of preliminary
injunction previously issued by this Court is hereby lifted and/or
set aside; insofar, however, as the case against the deceased
Celerino Delgado is concerned, the petition is granted, that is, the
complaint in the lower court against Celerino Delgado should be
dismissed. No costs." 7
Thereafter, the instant petition for review was filed. Petitioner raised the following
legal issue:
". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR
COLLECTION OF A SUM OF MONEY BASED ON THE
PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT
BE DISMISSED FOR LACK OF CAUSE OF ACTION AS
AGAINST MANOLO P. CERNA WHO IS NOT A DEBTOR
UNDER THE PROMISSORY NOTE CONSIDERING
THAT ACCORDING TO SETTLED JURISPRUDENCE THE
FILING OF A COLLECTION SUIT IS DEEMED AN
ABANDONMENT OF THE SECURITY OF THE CHATTEL
MORTGAGE?" 8
In holding petitioner liable, the Court of Appeals held that petitioner and Delgado
were solidary debtors. Thus, it held:

"But the herein petitioner pleads that the complaint states no

cause of actions against the defendants Manolo P. Cerna on the
following grounds: 1) that the petitioner did not sign as joint
obligator in the promissory note signed by the deceased Celerino
Delgado hence, even if the allegations of the complaint are
hypothetically admitted there is no cause of action against the
herein petitioner because having proceeded against the

promissory note he is deemed to have abandoned the foreclosure

of the chattel mortgage contract. This contention deserves scant
consideration. The chattel mortgage contract, prima facie shows
that it created the joint and solidary obligation of petitioner and
Celerino Delgado against private respondent." 9 (Emphasis
Ours)
We do not agree. Only Delgado signed the promissory note and accordingly, he was
the only one bound by the contract of loan. Nowhere did it appear in the promissory
note that petitioner was a co-debtor. The law is clear that "(c)ontracts take effect only
between the parties . . ." 10
But by some stretch of the imagination, petitioner was held solidarily liable for the
debt allegedly because he was a co-mortgagor of the principal debtor, Delgado. This
ignores the basic precept that "(t)here is solidarily liability only when the obligation
expressly so states, or when the law or the nature of the obligation requires
solidarity." 11
We have already stated that the contract of loan, as evidenced by the promissory note,
was signed by Delgado only. Petitioner had no part in the said contract. Thus,
nowhere could it be seen from the agreement that petitioner was solidarily bound
with Delgado for the payment of the loan.
There is also no legal provision nor jurisprudence in our jurisdiction which makes a
third person who secures the fulfillment of another's obligation by mortgaging his
own property to be solidarily bound with the principal obligor. A chattel mortgage
may be "an accessory contract" 12 to a contract of loan, but that fact alone does not
make a third-party mortgagor solidarily bound with the principal debtor in fulfilling
the principal obligation that is, to pay the loan. The signatory to the principal contract
loan remains to be primarily bound. It is only upon the default of the latter that
the creditor may have been recourse on the mortgagors by foreclosing the mortgaged
properties in lieu of an action for the recovery of the amount of the loan. And the
liability of the third-party mortgagors extends only to the property mortgaged. Should
there be any deficiency, the creditors has recourse on the principal debtor.
In this case, however, the mortgage contract was also signed only by Delgado as
mortgagor. It is true that the contract stated the following:
"That this CHATTEL MORTGAGE, made and entered into this
16th day of October, 1972 at Makati, Rizal, by and between:
CELERINO DELGADO, . . . as Attorney-in
-Fact of Manolo P. Cerna . . . by virtue of a Special
Power of Attorney executed by said Manolo P. Cerna in
my favor under the date of October 10, 1972 and

acknowledged before Orlando J. Coruna . . . herein

referred to as the MORTGAGOR; - and CONRAD C. LEVISTE, . . . hereinafter
referred to as the MORTGAGEE." 13
But this alone does not make petitioner a co-mortgagor especially so since only
Delgado singed the chattel mortgage as mortgagor. The Special Power of Attorney
did not make petitioner a mortgagor. All it did was to authorized Delgado to
mortgage certain properties belonging to petitioner. And this is in compliance with
the requirement in Article 2085 of the Civil Code which states that: cdrep
"Art. 2085.The following requisites are essential to the contracts
of pledge and mortgage:
xxx xxx xxx
(3)That the persons constituting the pledge or
mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for
the purpose." (Emphasis Ours.)
In effect, petitioner lent his car to Delgado so that the latter may mortgage the same
to secure his debt. Thus, from the contract itself, it was clear that only Delgado was
the mortgagor regardless of the fact the he used properties belonging to a third person
to secure his debt.
Granting, however, that petitioner was obligated under the mortgage contract to
answer for Delgado's indebtedness, under the circumstances, petitioner could not be
held liable because the complaint was for recovery of a sum of money, and not for the
foreclosure of the security. We agree with petitioner that the filing of collection suit
barred the foreclosure of the mortgage. Thus:
"A mortgage who files a suit for collection abandons the remedy
of foreclosure of the chattel mortgage constituted over the
personal property as security for the debt or value of the
promissory note which he seeks to recover in the said collection
suit." 14
The reason for this rule is that:
". . . when, however, the mortgage elects to file a suit for
collection, not foreclosure, thereby abandoning the chattel as
basis for relief, he clearly manifest his lack of desire and interest

to go after the mortgaged property as security for the promissory

note . . ." 15
Hence, Leviste, having chosen to file the collection suit, could not now run after
petitioner for the satisfaction of the debt. This is even more true in this case because
of the death of the principal debtor, Delgado. Leviste was pursuing a money claim
against a deceased person. Section 7, Rule 86 of the Rules of Court Provides:
"Sec. 7.Mortgage debt due from estate. A creditor holding a
claim against the deceased secured by mortgaged or other
collateral security, may abandon the security and prosecute his
claim in the manner provided in this rule, and share in the general
distribution of the assets of the estate; or he may foreclose his
mortgage or realize upon his security, by action in court, making
the executor or administrator a party defendant, and if there is a
judgment for a deficiency, after the sale of the mortgaged
premises, or the property pledged, in the foreclosure or the other
proceeding to realize upon security, he may claim his deficiency
judgment in the manner provided in the preceding section; or he
may upon his mortgage or other security alone, and foreclosure
the same at any time within the period of the statue of limitations,
and in that event he shall not be admitted as a creditor, and shall
receive no share in the distribution of the other assets of the
estate; . . ."
The above-quoted provision is substantially similar to Section 708 of the Code of
Civil Procedure which states:

But while there is a merit in the substantial allegations of this petition, We are
constrained to deny the petition on procedural grounds. The facts of this case reveal
that the decision under review in the decision in the second certiorari and prohibition
case lodged petitioner against the judge trying the civil case. It appeared that after the
denial of the first motion to dismiss, petitioner filed CA-G.R. No. 03088 wherein
petitioner alleged grave abuse of discretion on the part of Judge Sison. The first
petition was denied by the Court of Appeals. The decision became final. The second
motion to dismiss, based on the same grounds, was thereafter filed. It was likewise
denied and another petition for certiorari and prohibition was again instituted. The
decision in the latter case is now under review. prcd
We agree with the contention of private respondent, that the action has been barred
by the principle of res judicata.
It appears in this case that the second motion was filed to circumvent the effects of
the finality of the decision of the Court of Appeals in Ca-G.R. No. 03088. Petitioner
intended the second motion and the subsequent proceedings as remedies for his
lapsed appeal. We cannot such behavior. It delayed the proceedings in this case and
unduly burdened the courts. Petitioner should have allowed the trial of the case to go
on where his defenses could still be presented and heard.
WHEREFORE, in view of the foregoing, the Petition is hereby DISMISSED. With
costs.
SO ORDERED.

"Sec. 708.A creditor holding against the deceased, secured by

mortgage or other collateral security, may abandon the security
and prosecute his claim before the committee, and share in the
mortgage or realize upon his security, by ordinary action in court,
making the executor or administrator a party defendant; . . ."
EN BANC

The Supreme Court, in the case of Osorio vs. San Agustin, 16 has made the following
interpretation of the said provision, to wit:
"It is clear by the provisions quoted section that a person holding
a mortgage against the estate of a deceased person may abandon
such security and prosecute his claim before the committee, and
share in the distribution of the general assets of the estate. It
provides also that he may, at his own election, foreclose the
mortgage and realize upon his security. But the law does not
provide that he may have both remedies. If he elects one he must
abandon the other. If he fails in one he fails utterly."

[G.R. No. L-40018. December 15, 1975.]

NORTHERN MOTORS, INC., petitioner, vs. HON. JORGE R.
COQUIA, etc., et al., respondents, FILINVEST CREDIT
CORPORATION, intervenor.

SYNOPSIS
Respondents Honesto Ong and City Sheriff of Manila moved to reconsider this Court's
resolution of August 29, 1975, where it was held that the lien of Northern Motors, Inc., as

chattel mortgagee, over certain taxicabs, is superior to the levy made on said cabs by Honesto
Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor, Manila Yellow
Taxicab Co., Inc. On the other hand, Northern Motors, Inc. moved for the partial
reconsideration of the same August 29 resolution, praying for reversal of the lower court's
orders cancelling the bond filed by Filwriters Guaranty Assurance Corporation. Northern
Motors, Inc. also prayed that the sheriff should be required to deliver to it the proceeds of the
execution sale of the mortgaged taxicabs without deducting the expenses of execution.
The Supreme Court denied the motion for reconsideration of Ong and the Sheriff, and granted
the partial motion for reconsideration of Northern Motors, Inc.

SYLLABUS
1.EXECUTION; CHATTEL MORTGAGE; UNSECURED JUDGMENT CREDITOR CAN
LEVY ONLY ON THE MORTGAGOR'S EQUITY OF REDEMPTION. The contention
that an unsecured judgment creditor's only recourse is to levy upon the mortgaged chattels in
possession of the judgment debtor, while the unpaid seller and mortgagee has still an
independent legal remedy against the mortgagor for recovery of the unpaid balance of the
price, is not a justification for setting aside the holding that the said judgment creditor has no
right to levy upon the mortgaged chattels and that he could levy only upon the mortgagor's
equity of redemption.
2.ID.; ID.; ESSENCE OF CHATTEL MORTGAGE. The essence of the chattel mortgage is
that the mortgaged chattels should answer for the mortgage credit and not for the judgment
credit of the mortgagor's unsecured creditor. The mortgagee is not obligated to file an
"independent action" for the enforcement of his credit. To require him to do so would be a
nullification of his lien and would defeat the purpose of the chattel mortgage which is to give
him preference over the mortgaged chattels for the satisfaction of his credit. (See Art. 1087,
Civil Code)

chattels is the mere right of equity of redemption and that the sale does not extinguish the
preexisting mortgage lien.
6.ID.; ID.; A JUDGMENT DEBTOR CANNOT ADDUCE ARGUMENTS INTENDED TO
PROTECT INTERESTS OF MORTGAGOR. The argument of the judgment creditor that
the installments already paid to the mortgagee by the judgment debtor on the chattels (levied
on execution by the judgment creditor) should be deducted from the execution sale of said
mortgaged chattels, is a point which the judgment creditor does not directly affect him. That
matter should be raised by the judgment debtor in a replevin case filed by the chattel
mortgagee against the former.
7.ID.; THIRD-PARTY CLAIM; COURT MAY NOT CANCEL BOND FILED BY
JUDGMENT CREDITOR WHERE THIRD-PARTY CLAIMANT SUES SHERIFF FOR
DAMAGES WITHIN THE STATUTORY PERIOD. Where the unpaid seller and
mortgagee filed a third-party claim on the chattels levied upon by the judgment creditor of the
mortgagor, and subsequently sues the judgment creditor, the sheriff and the surety for damages
within the 120-day period provided for in Section 17, Rule 39, it is a grave abuse of discretion
to cancel the indemnity bond put up by said judgment creditor. And where the bond is
cancelled, the same should be reinstated.
8.ID.; ID.; ID.; CHATTEL MORTGAGEE ENTITLED TO ENTIRE PROCEEDS OF
EXECUTION SALE. The mortgagee is entitled to the possession of the chattel mortgage,
and the execution of the mortgaged chattels by the mortgagor's judgment creditor is not
justified. Where the mortgaged chattels have been levied upon and sold at public auction to
satisfy the judgment credit, which is inferior to the chattel mortgage, and the chattels could no
longer be recovered because they had been transferred to persons whose addresses are
unknown, the proceeds of the execution sale may be regarded as a partial substitute for the
unrecoverable chattels, and the mortgagee is entitled to the entire proceeds without deduction
of the expenses of execution.

3.ID.; ID; JUDGMENT DEBTOR AFFECTED BY CHATTEL MORTGAGOR'S BREACH

OF CHATTEL MORTGAGE. The breach by the chattel mortgagor of his obligation affects
said mortgagor's unsecured judgment creditor, although the latter is not privy to the chattel
mortgage contract. The registration of the chattel mortgage is an effective and binding notice to
the unsecured judgment creditor. The mortgage creates a real right (derecho real, jus in re or
jus ad rem) or a lien which, being recorded, follows the chattel wherever it goes.
4.ID.; ID.; LEVY BY MORTGAGOR'S JUDGMENT CREDITOR CANNOT PREVAIL
OVER MORTGAGE CREDIT. The proposition that levy made by the chattel mortgagor's
unsecured judgment creditor against the former should prevail over the chattel mortgage credit
is devoid of any legal sanction and is glaringly contrary to nature of a chattel mortgage. To
uphold that contention is to destroy the essence of a chattel mortgage as a paramount
encumbrance on the mortgaged chattel.
5.ID.; ID.; THIRD-PARTY CLAIM OF CHATTEL MORTGAGEE SHOULD ALERT
PURCHASERS OF THE CHATTEL. The third-party claim filed by the unpaid seller and
mortgagee should alert the purchasers of the chattels at the execution sale to the risk which
they are taking when take part in the auction sale. They should realize that at an execution sale
the buyers acquired only the right of the judgment debtor, which in the case of mortgaged

RESOLUTION

AQUINO, J p:
Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of
this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of
Northern Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made
on the said cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel
mortgagor, Manila Yellow Taxicab Co., Inc.
On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the
same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the
bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed

that the sheriff should be required to deliver to it the proceeds of the execution sale of the
mortgaged taxicabs without deducting the expenses of execution.
1.Respondents' motion for reconsideration. Honesto Ong in his motion invokes his
supposed "legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only
recourse was to levy upon the taxicabs which were in the possession of the judgment debtor,
Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and
mortgagee, "has still an independent legal remedy" against the mortgagor for the recovery of
the unpaid balance of the price.
That contention is not a justification for setting aside the holding that Ong had no right to levy
upon the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity of
redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer
for the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor.
The mortgagee is not obligated to file an "independent action" for the enforcement of his
credit. To require him to do so would be a nullification of his lien and would defeat the purpose
of the chattel mortgage which is to give him preference over the mortgaged chattels for the
satisfaction of his credit. (See art. 2087, Civil Code)
It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of
the chattel mortgage credit, realized that to vindicate its claim by independent action would be
illusory. For that pragmatic reason, it was constrained to enter into a compromise with Honesto
Ong by agreeing to pay him P145,000. That amount was characterized by Northern Motors,
Inc. as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong.
Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not
affect him because he is not privy of such contract is untenable. The registration of the chattel
mortgage is an effective and binding notice to him of its existence Ong Liong Tiak vs. Luneta
Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus
ad rem, XI Enciclopedia Juridica Espaola 294) or a lien which, being recorded, follows the
chattel wherever it goes.
Honesto Ong's contention that Northern Motors, Inc. was negligent because it did not sue the
sheriff within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is
not correct. Such action was filed on April 14, 1975 in the Court of First Instance of Rizal,
Pasig Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters
Guaranty Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor,
Tropical Commercial Corporation, was impleaded as a defendant therein. That might explain
his unawareness of the pendency of such action.

That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should
have alerted the purchasers to the risk which they were taking when they took part in the
auction sale. Moreover, at an execution sale the buyers acquire only the right of the judgment
debtor which in this case was a mere right or equity of redemption. The sale did not extinguish
the pre-existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros
and Provincial Sheriff of Rizal, 97 Phil. 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte
Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103).
Some arguments adduced by Honesto Ong in his motion were intended to protect the interests
of the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a
"respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution
sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc.
"only to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab
to" Northern Motors, Inc. That argument is not clear. Ong probably means that the installments
already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted
from the proceeds of the execution sale. If that is the point which Ong is trying to put across,
and it is something which does not directly affect him, then, that matter should be raised by
Manila Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of
First Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc. versus Manila Yellow
Taxicab Co., Inc. et al."
Ong's contention, that the writ of execution, which was enforced against the seven taxicabs
(whose sale at public auction was stopped) should have precedence over the mortgage lien,
cannot be sustained. Those cabs cannot be sold at an execution sale because, as explained in
the resolution under reconsideration, the levy thereon was wrongful.
The motion for reconsideration of Ong and the sheriff should be denied.
2.Petitioner's motion for partial reconsideration. The lower court in its order of January 3,
1975 cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters
Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled
without notice to Northern Motors, Inc. as third-party claimant.
We already held that the cancellation of the bonds constituted a grave abuse of discretion but
we previously denied petitioner's prayer for the reinstatement of the bonds because Northern
Motors Inc. had given the impression that it had not filed any action for damages against the
sheriff within the one hundred twenty-day period contemplated in Section 17, Rule 39 of the
Rules of Court.

The other arguments of Honesto Ong in his motion may be boiled down to the proposition that
the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail
over the chattel mortgage credit. That proposition is devoid of any legal sanction and is
glaringly contrary to the nature of a chattel mortgage. To uphold that contention is to destroy
the essence of chattel mortgage as a paramount encumbrance on the mortgaged chattel.

As already noted above, the truth is that such an action for damages was filed on April 14,
1975 against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the
Court of First Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond for
P240,000 (No. 0032 posted on December 18, 1974).

Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to
that of the judgment creditor". But he contends that the rights of the purchasers of the cars at
the execution sale should be respected. He reasons out they were not parties to the mortgage
and that they acquired the cars prior to the mortgagee's assertion of its rights thereto.

It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of
Rizal at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a
replevin case (where an amended complaint dated January 15, 1975 was filed), the surety,
Filwriters Guaranty Assurance Corporation, was impleaded as a defendant by reason of its

bond for P240,000. Northern Motors, Inc. in that case prayed that the surety be ordered to pay
to it damages in the event that the eight taxicabs could not be surrendered to the mortgagee.
Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for
the reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said
bond is not reinstated or if the lower court's orders cancelling it are allowed to stand, the
aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions against
the surety. That injustice should be corrected. Hence, our resolution of August 29, 1975,
insofar as it did not disturb the lower court's orders cancelling the indemnity bonds, should be
reconsidered.
Northern Motors, Inc. further prays for the reconsideration of that portion of our resolution
allowing the sheriff to deduct expenses from the proceeds of the execution sale for the eight
taxicabs which sale was held on December 18, 1974. It argues that Honesto Ong or Manila
Yellow Taxicab Co., Inc. should shoulder such expenses of execution.
We already held that the execution was not justified and that Northern Motors, Inc., as
mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have
been levied upon and sold at public auction to satisfy the judgment credit which was inferior to
the chattel mortgage. Since the cabs could no longer be recovered because apparently they had
been transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of
motion), the proceeds of the execution sale may be regarded as a partial substitute for the
unrecoverable cabs (See arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River
Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without
deduction of the expenses of execution.

SECOND DIVISION
[G.R. No. 179756. October 2, 2009.]

WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's

motion for partial reconsideration is granted. The resolution of August 29, 1975 is modified in
the sense that the lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond
for P240,000 (as reaffirmed in its order of January 17, 1975), are set aside. The said indemnity
bond for P240,000 is regarded as in full force and effect. Respondent Sheriff of Manila is
further directed to deliver to Northern Motors, Inc. the entire proceeds of the execution sale
held on December 18, 1974 for the eight taxicabs which were mortgaged to that firm.

RIZAL COMMERCIAL BANKING

CORPORATION, petitioner, vs. ROYAL CARGO
CORPORATION, respondent.

DECISION

SO ORDERED.

CARPIO MORALES, ** J p:
Terrymanila, Inc. 1 (Terrymanila) filed a petition for voluntary insolvency with
the Regional Trial Court (RTC) of Bataan on February 13, 1991. 2 One of its
creditors was Rizal Commercial Banking Corporation (petitioner) with which it had
an obligation of P3 Million that was secured by a chattel mortgage executed on
February 16, 1989. The chattel mortgage was duly recorded in the notarial register of
Amado Castano, a notary public for and in the Province of Bataan. 3 aHATDI
Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an
action before the RTC of Manila for collection of sum of money and preliminarily

attached "some" of Terrymanila's personal properties on March 5, 1991 to secure the

satisfaction of a judgment award of P296,662.16, exclusive of interests and attorney's
fees. 4

Petitioner, alleging that the annulment of sale case filed by respondent stated no
cause of action, filed on December 3, 1992 a Motion to Dismiss 11 which was,
however, denied by Branch 16 of the Manila RTC. 12

On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.

Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of
Appeals, docketed as CA-G.R. SP No. 31125. The appellate court dismissed the
petition, by Decision of February 21, 1994, it holding that respondent's petition for
annulment "prima facie states a sufficient cause of action and that the [trial court] in
denying [herein petitioner RCBC's] motion to dismiss, had acted advisedly and well
within its powers and authority". 13

On June 11, 1991, 5 the Manila RTC, by Decision of even date, rendered judgment in
the collection case in favor of respondent.
In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC
permission to extrajudicially foreclose the chattel mortgage which was granted by
Order of February 3, 1992. 6 It appears that respondent, together with its employees'
union, moved to have this Order reconsidered but the motion was denied by Order of
March 20, 1992 Order. 7
The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public
auction sale of the mortgaged personal properties at the Municipal Building of
Mariveles, Bataan. At the auction sale, petitioner, the sole bidder of the properties,
purchased them for P1.5 Million. Eventually, petitioner sold the properties to
Domingo Bondoc and Victoriano See. 8
Respondent later filed on July 30, 1992 a petition before the RTC of Manila,
docketed as Civil Case No. 92-62106, against the Provincial Sheriff of the RTC
Bataan and petitioner, for annulment of the auction sale (annulment of sale case).
Apart from questioning the inclusion in the auction sale 9 of some of the properties
which it had attached, respondent questioned the failure to duly notify it of the sale at
least 10 days before the sale, citing Section 14 of Act No. 1508 or the Chattel
Mortgage Law which reads:
Sec. 14.The mortgagee, his executor, administrator or assign,
may, after thirty days, from the time of condition broken, cause
the mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality
where the mortgagor resides, or where the property is situated,
provided at least ten days notice of the time, place, and purpose
of such sale has been posted at two or more public places in such
municipality, and the mortgagee, his executor, administrator
or assignee shall notify the mortgagor or person holding
under him and the persons holding subsequent mortgages of
the time and place of sale, either by notice in writing directed
to him or left at his abode, if within the municipality, or sent
by mail if he does not reside in such municipality, at least ten
days previous to the date. (Emphasis and underscoring
supplied). DHSCTI
it claiming that its counsel received a notice only on the day of the sale. 10

Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante
Cautelam 14 in the annulment of sale case in which it lodged a Compulsory
Counterclaim by seeking P1 Million for moral damages, P500,000 for exemplary
damages, and P250,000 for attorney's fees. It thereafter elevated the case to this Court
via petition for review oncertiorari, docketed as G.R. 115662. This Court by minute
Resolution of November 7, 1994, 15 denied the petition for failure to show that a
reversible error was committed by the appellate court. 16
Trial on the merits of the annulment of sale case thereupon ensued. By Decision 17 of
October 15, 1997, Branch 16 of the Manila RTC rendered judgment in favor of
respondent, disposing as follows:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby
rendered:
1.ORDERING . . . RCBC to pay plaintiff
[heein * respondent Royal Cargo] the amount
of P296,662.16 and P8,000.00 as reasonable
attorney's fees.
2.No pronouncement as to costs.
3.DISMISSING the petition as to respondents
Provincial Sheriff of Balanga, Bataan RTC;
SO ORDERED.
Both parties appealed to the Court of Appeals which, by Decision 18 of April 17,
2007, denied herein petitioner's appeal and partly granted herein 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 principal amount payable to it. Thus
it disposed: aIAcCH

WHEREFORE, the foregoing considered, the appeal instituted

by appellant RCBC is hereby DENIED for lack of merit
while the appeal of appellant Royal Cargo is PARTLY
GRANTED in that the amount of attorney's fees awarded by
the RTC is increased to P50,000.00.
In addition, RCBC is ordered to pay Royal Cargo the amount
of P100,000.00 as exemplary damages. The principal amount of
P296,662.18 [sic] to be paid by RCBC to Royal Cargo shall
likewise earn 12% interest per annum from the time the
petition was filed in the court a quo until fully paid. The rest of
the decision is AFFIRMED.
SO ORDERED. (Emphasis and underscoring supplied)
In partly granting respondent's appeal from the Decision of Br. 16 of RTC Manila,
the appellate court ratiocinated that respondent had a right to be "timely informed" of
the foreclosure sale.
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.
xxx xxx xxx

warranted a ruling against it by the RTC. (Italics in the original;

emphasis partly in the original; underscoring supplied) TIaCcD
Its motion for reconsideration having been denied by the appellate court, 19 petitioner
lodged the present petition for review which raises the following issues:
I
WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN
GIVEN A TEN (10)-DAY PRIOR NOTICE OF THE JUNE 16,
1992 FORECLOSURE SALE
II
WHETHER OR NOT THE TRIAL COURT AND THE COURT
OF APPEALS GRAVELY ERRED IN DECLARING
PETITIONER GUILTY OF CONSTRUCTIVE FRAUD IN
FAILING TO PROVIDE RESPONDENT A TEN (10)-DAY
PRIOR NOTICE OF THE FORECLOSURE SALE.
III
WHETHER OR NOT THE PETITIONER WAS CORRECTLY
HELD LIABLE TO PAY RESPONDENT P296,662.[16] PLUS
INTEREST THEREON, EXEMPLARY
DAMAGES ANDATTORNEY'S FEES.
IV
WHETHER OR NOT PETITIONER IS ENTITLED TO AN
AWARD OF ATTORNEY'S FEES. 20 (Underscoring supplied)

xxx xxx xxx

Petitioner faults the appellate court in applying res judicata by holding that
respondent's entitlement to notice of the auction sale had already been settled in
its Decision in CA G.R. SP No. 31125 and in this Court's Decision in G.R. No.
115662. For, so it contends, the decisions in these cases dealt
on interlocutory issues, viz.: the issue of whether respondent's petition for annulment
of the sale stated a cause of action, and the issue of whether petitioner's motion to
dismiss was properly denied. 21

The above-quoted provision clearly requires that the mortgagee

should notify in writing the mortgagor or person holding under
him of the time and place of the sale by personal delivery of the
notice. Thus, RCBC's failure to comply with this requirement

Arguing against respondent's position that it was entitled to notice of the auction sale,
petitioner cites the Chattel Mortgage Law which enumerates who are entitled to be
notified under Section 14 thereof. It posits that "[h]ad the law intended to include in
said Section an attaching creditor or a judgment creditor [like herein respondent], it

Moreover, Section 14 of the Chattel Mortgage Law pertaining to

the procedure in the foreclosure of chattel mortgages provides, to
wit:

could have so specifically stated therein, since in the preceding section, Section 13, it
already mentioned that a subsequent attaching creditor may redeem". 22
Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No.
31125 that Sections 13 23 and 14 of the Chattel Mortgage Law should be read in
tandem since the right given to the attaching creditor under Section 13 "would not
serve its purpose if we were to exclude the subsequent attaching creditor from those
who under Section 14 need to be notified of the foreclosure sale ten days before it is
held". 24 ACcaET

Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to

"redeem" the mortgage only before the holding of the auction sale, drawing attention
toParay v. Rodriguez 25 which instructs that no right of redemption exists
over personal property as the Chattel Mortgage Law is silent thereon. 26
Even assuming arguendo, petitioner contends, that there exists an obligation to
furnish respondent a notice of the auction sale 10 days prior thereto, "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 [m]illion bid of petitioner . . ." 27
As for the issue of constructive fraud-basis of the award of damages to respondent,
petitioner maintains that both the trial and appellate courts erred in concluding that it
(petitioner) was the one which sent the notice of sheriff's sale to, which was received
on the day of the sale by, the counsel for respondent for, so it contends, it had
absolutely no participation in the preparation and sending of such notice. 28
In its Comment, 29 respondent reiterates that the respective decisions of the appellate
court and this Court in CA G.R. SP No. 31125 and G.R. No.
115662 are conclusivebetween the parties, hence, "the right of [respondent] to a [tenday] notice has a binding effect and must be adopted in any other controversy
between the same parties in which the very same question is raised". 30
And respondent maintains that the obligation to notify the mortgagor or person
holding under him and the persons holding subsequent mortgages falls upon
petitioner as the mortgagee.
The petition is MERITORIOUS.
The respective decisions of the appellate court in CA G.R. SP No. 31125 and this
Court in G.R. No. 115662 did not conclusively settle the issue on the need to give a
10-day notice to respondent of the holding of the public auction sale of the chattels.

The elements of res judicata are: (1) the judgment sought to bar the new action must
be final; (2) the decision must have been rendered by a court having jurisdiction over
the subject matter and the parties; (3) the disposition of the case must be a judgment
on the merits; and (4) there must be as between the first and second action, identity of
parties, subject matter, and causes of action. 31
Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39,
Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness of judgment in
Rule 39, Section 47 (c). 32 DaTICE
There is bar by prior judgment when, as between the first case where the judgment
was rendered, and the second case that is sought to be barred, there is identity of
parties, subject matter, and causes of action. Where there is identity of parties and
subject matter in the first and second cases, but no identity of causes of action, there
isconclusiveness of judgment. 33 The first judgment is conclusive only as to those
matters actually and directly controverted and determined, not as to matters
merelyinvolved therein.
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 denying
petitioner's motion to dismiss respondent's petition for annulment was attended by
grave abuse of discretion. The appellate court did not rule on the merits of the
petition as to establish a controlling legal rule which has to be subsequently followed
by the parties in the same case. It merely held that respondent's petition in the trial
court stated a sufficient cause of action. Its determination of respondent's entitlement
to notice of the public auction sale was at best prima facie. Thus, the appellate court
held:
In view of the above, We are of the considered view that the
private respondent's petition in the court a quo prima facie states
a sufficient 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 authority. We, therefore, find no
cause to annul the challenged order issued by the respondent
court in Civil Case No. 92-62106. (Underscoring in the original;
emphasis and italics supplied) 34
An order denying a motion to dismiss is merely interlocutory and cannot give rise
to res judicata, hence, it is subject to amendments until the rendition of the final
judgment. 35
On respondent's contention that petitioner, as mortgagee, had the duty to notify it of
the public auction sale, the Court finds the same immaterial to the case.

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner

thereunder to redeem the mortgaged property only before its sale. Consider the
following pronouncement in Paray: 36 DCSTAH

respondents was merely Consolidated Mines' . . . equity of

redemption. . . . CHATEa
xxx xxx xxx

[T]here is no law in our statute books which vests the right of

redemption over personal property. Act No. 1508, or the Chattel
Mortgage Law, ostensibly could have served as the vehicle for
any legislative intent to bestow a right of redemption over
personal property, since that law governs the extrajudicial sale of
mortgagedpersonal property, but the statute is definitely silent
on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals,
starkly utters that the right of redemption applies
to real properties, not personal properties, sold on execution.
(Emphasis, italics and underscoring supplied)
Unmistakably, the redemption cited in Section 13 partakes of an equity of
redemption, which is the right of the mortgagor to redeem the mortgaged
property after his defaultin 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 equityof 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

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.

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) SIcEHC

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. DTIaHE
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. . .
. . 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:

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.

THIRD DIVISION
[G.R. No. 106435. July 14, 1999.]
PAMECA WOOD TREATMENT PLANT, INC.,
HERMINIO G. TEVES, VICTORIA V. TEVES and HIRAM
DIDAY R. PULIDO, petitioners, vs. HON. COURT OF
APPEALS and DEVELOPMENT BANK OF THE
PHILIPPINES, respondents.
Americo H. Acosta for petitioners.
Bonifacio M. Abad and Vicente Cuison for private respondent.
SYNOPSIS
This is a review on certiorari of a judgment of the Court of Appeals affirming in
toto the decision of the Regional Trial Court of Makati to award respondent bank's
deficiency claim, arising from a loan secured by a chattel mortgage.
The Court denied the petition. It held that since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds, there is a corollary
obligation on the part of the debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.
As to petitioners' contention that the public auction sale is void on ground of fraud
and inadequacy of price, the Court ruled that parties may not bring on appeal issues
that were not raised on trial. Petitioners never assailed the validity of the sale in the
RTC and only in the Court of Appeals did they attempt to prove inadequacy of price.
Moreover, fraud is a serious allegation that requires full and convincing evidence and
may not be inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. TAaIDH
SYLLABUS
1.CIVIL LAW; CHATTEL MORTGAGE LAW (ACT NO. 1508, AS AMENDED);
DEBTOR-MORTGAGOR BARRED FROM RETAINING EXCESS OF SALE
PROCEEDS AND OBLIGED TO PAY DEFICIENCY IN CASE OF REDUCTION
IN PRICE AT PUBLIC AUCTION. It is clear from Section 14 of Act No. 1508,
as amended that the effects of foreclosure under the Chattel Mortgage Law run
inconsistent with those of pledge under Article 2115. Whereas, in pledge, the sale of
the thing pledged extinguishes the entire principal obligation, such that the pledgor

may no longer recover proceeds of the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law expressly entitles the mortgagor
to the balance of the proceeds, upon satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtormortgagee to pay the deficiency in case of a reduction in the price at public auction.
(Manila Trading and Supply Co. vs. Tamaraw Plantation Co., cited in Ablaza vs.
Ignacio, G.R. No. L-11466, May 23, 1958 [unpublished]). We find no reason to
disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating. it. DEaCSA
2.ID.; CIVIL LAW; ARTICLE 1484 CLEARLY APPLIES TO SALE OF
PERSONAL PROPERTY IN INSTALLMENT BASIS. Neither do We find
tenable the application by analogy of Article 1484 of the Civil Code to the instant
case. As correctly pointed out by the trial court, the said article applies clearly and
solely to the sale of personal property the price of which is payable in installments.
Although Article 1484, paragraph (3) expressly bars any further action against the
purchaser to recover an unpaid balance of the price, where the vendor opts to
foreclose the chattel mortgage on the thing sold, should the vendee's failure to pay
cover two or more installments, this provision is specifically applicable to sale on
installments.
3.ID.; EQUITY; APPLIED ONLY IN ABSENCE OF STATUTORY LAW OR
JUDICIAL RULES OF PROCEDURE. To accommodate petitioners' prayer even
on the basis of equity would be to expand the application of the provisions of Article
1484 to situations beyond its specific purview, and ignore the language and intent of
the Chattel Mortgage Law. Equity, which has been aptly described as "justice outside
legality", is applied only in the absence of, and never against, statutory law or judicial
rules of procedure.
4.REMEDIAL LAW; ACTIONS; APPEALS; PARTIES MAY NOT BRING ON
APPEAL ISSUES NOT RAISED ON TRIAL. We are also unable to find merit in
petitioners' submission that the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of the sale in the RTC, and
only in the Court of Appeals did they attempt to prove inadequacy of price through
the documents, i.e., the "Open-End Mortgage on Inventory" and inventory dated
March 31, 1980, likewise attached to their Petition before this Court. Basic is the rule
that parties may not bring on appeal issues that were not raised on trial. AEcIaH
5.ID.; EVIDENCE; PRESUMPTION OF REGULARITY IN CONDUCT OF
PUBLIC SALE; CASE AT BAR. Furthermore, the mere fact that respondent bank
was the sole bidder for the mortgaged properties in the public sale does not warrant
the conclusion that the transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence, and may not be inferred from
the lone circumstance that it was only respondent bank that bid in the sale of the
foreclosed properties. The sparseness of petitioners' evidence in this regard leaves Us
no discretion but to uphold the presumption of regularity in the conduct of the public
sale.

6.ID.; ID.; FINDINGS OF FACT OF TRIAL COURT ON JOINT AND SOLIDARY

LIABILITY OF PETITIONER CORPORATION IN LOAN AFFIRMED ON
APPEAL; CASE AT BAR. We likewise affirm private petitioners' joint and
several liability with petitioner corporation in the loan. As found by the trial court and
the Court of Appeals, the terms of the promissory note unmistakably set forth the
solidary nature of private petitioners' commitment. From the foregoing, it is clear that
private petitioners intended to bind themselves solidarily with petitioner PAMECA in
the loan. As correctly submitted by respondent bank, private petitioners are not made
to answer for the corporate act of petitioner PAMECA, but are made liable because
they made themselves co-makers with PAMECA under the promissory
note. DACIHc

DECISION

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

"WHEREFORE, judgment is hereby rendered ordering the

defendants to pay jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the deficiency claim of the latter as
of March 31, 1984, plus 21% interest per annum and other
charges from April 1, 1984 until the whole amount is fully paid
and (2) the costs of the suit. SO ORDERED." 4 cdasia
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
"1.Respondent appellate court gravely erred in not reversing the
decision of the trial court, and in not holding that the
public auction sale of petitioner PAMECA's chattels
were tainted with fraud, as the chattels of the said
petitioner were bought by private respondent as sole
bidder in only 1/6 of the market value of the property,
hence unconscionable and inequitable, and therefore
null and void.
2.Respondent appellate court gravely erred in not applying by
analogy Article 1484 and Article 2115 of the Civil Code
by reading the spirit of the law, and taking into
consideration the fact that the contract of loan was a
contract of adhesion.
3.The appellate court gravely erred in holding the petitioners
Herminio Teves, Victoria Teves and Hiram Diday R.
Pulido solidarily liable with PAMECA Wood Treatment
Plant, Inc. when the intention of the parties was that the
loan is only for the corporation's benefit." LLphil
Relative to the first ground, petitioners contend that the amount of P322,350.00 at
which respondent bank bid for and purchased the mortgaged properties was
unconscionable and inequitable considering that, at the time of the public sale, the
mortgaged properties had a total value of more than P2,000,000.00. According to
petitioners, this is evident from an inventory dated March 31, 1980, 5 which valued
the properties at P2,518,621.00, in accordance with the terms of the chattel mortgage
contract 6 between the parties that required that the inventories "be maintained at a
level no less than P2 million". Petitioners argue that respondent bank's act of bidding
and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their
actual value in a public sale in which it was the sole bidder was fraudulent,
unconscionable and inequitable, and constitutes sufficient ground for the annulment
of the auction sale.

To this, respondent bank contends that the above-cited inventory and chattel
mortgage contract were not in fact submitted as evidence before the RTC of Makati,
and that these documents were first produced by petitioners only when the case was
brought to the Court of Appeals. 7 The Court of Appeals, in turn, disregarded these
documents for petitioners' failure to present them in evidence, or to even allude to
them in their testimonies before the lower court. 8 Instead, respondent court declared
that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have
fetched such a low price at the time of the auction sale. 9 Neither did respondent
court find anything irregular or fraudulent in the circumstance that respondent bank
was the sole bidder in the sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise to the presumption of
regularity in the performance of public duties. 10

Petitioners also question the ruling of respondent court, affirming the RTC, to hold
private petitioners, officers and stockholders of petitioner PAMECA, liable with
PAMECA for the obligation under the loan obtained from respondent bank, contrary
to the doctrine of separate and distinct corporate personality. 11 Private petitioners
contend that they became signatories to the promissory note "only as a matter of
practice by the respondent bank", that the promissory note was in the nature of a
contract of adhesion, and that the loan was for the benefit of the corporation,
PAMECA, alone. 12
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that
Articles 1484 13 and 2115 14 of the Civil Code be applied in analogy to the instant
case to preclude the recovery of a deficiency claim. 15
Petitioners are not the first to posit the theory of the applicability of Article 2115 to
foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio, 16 the
lower court dismissed the complaint for collection of deficiency judgment in view of
Article 2141 of the Civil Code, which provides that the provisions of the Civil Code
on pledge shall also apply to chattel mortgages, insofar as they are not in conflict
with the Chattel Mortgage Law. It was the lower court's opinion that, by virtue of
Article 2141, the provisions of Article 2115 which deny the creditor-pledgee the right
to recover deficiency in case the proceeds of the foreclosure sale are less than the
amount of the principal obligation, will apply. prcd
This Court reversed the ruling of the lower court and held that the provisions of the
Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being
contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141,
may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
"xxx xxx xxx

The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the Registry of Deeds where the mortgage is recorded,
and the Register of Deeds shall record the same. The fees of the
officer for selling the property shall be the same as the case of
sale on execution as provided in Act Numbered One Hundred
and Ninety, and the amendments thereto, and the fees of the
Register of Deeds for registering the officer's return shall be
taxed as a part of the costs of sale, which the officer shall pay to
the Register of Deeds. The return shall particularly describe the
articles sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be applied to the
payment, first, of the costs and expenses of keeping and sale, and
then to the payment of the demand or obligation secured by such
mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after
paying the mortgage, shall be paid to the mortgagor or persons
holding under him on demand." (Emphasis supplied) cdasia
It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of the sale in excess of the amount
of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles
the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtormortgagee to pay the deficiency in case of a reduction in the price at public auction.
As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation
Co., 17 cited in Ablaza vs. Ignacio, supra:
"While it is true that section 3 of Act No. 1508 provides that 'a
chattel mortgage is a conditional sale', it further provides that it
'is a conditional sale of personal property as security for the
payment of a debt, or for the performance of some other
obligation specified therein.' The lower court overlooked the fact
that the chattels included in the chattel mortgage are only given
as security and not as a payment of the debt, in case of a failure
of payment. cdtai
The theory of the lower court would lead to the absurd
conclusion that if the chattels mentioned in the mortgage, given
as security, should sell for more than the amount of the
indebtedness secured, that the creditor would be entitled to the

full amount for which it might be sold, even though that amount
was greatly in excess of the indebtedness. Such a result certainly
was not contemplated by the legislature when it adopted Act No.
1508. There seems to be no reason supporting that theory under
the provision of the law. The value of the chattels changes
greatly from time to time, and sometimes very rapidly. If, for
example, the chattels should greatly increase in value and a sale
under that condition should result in largely overpaying the
indebtedness, and if the creditor is not permitted to retain the
excess, then the same token would require the debtor to pay the
deficiency in case of a reduction in the price of the chattels
between the date of the contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as
well as other authors on the question of chattel mortgages, have
said, that 'in case of a sale under a foreclosure of a chattel
mortgage, there is no question that the mortgagee or creditor may
maintain an action for the deficiency, if any should occur.' And
the fact that Act No. 1508 permits a private sale, such sale is not,
in fact, a satisfaction of the debt, to any greater extent than the
value of the property at the time of the sale. The amount received
at the time of the sale, of course, always requiring good faith and
honesty in the sale, is only a payment, pro tanto, and an action
may be maintained for a deficiency in the debt."
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating
it. 18
Neither do We find tenable the application by analogy of Article 1484 of the Civil
Code to the instant case. As correctly pointed out by the trial court, the said article
applies clearly and solely to the sale of personal property the price of which is
payable in installments. Although Article 1484, paragraph (3) expressly bars any
further action against the purchaser to recover an unpaid balance of the price, where
the vendor opts to foreclose the chattel mortgage on the thing sold, should the
vendee's failure to pay cover two or more installments, this provision is specifically
applicable to a sale on installments.
To accommodate petitioners' prayer even on the basis of equity would be to expand
the application of the provisions of Article 1484 to situations beyond its specific
purview, and ignore the language and intent of the Chattel Mortgage Law. Equity,
which has been aptly described as "justice outside legality", is applied only in the
absence of, and never against, statutory law or judicial rules of procedure. 19
We are also unable to find merit in petitioners' submission that the public auction sale
is void on grounds of fraud and inadequacy of price. Petitioners never assailed the
validity of the sale in the RTC, and only in the Court of Appeals did they attempt to

prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on
Inventory" and inventory dated March 31, 1980, likewise attached to their Petition
before this Court. Basic is the rule that parties may not bring on appeal issues that
were not raised on trial.LLpr
Having nonetheless examined the inventory and chattel mortgage document as part of
the records, We are not convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on January 18, 1984, the date
of the foreclosure sale. At best, the chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the inventory at a value of at least
P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn,
was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties
entered into the contracts of loan and chattel mortgage, and is far from being an
accurate estimate of the market value of the properties at the time of the foreclosure
sale four years thereafter. Thus, even assuming that the inventory and chattel
mortgage contract were duly submitted as evidence before the trial court, it is clear
that they cannot suffice to substantiate petitioners' allegation of inadequacy of price.

xxx xxx xxx

"In case of default in the payment of any installment above, we
bind ourselves to pay DBP for advances . . ."
xxx xxx xxx
"We further bind ourselves to pay additional interest and penalty
charges on loan amortizations or portion thereof in arrears as
follows:"
xxx xxx xxx
"In addition to the above, we also bind ourselves to pay for bank
advances for insurance premiums, taxes . . ."
xxx xxx xxx

Furthermore, the mere fact that respondent bank was the sole bidder for the
mortgaged properties in the public sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious allegation that requires full
and convincing evidence, 20 and may not be inferred from the lone circumstance that
it was only respondent bank that bid in the sale of the foreclosed properties. The
sparseness of petitioners' evidence in this regard leaves Us no discretion but to uphold
the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners' joint and several liability with petitioner
corporation in the loan. As found by the trial court and the Court of Appeals, the
terms of the promissory note unmistakably set forth the solidary nature of private
petitioners' commitment. Thus: cdrep
"On or before May 12, 1980, for value received, PAMECA
WOOD TREATMENT PLANT, INC., a corporation organized
and existing under the laws of the Philippines, with principal
office at 304 El Hogar Filipina Building, San Juan, Manila,
promise to pay to the order of DEVELOPMENT BANK OF
THE PHILIPPINES at its office located at corner Buendia and
Makati Avenues, Makati, Metro Manila, the principal sum of
TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT
HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS
(US$267,881.67) with interest at the rate of three per cent (3%)
per annum over DBP's borrowing rate for these funds. Before the
date of maturity, we hereby bind ourselves, jointly and severally,
to make partial payments as follows:"

"We further bind ourselves to reimburse DBP on a pro-rata basis

for all costs incurred by DBP on the foreign currency borrowings
from where the loan shall be drawn . . ."
xxx xxx xxx
"In case of non-payment of the amount of this note or any portion
of it on demand, when due, or any other amount or amounts due
on account of this note, the entire obligation shall become due
and demandable, and if, for the enforcement of the payment
thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is
constrained to entrust the case to its attorneys, we jointly and
severally bind ourselves to pay for attorney's fees as provided for
in the mortgage contract, in addition to the legal fees and other
incidental expenses. In the event of foreclosure of the mortgage
securing this note, we further bind ourselves jointly and severally
to pay the deficiency, if any." (Emphasis supplied) 21
The promissory note was signed by private petitioners in the following manner: cdll
"PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named

corporation)
(Sgd) HIRAM DIDAY PULIDO
(Sgd) VICTORIA V. TEVES" 22
From the foregoing, it is clear that private petitioners intended to bind themselves
solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent
bank, private petitioners are not made to answer for the corporate act of petitioner
PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note. LibLex
IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the
Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby
AFFIRMED. Costs against petitioners.
SO ORDERED.

EN BANC

the case of the vendor's lien, or the unpaid price of real property sold, the lawmakers
could have easily inserted the same qualification which now modifies mortgage
credits. The fact that the law makes no distinction between registered and
unregistered vendor's lien, only goes to show that any lien of that kind enjoys the
preferred credit status.
2.ID.; CIVIL CODE; PROVISIONS ON CONCURRENCE AND PREFERENCE
OF CREDITS; APPLICATION NOT LIMITED TO INSOLVENCY CASES.
There is nothing in the Civil Code to show that the articles therein on concurrence
and preference of credits are applicable only to the insolvent debtor. If that portion of
the Code were interpreted as intended only for insolvency cases, then other creditordebtor relationships where there is concurrence of credits would be left without any
rule to govern them, and it would render purposeless the special laws on insolvency.
3.PREFERENCE AND PRIORITIES; NATURE AND EFFECT OF
PREFERENCES; THE REST ARE PAID PRO-RATA. Under the system of the
Civil Code of the Philippines, only taxes enjoy absolute preference. All the remaining
thirteen classes of preferred creditors under Article 2242 enjoy no priority among
themselves, but must be paid pro-rata, i.e., in proportion to the amount of the
respective credits.
4.ID.; ID.; ID.; NECESSITY OF LIQUIDATION PROCEEDINGS. The full
application of Articles 2249 and 2242 demands that there must be first some
proceeding where the claims of all the preferred creditors may be bindingly
adjudicated such as insolvency, the settlement of a decedent's estate under Rule 87 of
the Rules of Court, or other liquidation proceedings of similar import.

[G.R. No. L-14938. January 28, 1961.]

MAGDALENA C. DE BARRETTO, ET AL., plaintiffsappellants, vs. JOSE G. VILLANUEVA, ET AL., defendantsappellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.
Esteban Ocampo for defendants-appellees.
SYLLABUS
1.PREFERENCES OF CREDITS; VENDOR'S LIEN; PREFERRED CREDIT
STATUS OF UNREGISTERED VENDOR'S LIEN. Article 2242 of the New
Civil Code, which enumerates, the preferred claims, mortgages and liens on
immovables, specifically requires that unlike the unpaid price of real property sold
mortgage credits, in order to be given preference, should be recorded in the
registry of property. If the legislative intent was to impose the same requirement in

5.ID.; ID.; ID.; ID.; ONE PREFERRED CREDITOR'S THIRD-PARTY CLAIM TO

PROCEEDS OF FORECLOSURE IS NOT THE PROCEEDING
CONTEMPLATED BY LAW. One preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the case now before us) is not the proceeding
contemplated by law for the enforcement of preferences under Article 2242, unless
the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of
the claims is for taxes, a dispute between two creditors will not enable the Court to
ascertain the pro-rata dividend corresponding to each, because the rights of the other
creditors likewise enjoying preference under Article 2242 can not be ascertained.
6.ID.; PARTICULAR PREFERENCES AND PRIORITIES; IN ABSENCE OF
LIQUIDATION PROCEEDINGS AN UNPAID VENDOR'S CLAIM
SUBORDINATE TO THE MORTGAGEE'S RECORD ENCUMBRANCE. In the
absence of insolvency proceedings (or other equivalent general liquidation of the
debtor's estate), the conflict between the parties must be decided pursuant to the wellestablished principle concerning registered lands. That a purchaser in good faith and
for value (as the appellant concededly is) takes registered property free from liens and
encumbrances other than statutory liens and those recorded in the certificates of title.
There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor,

did not acquire the character and rank of a statutory lien co-equal to the mortgagee's
recorded encumbrance, and must remain subordinate to the latter.
7.ID.; ID.; MAKER OF QUITCLAIM DEED IS NOT TRUE VENDOR AS
AGAINST VENDEE IN FORECLOSURE SALE OF THE SAME PROPERTY.
When after defaulting in their payments due under the sale contract with the RFC the
Cruzados sold to appellee "their rights, title, interest and dominion" to the property
they merely assigned whatever rights or claim they might still have thereto; the
ownership of the property rested with the RFC. The sale from Cruzado to appellee,
therefore, was not so much a sale of the land and its improvements, as it was a
quitclaim deed in favor of the appellee. In law, the operative sales was that from the
RFC to the latter, and it was the RFC that should be regarded as the true vendor of the
property. At the most the Cruzados transferred to appellee an option to acquire the
property, but not the property itself, and their credit, therefore, can not legally
constitute a vendor's lien on the corpus of the property that should stand in an equal
footing with the mortgage credit held by the appellant Barretto.

DECISION

GUTIERREZ DAVID, J p:
On May 10, 1948, Rosario Cruzado, for herself and as administratrix of the intestate
estate of her deceased husband Pedro Cruzado in Special Proceedings No. 4959 of
the Court of First Instance of Manila, obtained from the defunct Rehabilitation
Finance Corporation (hereinafter referred to as the RFC) a loan in the amount of
P11,000.00. To secure payment thereof, she mortgaged the land then covered by
Transfer Certificate of Title No. 61358 issued in her name and that of her deceased
husband. As she failed to pay certain installments on the loan, the mortgage was
foreclosed and the RFC acquired the property for P11,000.00, subject to her rights as
mortgagor to repurchase the same. On July 26, 1951, upon her application, the land
was sold back to her conditionally for the amount of P14,269.03, payable in seven
years.
About two years thereafter, or on February 13, 1953, Rosario Cruzado, as guardian of
her minor children in Special Proceedings No. 14198 of the Court of First Instance of
Manila, was authorized by the court to sell with the previous consent of the RFC the
land in question together with the improvements thereon for a sum not less than
P19,000. Pursuant to such authority and with the consent of the RFC, she sold to Pura
L. Villanueva for P19,000.00 "all their rights, interest, title and dominion on and over
the herein described parcel of land together with the existing improvements thereon,
including one house and an annex thereon; free from all charges and encumbrances,
with the exception of the sum of P11,009.52, plus stipulated interest thereon which
the vendor is still presently obligated to the RFC and which the vendee herein now

assumes to pay to the RFC under the same terms and conditions specified in that deed
of sale dated July 26, 1951." Having paid in advance the sum of P1,500.00, Pura L.
Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of the
vendor Rosario Cruzado a promissory note dated March 9, 1953, undertaking to pay
the balance of P17,500.00 in monthly installments. On April 22, 1953, she made an
additional payment of P5,500.00 on the promissory note. She was, subsequently, able
to secure in her name Transfer Certificate of Title No. 32526 covering the house and
lot above referred to, and on July 10, 1953, she mortgaged the said property to
Magdalena C. Barretto as security for a loan in the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid
balance of P12,000.00 on her promissory note for the sale of the property in question,
a complaint for the recovery of the same from her and her husband was filed on
September 21, 1953 by Rosario Cruzado in her own right and in her capacity as
judicial guardian of her minor children. Pending trial of the case, a lien was
constituted upon the property in the nature of a levy in attachment in favor of the
Cruzados, said lien being annotated at the back of Transfer Certificate of Title No.
32526. After trial, decision was rendered ordering Pura Villanueva and her husband,
jointly and severally, to pay Rosario Cruzado the sum of P12,000.00, with legal
interest thereon from the date of the filing of the complaint until fully paid plus the
sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to
Magdalena C. Barretto, the latter, jointly with her husband, instituted against the
Villanueva spouses an action for foreclosure of mortgage, impleading Rosario
Cruzado and her children as parties defendants. On November 11, 1956, decision was
rendered in the case absolving the Cruzados from the complaint and sentencing the
Villanuevas to pay the Barrettos, jointly and severally, the sum of P30,000.00, with
interest thereon at the rate of 12% per annum from January 11, 1954, plus the sum of
P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos filed a
motion for the issuance of a writ of execution which was granted by the lower court
on July 31, 1958. On August 14, 1953, the Cruzados filed their "Vendor's Lien" in the
amount of P12,000.00, plus legal interest, over the real property subject of the
foreclosure suit, the said amount representing the unpaid balance of the purchase
price of the said property. Giving due course to the lien, the court on August 18, 1958
ordered the same annotated in Transfer Certificate of Title No. 32526 of the Registry
of Deeds of Manila, decreeing that should the realty in question be sold at public
auction in the foreclosure proceedings, the Cruzados shall be credited with their prorata share in the proceeds thereof "pursuant to the provisions of Articles 2248 and
2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same
Code." The Barrettos filed a motion for reconsideration on September 12, 1958, but
on that same date, the sheriff of the City of Manila, acting in pursuance of the order
of the court granting the writ of execution, sold at public auction the property in
question. As highest bidder, the Barrettos themselves acquired the properties for the
sum of P49,000.00.

On October 4, 1958, the Court of First Instance issued an order confirming the
aforesaid sale and directing the Register of Deeds of the City of Manila to issue to the
Barrettos the corresponding certificate of title, subject, however, to the order of
August 18, 1958 concerning the vendor's lien. On the same date, the motion of the
Barrettos seeking reconsideration of the order of the court giving due course to the
said vendor's lien was denied. From this last order, the Barrettos spouses interposed
the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court of First Instance of Manila in Civil Case
No. 20075 awarding the, amount of P12,000.00 in favor of Rosario Cruzado and
her minor children cannot constitute a basis for the vendor's lien filed by the
appellee Rosario Cruzado, appellants allege that the action in said civil case was
merely to recover the balance of a promissory note. But while, apparently, the action
was to recover the remaining obligation of promisor Pura Villanueva on the note, the
fact remains that Rosario P. Cruzado as guardian of her minor children was an unpaid
vendor of the realty in question, and the promissory note was, precisely, for the
unpaid balance of the purchase price of the property bought by said Pura Villanueva.
Article 2242 of the New Civil Code enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable property, and among them are:
"(2)For the unpaid price of real property sold, upon the
immovable sold"; and
"(5)Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits
with respect to the same specific real property or real rights, they shall be
satisfied pro-rata, after the payment of the taxes and assessments upon the
immovable property of real rights.
Application of the above-quoted provisions to the case at bar would mean that the
herein appellee Rosario Cruzado as an unpaid vendor of the property in question has
the right to share pro-rata with the appellants the proceeds of the foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case
was not registered, it should not prejudice the said appellants' registered rights over
the property. There is nothing to this argument. Note must be taken of the fact that
article 2242 of the new Civil Code enumerating the preferred claims, mortgages and
liens on immovables, specifically requires that unlike the unpaid price of real
property sold mortgage credits, in order to be given preference, should be recorded
in the Registry of Property. If the legislative intent was to impose the same
requirement in the case of the vendors lien, or the unpaid price of real property sold,
the lawmakers could have easily inserted the same qualification which now modifies

the mortgage credits. The law, however, does not make any distinction between
registered and unregistered vendor's lien, which only goes to show that any lien of
that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded vendor's lien the same standing as
the registered mortgage credit would be to nullify the principle in land registration
system that prior unrecorded interests cannot prejudice persons who subsequently
acquire interests over the same property. The Land Registration Act itself, however,
respects without reserve or qualification the paramount rights of alien holders on real
property. Thus, section 70 of that Act provides that:
"Registered land, and ownership therein shall in all respects be
subject to the same burdens and incidents attached by law to
unregistered land. Nothing contained in this Act shall in any way
be construed to relieve registered land or the owners thereof from
any rights incident to the relation of husband and wife, or from
liability to attachment on mesne process or levy on execution, or
from liability to any lien of any description established by law on
land and the buildings thereon, or the interest of the owners of
such land or buildings, or to change the laws of descent, or the
rights of partition between co-owners, joint tenants and other cotenants, or the right to take the same by eminent domain, or to
relieve such land from liability to be appropriated in any lawful
manner for the payment of debts, or to change or affect in any
other way any other rights or liabilities created by law and
applicable to unregistered land, except as otherwise expressly
provided in this Act or in the amendments thereof." (Emphasis
supplied)
As to the point made that the articles of the Civil Code on concurrence and preference
of credits are applicable only to the insolvent debtor, suffice it to say that nothing in
the law shows any such limitation. If we are to interpret this portion of the Code as
intended only for insolvency cases, then other creditor-debtor relationships where
there are concurrence of credits would be left without any rules to govern them, and it
would render purposeless the special laws on insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against the
appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes, and Dizon J .J ., concur.
Concepcion, Reyes, J.B.L., and Barrera, JJ ., concur in the result.

decision, petitioners filed before the Court the instant petition assailing the appellate
court's decision. DTEAHI
THIRD DIVISION
[G.R. No. 105827. January 31, 2000.]
J.L. BERNARDO CONSTRUCTION, represented by
attorneys-in-fact Santiago R. Sugay, Edwin A. Sugay and
Fernando S.A. Erana, SANTIAGO R. SUGAY, EDWIN A.
SUGAY and FERNANDO S.A. ERANA, petitioners, vs.
COURT OF APPEALS and MAYOR JOSE L.
SALONGA, respondents.
Gonzalez Sinense Jimenez & Associates and Cruz Durian Alday & Cruz-Matters for
petitioners.
Bauto & Bauto Law Office for private respondent.

The Supreme Court held that the petition for certiorari filed by the respondent with
the Court of Appeals questioning the writ of attachment issued by the trial court
should not have been given due course for they still had recourse to a plain, speedy
and adequate remedy the filing of a motion to fix counter-bond. Moreover, they
could have filed a motion to discharge the attachment for having been improperly or
irregularly issued or enforced or that the bond is insufficient, or that the attachment is
excessive. With such remedies still available to the municipality and Salonga, the
filing of a petition for certiorari with the Court of Appeals was clearly premature.
However, with regards to the contractor's lien, the Court upheld the appellate court's
ruling reversing the trial court's grant of a contractor's lien in favor of petitioners. The
trial court's order granting possession and use of the public market to petitioners did
not adhere to the procedure for attachment laid out in the Rules of Court. In issuing
such an order, the trial court gravely abused its discretion and the appellate court's
nullification of the same should be sustained. Accordingly, the Court affirmed the
Court of Appeal's decision insofar as it nullified the contractor's lien, but reversed and
set aside the appellate court's decision nullifying the writ of attachment granted by the
trial court.

SYNOPSIS

SYLLABUS

Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved
the construction of the San Antonio Public Market. The construction of the market
was to be funded by the Economic Support Fund Secretariat (ESFS), a government
agency working with the USAID. Under ESFS' grant-loan-equity financing program,
the funding for the market would be composed of a grant from ESFS and loan
extended by ESFS to the municipality of San Antonio, and equity or counterpart
funds from the municipality. On April 20, 1990, petitioner submitted its bid together
with other qualified bidders and after evaluation, respondent Mayor as chairman of
the pre-qualification bids and awards committee, awarded the contract to petitioner.
On July 31, 1991, petitioners filed a complaint for breach of contract, specific
performance, and collection of sum of money, with prayer for preliminary attachment
and enforcement of contractor's lien against the municipality of San Antonio, Nueva
Ecija, and Mayor Salonga before the Regional Trial Court of Nueva Ecija. After the
respondents filed their answers, the RTC held hearings on the ancillary remedies
prayed for by the petitioners. On September 5, 1991, the lower court issued the writ
of preliminary attachment prayed for by the petitioners and granted the right to
maintain possession of the public market and operate the same. Respondent moved
for reconsideration, but the same was denied. After filing a motion for approval of
counterbond in the lower court, respondent Salonga filed with the Court of Appeals a
petition for certiorari under Rule 65 with prayer for a writ of preliminary injunction
and temporary restraining order. On February 6, 1992, the Court of Appeals reversed
and set aside the trial court's decision and ruled in favor of Salonga. Aggrieved by the

1.REMEDIAL LAW; CIVIL PROCEDURE; SPECIAL CIVIL

ACTIONS; CERTIORARI; NOT AN APPROPRIATE REMEDY TO ASSAIL AN
INTERLOCUTORY ORDER. A petition for certiorari may be filed in case a
tribunal, board or officer exercising judicial or quasi-judicial functions has acted
without or in excess of jurisdiction, or with grave abuse of discretion amounting to
lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and
adequate remedy in the ordinary course of law. The office of a writ ofcertiorari is
restricted to truly extraordinary cases wherein the act of the lower court or quasijudicial body is wholly void. We held in a recent case that certiorari may be issued
"only where it is clearly shown that there is a patent and gross abuse of discretion as
to amount to an evasion of positive duty or to virtual refusal to perform a duty
enjoined by law, or to act at all in contemplation of law, as where the power is
exercised in an arbitrary and despotic manner by reason of passion or personal
hostility." As a general rule, an interlocutory order is not appealable until after the
rendition of the judgment on the merits for a contrary rule would delay the
administration of justice and unduly burden the courts. However, we have held
that certiorari is an appropriate remedy to assail an interlocutory order (1) when the
tribunal issued such order without or in excess of jurisdiction or with grave abuse of
discretion and (2) when the assailed interlocutory order is patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief. CAIHTE

2.CIVIL LAW; CONCURRENCE AND PREFERENCE OF CREDITS; THE

CONTRACTOR IS DISALLOWED FROM ENFORCING HIS LIEN PURSUANT
TO ARTICLE 2242 OF THE CIVIL CODE IF THE ACTION FILED IS FOR
SPECIFIC PERFORMANCE AND DAMAGES. Articles 2241 and 2242 of the
Civil Code enumerates certain credits which enjoy preference with respect to specific
personal or real property of the debtor. Specifically, the contractor's lien claimed by
petitioners is granted under the third paragraph of Article 2242 which provides that
the claims of contractors engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with respect to the specific building or
other immovable property constructed. However, Article 2242 only finds application
when there is a concurrence of credits, i.e. when the same specific property of the
debtor is subjected to the claims of several creditors and the value of such property of
the debtor is insufficient to pay in full all the creditors. In such a situation, the
question of preference will arise, that is, there will be a need to determine which of
the creditors will be paid ahead of the others. Fundamental tenets of due process will
dictate that this statutory lien should then only be enforced in the context of some
kind of a proceeding where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency proceedings. This is made explicit by Article 2243
which states that the claims and liens enumerated in Articles 2241 and 2242 shall be
considered as mortgages or pledges of real or personal property, or liens within the
purview of legal provisions governing insolvency. The action filed by petitioners in
the trial court does not partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages. Thus, even if it is finally adjudicated
that petitioners herein actually stand in the position of unpaid contractors and are
entitled to invoke the contractor's lien granted under Article 2242, such lien cannot be
enforced in the present action for there is no way of determining whether or not there
exist other preferred creditors with claims over the San Antonio Public Market. The
records do not contain any allegation that petitioners are the only creditors with
respect to such property. The fact that no third party claims have been filed in the trial
court will not bar other creditors from subsequently bringing actions and claiming
that they also have preferred liens against the property involved. ICAcTa

2.Resolution dated June 10, 1992 issued by the former Eleventh Division of the Court
of Appeals in CA-G.R. No. 26336 denying the motions for reconsideration filed by
both parties.
The factual antecedents of this case, as culled from the pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio, Nueva Ecija approved
the construction of the San Antonio Public Market. The construction of the market
was to be funded by the Economic Support Fund Secretariat (ESFS), a government
agency working with the USAID. Under ESFS' "grant-loan-equity" financing
program, the funding for the market would be composed of a (a) grant from ESFS,
(b) loan extended by ESFS to the Municipality of San Antonio, and (c) equity or
counterpart funds from the Municipality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A. Erana
and J.L. Bernardo Construction, a single proprietorship owned by Juanito L.
Bernardo, that they entered into a business venture for the purpose of participating in
the bidding for the public market. It was agreed by petitioners that Santiago Sugay
would take the lead role and be responsible for the preparation and submission of the
bid documents, financing the entire project, providing and utilizing his own
equipment, providing the necessary labor, supplies and materials and making the
necessary representations and doing the liaison work with the concerned government
agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay,
submitted its bid together with other qualified bidders. After evaluating the bids, the
municipal pre-qualification bids and awards committee, headed by respondent Jose L.
Salonga (then incumbent municipal mayor of San Antonio) as Chairman, awarded the
contract to petitioners. On June 8, 1990, a Construction Agreement was entered into
by the Municipality of San Antonio thru respondent Salonga and petitioner J.L.
Bernardo Construction.

DECISION

GONZAGA-REYES, J p:
This petition for certiorari under Rule 65 seeks to annul and set aside the following:
1.Decision dated February 6, 1992 issued by the Eleventh Division of the Court of
Appeals in CA-G.R. No. 26336 which nullified the order of the Regional Trial Court
of Cabanatuan City in Civil Case No. 1016-AF granting plaintiffs (petitioners herein)
a writ of attachment and a contractor's lien upon the San Antonio Public Market; and

It is claimed by petitioners that under this Construction Agreement, the Municipality

agreed to assume the expenses for the demolition, clearing and site filling of the
construction site in the amount of P1,150,000 and, in addition, to provide cash equity
of P767,305.99 to be remitted directly to petitioners.
Petitioners allege that, although the whole amount of the cash equity became due, the
Municipality refused to pay the same, despite repeated demands and notwithstanding
that the public market was more than ninety-eight percent (98%) complete as of July
20, 1991. Furthermore, petitioners maintain that Salonga induced them to advance the
expenses for the demolition, clearing and site filling work by making representations
that the Municipality had the financial capability to reimburse them later on.
However, petitioners claim that they have not been reimbursed for their expenses. 1

On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and
Fernando Erana, with the latter three bringing the case in their own personal
capacities and also in representation of J.L. Bernardo Construction, filed a complaint
for breach of contract, specific performance, and collection of a sum of money, with
prayer for preliminary attachment and enforcement of contractor's lien against the
Municipality of San Antonio, Nueva Ecija and Salonga, in his personal and official
capacity as municipal mayor. After defendants filed their answer, the Regional Trial
Court held hearings on the ancillary remedies prayed for by plaintiffs. 2
On September 5, 1991, the Regional Trial Court issued the writ of preliminary
attachment prayed for by plaintiffs. It also granted J.L. Bernardo Construction the
right to maintain possession of the public market and to operate the same. The
dispositive portion of the decision provides: LibLex
IN VIEW OF THE FOREGOING DISQUISITION, the Court
finds the auxiliary reliefs of attachment prayed for by the
plaintiffs to be well-taken and the same is hereby GRANTED.
Conformably thereto, let a writ of preliminary attachment be
issued upon the filing by the plaintiffs of a bond in the amount of
P2,653,576.84 to answer for costs and damages which the
defendants may suffer should the Court finally adjudged (sic)
that the plaintiffs are not entitled to the said attachment, and
thereafter, the Deputy Sheriff of this court is hereby ordered to
attach the properties of the defendants JOSE LAPUZ SALONGA
and the MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA
which are not exempt from execution.
COROLLARILY, the Court grants the plaintiffs J.L.
BERNARDO CONSTRUCTION, represented by SANTIAGO
R. SUGAY, EDWIN A. SUGAY and FERNANDO S.A.
ERANA, the authority to hold on to the possession of the public
market in question and to open and operate the same based on
fair and reasonable guidelines and other mechanics of operation
to be submitted by plaintiffs within fifteen (15) days from their
receipt of this Order which shall be subject to Court's approval
and to deposit the income they may derive therefrom to the
Provincial Treasurer of Nueva Ecija after deducting the
necessary expenses for the operation and management of said
market, subject to further orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs' claims that defendants were guilty of fraud
in incurring their contractual obligations as evidenced by the complaint and the
affidavits of plaintiffs Santiago Sugay and Erana. The court ruled that defendants'
acts of ". . . obtaining property, credit or services by false representations as to

material facts made by the defendant to the plaintiff with intent to deceive constitutes
fraud warranting attachment" and that ". . . a debt is considered fraudulently
contracted if at the time of contracting it, the debtor entertained an intention not to
pay."
With regards to the contractor's lien, the trial court held that since plaintiffs have not
been reimbursed for the cash equity and for the demolition, clearing and site filling
expenses, they stand in the position of an unpaid contractor and as such are entitled,
pursuant to Articles 2242 and 2243 of the Civil Code, to a lien in the amount of
P2,653,576.84 (as of August 1, 1991), excluding the other claimed damages,
attorney's fees an litigation expenses, upon the public market which they constructed.
It was explained that, although the usual way of enforcing a lien is by a decree for the
sale of the property and the application of the proceeds to the payment of the debt
secured by it, it is more practical and reasonable to permit plaintiffs to operate the
public market and to apply to their claims the income derived therefrom, in the form
of rentals and goodwill from the prospective stallholders of the market, as prayed for
by plaintiffs.
The trial court made short shrift of defendants' argument that the case was not
instituted in the name of the real parties-in-interest. It explained that the plaintiff in
the cause of action for money claims for unpaid cash equity and demolition and site
filling expenses is J.L. Bernardo Construction, while the plaintiffs in the claim for
damages for violation of their rights under the Civil Code provisions on human
relations are plaintiffs Santiago Sugay, Edwin Sugay and Erana. 3
The defendants moved for reconsideration of the trial court's order, to which the
plaintiffs filed an opposition. On October 10, 1991 the motion was denied. The
following day, the trial court approved the guidelines for the operation of the San
Antonio Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his counterbond which was
treated by the trial court in its October 29, 1991 order as a motion to fix counterbond
and for which it scheduled a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion, respondent Salonga filed
with the Court of Appeals a petition for certiorari under Rule 65 with prayer for a
writ of preliminary injunction and temporary restraining order which case was
docketed as CA-G.R. SP No. 26336. 4 Petitioners opposed the petition, claiming that
respondent had in fact a plain, speedy and adequate remedy as evidenced by the filing
of a motion to approve counter-bond with the trial court. 5
On February 6, 1992, the Court of Appeals reversed the trial court's decision and
ruled in favor of Salonga. The dispositive portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as
follows:

1.The respondent judge's ORDER dated September 5, 1991 for

the issuance of a writ of attachment and for the enforcement of a
contractor's lien, is hereby NULLIFIED and SET ASIDE; the
writ of attachment issued pursuant thereto and the proceedings
conducted by the Sheriffs assigned to implement the same are, as
a consequence, also hereby NULLIFIED and SET ASIDE;
2.The respondent judge's ORDER dated October 11, 1991 further
enforcing the contractor's lien and approving the guidelines for
the operation of the San Antonio Public Market is also
NULLIFIED and SET ASIDE.
Petitioner's prayers for the dismissal of Civil Case No. 1016 (now
pending before respondent judge) and for his deletion from said
case as defendant in his private capacity are, however, DENIED.
The respondent judge may now proceed to hearing of Civil Case
No. 1016 on the merits.
SO ORDERED.
The appellate court reasoned that since the Construction Agreement was only
between Juanito Bernardo and the Municipality of San Antonio, and since there is no
sworn statement by Juanito Bernardo alleging that he had been deceived or misled by
Mayor Salonga or the Municipality of San Antonio, it is apparent that the applicant
has not proven that the defendants are guilty of inceptive fraud in contracting the debt
or incurring the obligation, pursuant to Rule 57 of the Rules of Court, and therefore,
the writ of attachment should be struck down for having been improvidently and
irregularly issued.
The filing of a motion for the approval of counter-bond by defendants did not,
according to the Court of Appeals, render the petition for certiorari premature. The
appellate court held that such motion could not cure the defect in the issuance of the
writ of attachment and that, moreover, the defendants' motion was filed by them
"without prejudice to the petition for certiorari."
As to the contractor's lien, the appellate court ruled that Article 2242 of the Civil
Code finds application only in the context of insolvency proceedings, as expressly
stated in Article 2243. Even if it is conceded that plaintiffs are entitled to retain
possession of the market under its contractor's lien, the appellate court held that the
same right cannot be expanded to include the right to use the building. Therefore, the
trial court's grant of authority to plaintiffs to operate the San Antonio Public Market
amounts to a grave abuse of discretion.

With regard to the allegations of defendants that plaintiffs are not the proper parties,
the Court of Appeals ruled that such issue should be assigned as an error by
defendants later on should the outcome of the case be adverse to the latter. 6
Petitioners are now before this Court assailing the appellate court's decision. In their
petition, they make the following assignment of errors:
1.THE DECISION IS CONTRARY TO LAW IN THAT THE
COURT OF APPEALS OVERLOOKED AND/OR
DISREGARDED THE FUNDAMENTAL REQUIREMENT
AND ESTABLISHED SUPREME COURT DECISIONS IN
ACTIONS FOR CERTIORARI CONSIDERING THAT THE
FILING OF THE PETITION BY RESPONDENT SALONGA
WITH THE COURT OF APPEALS IS OBVIOUSLY
PREMATURE AND IMPROPER SINCE THERE
ADMITTEDLY EXIST A PLAIN, SPEEDY AND ADEQUATE
REMEDY AVAILABLE TO RESPONDENT SALONGA
WHICH IS HIS UNRESOLVED "MOTION TO APPROVE
COUNTERBOND" PENDING WITH THE TRIAL COURT.
2.IN COMPLETE DISREGARD OF ESTABLISHED
JURISPRUDENCE, THE COURT OF APPEALS HAS
SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED
THE EQUALLY CRUCIAL ISSUE THAT THE QUESTIONED
ORDERS ARE CLEARLY AND ADMITTEDLY
INTERLOCUTORY IN NATURE AND THEREFORE THEY
CANNOT BE THE PROPER SUBJECT OF AN ACTION
FOR CERTIORARI; PROOF THAT THE ORDERS ASSAILED
BY RESPONDENT SALONGA ARE INTERLOCUTORY IN
CHARACTER IS THE DISPOSITIVE PORTION OF THE
DECISION WHEN THE COURT OF APPEALS SAID "THE
RESPONDENT JUDGE MAY NOW PROCEED TO HEARING
OF SAID CIVIL CASE NO. 1016 ON THE MERITS;"
PETITION FILED BY RESPONDENT SALONGA WITH THE
COURT OF APPEALS SHOULD HAVE BEEN DISMISSED
OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN
THEIR VARIOUS UNACTED PLEADINGS.

3.THE DECISION IS BASED ON FINDINGS OF FACTS AND

CONCLUSIONS WHICH ARE NOT ONLY GROSSLY
ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY
THE EVIDENCE ON RECORD.

4.THE COURT OF APPEALS HAS CLEARLY

MISAPPRECIATED, MISREAD AND DISREGARDED
HEREIN PETITIONERS' CAUSES OF ACTION AGAINST
RESPONDENT SALONGA AND HIS CO-RESPONDENT
MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.
5.THE COURT OF APPEALS HAS MADE ERRONEOUS
AND CONTRADICTORY CONCLUSIONS AND FINDINGS
ON THE ISSUE OF "REAL PARTY IN INTEREST" IN
COMPLETE DISREGARD OF THE POWERS AND
AUTHORITY GRANTED BY JUANITO L. BERNARDO
CONSTRUCTION TO HEREIN PETITIONERS.
6.THE COURT OF APPEALS HAS SKIRTED THE
IMPORTANT ISSUE OF "AGENCY COUPLED WITH AN
INTEREST."
7.THE COURT OF APPEALS WENT BEYOND THE ISSUES
OF THE CERTIORARI CASE AND ITS FINDINGS AND
CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE
FOR CERTIORARI ARE CONTRARY TO THE PLEADINGS
AND DO NOT CONFORM TO THE EVIDENCE ON
RECORD.
8.THE COURT OF APPEALS HAS LIKEWISE
DISREGARDED THE PRECEPT THAT CONCLUSIONS
AND FINDINGS OF FACT OF THE TRIAL COURT ARE
ENTITLED TO GREAT WEIGHT ON APPEAL AND
SHOULD NOT BE DISTURBED SINCE THERE IS NO
STRONG AND COGENT REASON WHATSOEVER TO
OVERCOME THE WELL-WRITTEN AND DETAILED AND
ESTABLISHED FACTUAL FINDINGS OF THE TRIAL
COURT. LLpr
9.PETITIONERS HAVE STRONG REASONS TO BELIEVE
THAT THE DECISION OF THE COURT OF APPEALS WAS
ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE
TENETS OF FAIR PLAY SINCE THE DECISION HAD BEEN
KNOWN TO AS IT WAS OPENLY AND PUBLICLY
ANNOUNCED BY RESPONDENT SALONGA LONG
BEFORE IT WAS "PROMULGATED" BY THE COURT OF
APPEALS.
The various issues raised by petitioners may be restated in a more summary manner
as

1.Whether or not the Court of Appeals correctly assumed jurisdiction over the
petition for certiorari filed by respondents herein assailing the trial court's
interlocutory orders granting the writ of attachment and the contractor's lien?
2.Whether or not the Court of Appeals committed reversible errors of law in its
decision?
A petition for certiorari may be filed in case a tribunal, board or officer exercising
judicial or quasi-judicial functions has acted without or in excess of jurisdiction, or
with grave abuse of discretion amounting to lack or excess of jurisdiction, and there
is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of
law. 7
The office of a writ of certiorari is restricted to truly extraordinary cases wherein the
act of the lower court or quasi-judicial body is wholly void. 8 We held in a recent
case thatcertiorari may be issued "only where it is clearly shown that there is a patent
and gross abuse of discretion as to amount to an evasion of positive duty or to virtual
refusal to perform a duty enjoined by law, or to act at all in contemplation of law, as
where the power is exercised in an arbitrary and despotic manner by reason of
passion or personal hostility." 9
As a general rule, an interlocutory order is not appealable until after the rendition of
the judgment on the merits for a contrary rule would delay the administration of
justice and unduly burden the courts. 10 However, we have held that certiorari is an
appropriate remedy to assail an interlocutory order (1) when the tribunal issued such
order without or in excess of jurisdiction or with grave abuse of discretion and (2)
when the assailed interlocutory order is patently erroneous and the remedy of appeal
would not afford adequate and expeditious relief. 11
We hold that the petition for certiorari filed by Salonga and the Municipality with the
Court of Appeals questioning the writ of attachment issued by the trial court should
not have been given due course for they still had recourse to a plain, speedy and
adequate remedy the filing of a motion to fix the counter-bond, which they in fact
filed with the trial court, the grant of which would effectively prevent the issuance of
the writ of attachment. Moreover, they could also have filed a motion to discharge the
attachment for having been improperly or irregularly issued or enforced, or that the
bond is insufficient, or that the attachment is excessive. 12 With such remedies still
available to the Municipality and Salonga, the filing of a petition for certiorari with
the Court of Appeals insofar as it questions the order of attachment was clearly
premature.
However, with regards to the contractor's lien, we uphold the appellate court's ruling
reversing the trial court's grant of a contractor's lien in favor of petitioners.
Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
preference with respect to specific personal or real property of the debtor.

Specifically, the contractor's lien claimed by petitioners is granted under the third
paragraph of Article 2242 which provides that the claims of contractors engaged in
the construction, reconstruction or repair of buildings or other works shall be
preferred with respect to the specific building or other immovable property
constructed. 13
However, Article 2242 only finds application when there is a concurrence of
credits, i.e. when the same specific property of the debtor is subjected to the claims of
several creditors and the value of such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question of preference will arise, that is,
there will be a need to determine which of the creditors will be paid ahead of the
others. 14 Fundamental tenets of due process will dictate that this statutory lien
should then only be enforced in the context of some kind of a proceeding where the
claims of all the preferred creditors may be bindingly adjudicated, such as insolvency
proceedings. 15
This is made explicit by Article 2243 which states that the claims and liens
enumerated in Articles 2241 and 2242 shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of legal provisions governing
insolvency. 16
The action filed by petitioners in the trial court does not partake of the nature of an
insolvency proceeding. It is basically for specific performance and damages. 17 Thus,
even if it is finally adjudicated that petitioners herein actually stand in the position of
unpaid contractors and are entitled to invoke the contractor's lien granted under
Article 2242, such lien cannot be enforced in the present action for there is no way of
determining whether or not there exist other preferred creditors with claims over the
San Antonio Public Market. The records do not contain any allegation that petitioners
are the only creditors with respect to such property. The fact that no third party
claims have been filed in the trial court will not bar other creditors from subsequently
bringing actions and claiming that they also have preferred liens against the property
involved. 18
Our decision herein is consistent with our ruling in Philippine Savings Bank
v. Lantin, 19 wherein we also disallowed the contractor from enforcing his lien
pursuant to Article 2242 of the Civil Code in an action filed by him for the collection
of unpaid construction costs.
It not having been alleged in their pleadings that they have any rights as a mortgagee
under the contracts, petitioners may only obtain possession and use of the public
market by means of a preliminary attachment upon such property, in the event that
they obtain a favorable judgment in the trial court. Under our rules of procedure, a
writ of attachment over registered real property is enforced by the sheriff by filing
with the registry of deeds a copy of the order of attachment, together with a
description of the property attached, and a notice that it is attached, and by leaving a
copy of such order, description, and notice with the occupant of the property, if

any. 20 If judgment be recovered by the attaching party and execution issue thereon,
the sheriff may cause the judgment to be satisfied by selling so much of the property
as may be necessary to satisfy the judgment. 21 Only in the event that petitioners are
able to purchase the property will they then acquire possession and use of the same.
Clearly, the trial court's order of September 5, 1991 granting possession and use of
the public market to petitioners does not adhere to the procedure for attachment laid
out in the Rules of Court. In issuing such an order, the trial court gravely abused its
discretion and the appellate court's nullification of the same should be sustained.
At this stage of the case, there is no need to pass upon the question of whether or not
petitioners herein are the real parties-in-interest. In the event that judgment is render
against Salonga and the Municipality, this issue may be assigned as an error in their
appeal from such judgment. cdasia
WHEREFORE, we UPHOLD the Court of Appeals' Decision dated February 6, 1992
in CA-G.R. SP No. 26336 insofar as it nullifies the contractor's lien granted by the
trial court in favor of petitioners in its September 5, 1991 Order. Consequently, we
also UPHOLD the appellate court's nullification of the trial court's October 11, 1991
Order approving the guidelines for the operation of the San Antonio Public Market.
However, we REVERSE the appellate court's order nullifying the writ of attachment
granted by the trial court.
No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION
[G.R. No. 146555. July 3, 2007.]
JOSE C. CORDOVA, petitioner, vs. REYES DAWAY LIM
BERNARDO LINDO ROSALES LAW OFFICES, ATTY.
WENDELL CORONEL and the SECURITIES AND
EXCHANGE COMMISSION, *** respondents.

DECISION

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

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner
of the CSPI shares but the recovery of such shares had become impossible. It also
declared that the clarificatory order merely harmonized the dispositive portion with
the body of the resolution. Petitioner's motion for reconsideration was denied.
Hence this petition raising the following issues:

Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine
Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity
Sports Plaza Incorporated (CSPI) and shares of stock of various other corporations.
He was issued a confirmation of sale. 4 The CSPI shares were physically delivered by
Philfinance to the former Filmanbank 5 and Philtrust Bank, as custodian banks, to
hold these shares in behalf of and for the benefit of petitioner. 6
On June 18, 1981, Philfinance was placed under receivership by public respondent
Securities and Exchange Commission (SEC). Thereafter, private respondents Reyes
Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell Coronel (private
respondents) were appointed as liquidators. 7 Sometime in 1991, without the
knowledge and consent of petitioner and without authority from the SEC, private
respondents withdrew the CSPI shares from the custodian banks. 8 On May 27, 1996,
they sold the shares to Northeast Corporation and included the proceeds thereof in the
funds of Philfinance. Petitioner learned about the unauthorized sale of his shares only
on September 10, 1996. 9He lodged a complaint with private respondents but the
latter ignored it 10 prompting him to file, on May 6, 1997, 11 a formal complaint
against private respondents in the receivership proceedings with the SEC, for the
return of the shares.
Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for
Philfinance's creditors and investors. 12 On May 13, 1997, the liquidators began the
process of settling the claims against Philfinance, from its assets. 13
On April 14, 1998, the SEC rendered judgment dismissing the petition. However, it
reconsidered this decision in a resolution dated September 24, 1999 and granted the
claims of petitioner. It held that petitioner was the owner of the CSPI shares by virtue
of a confirmation of sale (which was considered as a deed of assignment) issued to
him by Philfinance. But since the shares had already been sold and the proceeds
commingled with the other assets of Philfinance, petitioner's status was converted
into that of an ordinary creditor for the value of such shares. Thus, it ordered private
respondents to pay petitioner the amount of P5,062,500 representing 15% of the
monetary value of his CSPI shares plus interest at the legal rate from the time of their
unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24, 1999
resolution. While it reiterated its earlier order to pay petitioner the amount of
P5,062,500, it deleted the award of legal interest. It clarified that it never meant to
award interest since this would be unfair to the other claimants. TAECaD

1)whether petitioner should be considered as a preferred (and

secured) creditor of Philfinance;
2)whether petitioner can recover the full value of his CSPI shares
or merely 15% thereof like all other ordinary creditors
of Philfinance and
3)whether petitioner is entitled to legal interest. 14
To resolve these issues, we first have to determine if petitioner was indeed a creditor
of Philfinance.
There is no dispute that petitioner was the owner of the CSPI shares. However,
private respondents, as liquidators of Philfinance, illegally withdrew said certificates
of stock without the knowledge and consent of petitioner and authority of the
SEC. 15 After selling the CSPI shares, private respondents added the proceeds of the
sale to the assets of Philfinance. 16 Under these circumstances, did the petitioner
become a creditor of Philfinance? We rule in the affirmative.
The SEC, after holding that petitioner was the owner of the shares, stated:
Petitioner is seeking the return of his CSPI shares which, for the
present, is no longer possible, considering that the same had
already been sold by the respondents, the proceeds of which are
ADMITTEDLY commingled with the assets of PHILFINANCE.
This being the case, [petitioner] is now but a claimant for the
value of those shares. As a claimant, he shall be treated as an
ordinary creditor in so far as the value of those certificates is
concerned. 17
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly
abusive and illicit contrivance employed by private respondents
against petitioner, we, nevertheless, concur with public
respondent that the return of petitioner's CSPI shares is well-nigh
impossible, if not already an utter impossibility, inasmuch as the

certificates of stocks have already been alienated or transferred in

favor of Northeast Corporation, as early as May 27, 1996, in
consequence whereof the proceeds of the sale have been
transmuted into corporate assets of Philfinance, under custodia
legis, ready for distribution to its creditors and/or investors. Case
law holds that the assets of an institution under receivership or
liquidation shall be deemed in custodia legis in the hands of the
receiver or liquidator, and shall from the moment of such
receivership or liquidation, be exempt from any order,
garnishment, levy, attachment, or execution.
Concomitantly, petitioner's filing of his claim over the subject
CSPI shares before the SEC in the liquidation proceedings bound
him to the terms and conditions thereof. He cannot demand any
special treatment [from] the liquidator, for this flies in the face
of, and will contravene, the Supreme Court dictum that when a
corporation threatened by bankruptcy is taken over by a receiver,
all the creditors shall stand on equal footing. Not one of them
should be given preference by paying one or some [of] them
ahead of the others. This is precisely the philosophy underlying
the suspension of all pending claims against the corporation
under receivership. The rule of thumb is equality in equity. 18
We agree with both the SEC and the CA that petitioner had become an ordinary
creditor of Philfinance.
Certainly, petitioner had the right to demand the return of his CSPI shares. 19 He in
fact filed a complaint in the liquidation proceedings in the SEC to get them back but
was confronted by an impossible situation as they had already been sold.
Consequently, he sought instead to recover their monetary value.
Petitioner's CSPI shares were specific or determinate movable properties. 20 But after
they were sold, the money raised from the sale became generic 21 and were
commingled with the cash and other assets of Philfinance. Unlike shares of stock,
money is a generic thing. It is designated merely by its class or genus without any
particular designation or physical segregation from all others of the same
class. 22 This means that once a certain amount is added to the cash balance, one can
no longer pinpoint the specific amount included which then becomes part of a whole
mass of money. HDICSa
It thus became impossible to identify the exact proceeds of the sale of the CSPI
shares since they could no longer be particularly designated nor distinctly segregated
from the assets of Philfinance. Petitioner's only remedy was to file a claim on the
whole mass of these assets, to which unfortunately all of the other creditors and
investors of Philfinance also had a claim.

Petitioner's right of action against Philfinance was a "claim" properly to be litigated

in the liquidation proceedings. 23 In Finasia Investments and Finance Corporation v.
CA, 24we discussed the definition of "claims" in the context of liquidation
proceedings:
We agree with the public respondent that the word 'claim' as used
in Sec. 6(c) of P.D. 902-A, 25 as amended, refers to debts or
demands of a pecuniary nature. It means "the assertion of a right
to have money paid. It is used in special proceedings like those
before [the administrative court] on insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced
to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable
remedy for breach of performance if such breach gives
rise to a right to payment, whether or not such right to
an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed,
secured, unsecured. 26
Undoubtedly, petitioner had a right to the payment of the value of his shares. His
demand was of a pecuniary nature since he was claiming the monetary value of his
shares. It was in this sense (i.e. as a claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of credits are applicable to
the liquidation proceedings. 27 The next question is, was petitioner a preferred or
ordinary creditor under these provisions?
Petitioner argues that he was a preferred creditor because private respondents
illegally withdrew his CSPI shares from the custodian banks and sold them without
his knowledge and consent and without authority from the SEC. He quotes Article
2241 (2) of the Civil Code:

With reference to specific movable property of the debtor, the

following claims or liens shall be preferred:
xxx xxx xxx
(2)Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance of

their duties, on the movables, money or securities obtained by

them;

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

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

xxx xxx xxx

(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the entire monetary
value of his shares.
Petitioner's argument is incorrect. Article 2241 refers only to specific movable
property. His claim was for the payment of money, which, as already discussed, is
generic property and not specific or determinate.
Considering that petitioner did not fall under any of the provisions applicable to
preferred creditors, he was deemed an ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no
preference.
This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be paid pro
rata regardless of dates.
Like all the other ordinary creditors or claimants against Philfinance, he was
entitled to a rate of recovery of only 15% of his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner would have given petitioner an
unfair advantage or preference over the other creditors. 28 Petitioner counters that he
was entitled to 12% legal interest per annum under Article 2209 of the Civil Code
from the time he was deprived of the shares until fully paid. HTaIAC
The guidelines for awarding interest were laid down in Eastern Shipping Lines, Inc.
v. CA: 29
I.When an obligation, regardless of its source, i.e., law, contracts,
quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for damages. The provisions under
Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

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

of a sum of money, i.e., a loan or forbearance of money, the
interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the
Civil Code.
2.When an obligation, not constituting a loan or forbearance
of money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is
made, the interest shall begin to run only from the date of the
judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest
shall, in any case, be on the amount of finally adjudged.
3.When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit. 30 (Emphasis supplied)
Under this ruling, petitioner was not entitled to legal interest of 12% per annum (from
demand) because the amount owing to him was not a loan 31 or forbearance of
money.32
Neither was he entitled to legal interest of 6% per annum under Article 2209 of the
Civil Code 33 since this provision applies only when there is a delay in the payment
of a sum of money. 34 This was not the case here. In fact, petitioner himself
manifested before the CA that the SEC (as liquidator) had already paid him
P5,062,500 representing 15% of P33,750,000. 35

Accordingly, petitioner was not entitled to interest under the law and current
jurisprudence.
Considering that petitioner had already received the amount of P5,062,500, the
obligation of the SEC as liquidator of Philfinance was totally extinguished. 36
We note that there is an undisputed finding by the SEC and CA that private
respondents sold the subject shares without authority from the SEC. Petitioner
evidently has a cause of action against private respondents for their bad faith and
unauthorized acts, and the resulting damage caused to him. 37
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.