PCI LEASING AND FINANCE VS TROJAN
METAL INDUSTRIES INC.
FACTS:
Respondent came to petitioner to seek a loan
Instead of extending a loan, PCILF offered to buy
various equipment TMI owned. TMI agreed.
PCILF and TMI immediately executed deeds of
sale5 evidencing TMIs sale to PCILF of the
various equipment in consideration of the total
amount of P 2,865,070.00. PCILF and TMI then
entered into a lease agreement,6 dated 8 April
1997, whereby the latter leased from the former
the various equipment it previously owned.
Pursuant to the lease agreement, TMI issued
postdated checks representing 24 monthly
installments. The lease agreement required TMI to
give PCILF a guaranty deposit of P1,030,350.00,7
which would serve as security for the timely
performance of TMIs obligations under the lease
agreement, to be automatically forfeited should
TMI return the leased equipment before the
expiration of the lease agreement. Further, spouses
Walfrido and Elizabeth Dizon, as TMIs President
and Vice-President, respectively executed in favor
of PCILF a Continuing Guaranty of Lease
Obligations.8 Under the continuing guaranty, the
Dizon spouses agreed to immediately pay
whatever obligations would be due PCILF in case
TMI failed to meet its obligations under the lease
agreement. To obtain additional loan from another
financing company,9 TMI used the leased
equipment as temporary collateral.10 PCILF
considered the second mortgage a violation of the
lease agreement. At this time, TMIs partial
payments had reached P1,717,091.00.11 On 8
December 1998, PCILF sent TMI a demand
letter12 for the payment of the latters outstanding
obligation. PCILFs demand remained unheeded.
On 7 May 1999, PCILF filed in the Regional Trial
Court (Branch 79) of Quezon City a complaint13
against TMI for recovery of a sum of money. the
RTC issued the writ of replevin14 PCILF prayed
for, directing the sheriff to take custody of the
leased equipment. the RTC granted the prayer of
PCILF in its complaint. The RTC ruled that the
lease agreement must be presumed valid as the law
between the parties even if some of its provisions
constituted unjust enrichment on the part of
PCILF. CA reversed and ruled that the sale with
lease agreement was in fact a loan secured by
chattel mortgage.
ISSUE:
whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured
by chattel mortgage
HELD:
Leasing shall refer to financial leasing which is a
mode of extending credit through a non-
cancelable contract under which the lessor
purchases or acquires at the instance of the
lessee equipment, motor vehicles, machinery or
other movable property in consideration of the
periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least
70% of the purchase price or acquisition cost,
including any incidental expenses and a margin of
profit, over the lease period. The contract shall
extend over an obligatory period during which the
lessee has the right to hold and use the leased
property and shall bear the cost of repairs,
maintenance, insurance, and preservation thereof,
but with no obligation or option on the part of the
lessee to purchase the leased property at the end of
the lease contract. Thus, in
a true financial leasing, whether under RA 5980
or RA 8556, a finance company purchases on
behalf of a cash-strapped lessee the equipment
the latter wants to buy but, due to financial
limitations, is incapable of doing so. The finance
company then leases the equipment to the lessee
in exchange for the latters periodic payment of
a fixed amount of rental. In this case, however,
TMI already owned the subject equipment
before it transacted with PCILF. Therefore, the
transaction between the parties in this case
cannot be deemed to be in the nature of a
financial leasing as defined by law.
Under Article 1144 of the Civil Code, the
prescriptive period for actions based upon a
written contract and for reformation of an
instrument is ten years. The right of action for
reformation accrued from the date of execution of
the lease agreement on 8 April 1997. TMI timely
exercised its right of action when it filed an answer
on 14 February 2000 asking for the reformation of
the lease agreement.
Hence, had the true transaction between the parties
been expressed in a proper instrument, it would
have been a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing.
Thus, upon TMIs default, PCILF was entitled to
seize the mortgaged equipment, not as owner but
as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILFs sale to a
third party of the mortgaged equipment and
collection of the proceeds of the sale can be
deemed in the exercise of its right to foreclose the
chattel mortgage as creditor-mortgagee. The Court
of Appeals correctly ruled that the transaction
between the parties was simply a loan secured by a
chattel mortgage.
MAKATI LEASING AND FINANCE
CORPORATION VS WEAREVER
TEXTILE MILLS
FACTS:
in order to obtain financial accommodations from
herein petitioner Makati Leasing and Finance
Corporation, the private respondent Wearever
Textile Mills, Inc., discounted and assigned several
receivables with the former under a Receivable
Purchase Agreement. To secure the collection of
the receivables assigned, private respondent
executed a Chattel Mortgage over certain raw
materials inventory as well as a machinery
described as an Artos Aero Dryer Stentering
Range.
Upon private respondent's default, petitioner filed
a petition for extrajudicial foreclosure of the
properties mortgage to it. However, the Deputy
Sheriff assigned to implement the foreclosure
failed to gain entry into private respondent's
premises and was not able to effect the seizure of
the aforedescribed machinery. Petitioner thereafter
filed a complaint for judicial foreclosure with the
Court of First Instance of Rizal, Branch VI,
docketed as Civil Case No. 36040, the case before
the lower court.
Acting on petitioner's application for replevin, the
lower court issued a writ of seizure, the
enforcement of which was however subsequently
restrained upon private respondent's filing of a
motion for reconsideration. After several incidents,
the lower court finally issued on February 11,
1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to
break open the premises of private respondent to
enforce said writ. The lower court reaffirmed its
stand upon private respondent's filing of a further
motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure
order, repaired to the premises of private
respondent and removed the main drive motor of
the subject machinery.
The Court of Appeals, in certiorari and prohibition
proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court
and ordered the return of the drive motor seized by
the sheriff pursuant to said Orders, after ruling that
the machinery in suit cannot be the subject of
replevin, much less of a chattel mortgage, because
it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the
ground by means of bolts and the only way to
remove it from respondent's plant would be to drill
out or destroy the concrete floor, the reason why
all that the sheriff could do to enfore the writ was
to take the main drive motor of said machinery.
ISSUE:
whether the machinery in suit is real or personal
property from the point of view of the parties with
petitioner arguing that it is a personality, while the
respondent claiming the contrary
HELD:
Examining the records of the instant case, We find
no logical justification to exclude the rule out, as
the appellate court did, the present case from the
application of the abovequoted pronouncement. If
a house of strong materials, like what was
involved in the above Tumalad case, may be
considered as personal property for purposes of
executing a chattel mortgage thereon as long as
the parties to the contract so agree and no
innocent third party will be prejudiced thereby,
there is absolutely no reason why a machinery,
which is movable in its nature and becomes
immobilized only by destination or purpose,
may not be likewise treated as such. This is
really because one who has so agreed is
estopped from denying the existence of the
chattel mortgage.
In rejecting petitioner's assertion on the
applicability of the Tumalad doctrine, the Court of
Appeals lays stress on the fact that the house
involved therein was built on a land that did not
belong to the owner of such house. But the law
makes no distinction with respect to the
ownership of the land on which the house is
built and We should not lay down distinctions
not contemplated by law.
It must be pointed out that the characterization
of the subject machinery as chattel by the
private respondent is indicative of intention and
impresses upon the property the character
determined by the parties. As stated in
Standard Oil Co. of New York v. Jaramillo, 44
Phil. 630, it is undeniable that the parties to a
contract may by agreement treat as personal
property that which by nature would be real
property, as long as no interest of third parties
would be prejudiced thereby.
ALEJANDRA TORRES VS FRANCISCO
LIMJAP
FACTS:
In the first case the plaintiffs alleged that Jose B.
Henson, in his lifetime, executed in their favor a
chattel mortgage (Exhibit A) on his drug store at
Nos. 101-103 Calle Rosario, known as Farmacia
Henson, to secure a loan of P7,000, although it was
made to appear in the instrument that the loan was
for P20,000.
In the second case the plaintiffs alleged that they
were the heirs of the late Don Florentino Torres;
and that Jose B. Henson, in his lifetime, executed
in favor of Don Florentino Torres a chattel
mortgage (also Exhibit A) on his three drug stores
known as Henson's Pharmacy, Farmacia Henson
and Botica Hensonina, to secure a loan of P50,000,
which was later reduced to P26,000, and for
which, Henson's Pharmacy at Nos. 71-73 Escolta,
remained as the only security by agreement of the
parties.
In both cases the plaintiffs alleged that the
defendant violated the terms of the mortgage and
that, in consequence thereof they became entitled
to the possession of the chattels and to foreclose
their mortgages thereon. Upon the petition of the
plaintiffs and after the filing of the necessary
bonds, the court issued in each case an order
directing the sheriff of the City of Manila to take
immediate possession of said drug stores.
The defendant filed practically the same answer to
both complaints. He denied generally and
specifically the plaintiffs' allegations, and set up
the following special defenses:
(1) That the chattel mortgages (Exhibit A, in
G.R. No. 34385 and Exhibit A, in G.R. No. 34286)
are null and void for lack of sufficient particularity
in the description of the property mortgaged; and
(2) That the chattels which the plaintiffs sought
to recover were not the same property described in
the mortgage.
The defendant also filed a counterclaim for
damages in the sum of P20,000 in the first case
and P100,000 in the second case.
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.
ISSUE:
HELD:
In his second assignment of error the appellant
attacks the validity of the stipulation in said
mortgages authorizing the mortgagor to sell the
goods covered thereby and to replace them with
other goods thereafter acquired. He insists that a
stipulation authorizing the disposal and
substitution of the chattels mortgaged does not
operate to extend the mortgage to after-acquired
property, and that such stipulation is in
contravention of the express provision of the last
paragraph of section 7 Act No. 1508
A stipulation in the mortgage, extending its scope
and effect to after-acquired property, is valid and
binding
. . . where the after-acquired property is in renewal
of, or in substitution for, goods on hand when the
mortgage was executed, or is purchased with the
proceeds of the sale of such goods, etc. (11 C.J., p.
436.)
Cobbey, a well-known authority on Chattel
Mortgages, recognizes the validity of stipulations
relating to after-acquired and substituted chattels.
His views are based on the decisions of the
supreme courts of several states of the Union. He
says: "A mortgage may, by express stipulations,
be drawn to cover goods put in stock in place of
others sold out from time to time. A mortgage
may be made to include future acquisitions of
goods to be added to the original stock
mortgaged, but the mortgage must expressly
provide that such future acquisitions shall be
held as included in the mortgage. ... Where a
mortgage covering the stock in trade, furniture,
and fixtures in the mortgagor's store provides
that "all goods, stock in trade, furniture, and
fixtures hereafter purchased by the mortgagor
shall be included in and covered by the
mortgage," the mortgage covers all after-
acquired property of the classes mentioned,
and, upon foreclosure, such property may be
taken and sold by the mortgagee the same as
the property in possession of the mortgagor at
the time the mortgage was executed." (Vol. I,
Cobbey on Chattel Mortgages, sec. 361, pp. 474,
475.)
In harmony with the foregoing, we are of the
opinion (a) that the provision of the last
paragraph of section 7 of Act No. 1508 is not
applicable to drug stores, bazaars and all other
stores in the nature of a revolving and floating
business; (b) that the stipulation in the chattel
mortgages in question, extending their effect to
after-acquired property, is valid and binding;
and (c) that the lower court committed no error
in not permitting the defendant-appellant to
introduce evidence tending to show that the
goods seized by the sheriff were in the nature of
after-acquired property.
ACME SHOE RUBBER AND PLASTIC CORP
VS CA AND BANK OF THE PHILIPPINES
FACTS:
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). 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 extra judicial foreclosure of the chattel
mortgage, herein before 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.
CA affirmed. The instant petition interposed by
petitioner corporation was initially dinied 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.
ISSUE:
WON it 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.
HELD:
No. While a pledge, real estate mortgage, or
antichresis may exceptionally secure after-incurred
obligations so long as these future debts are
accurately described, a chattel mortgage 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 is executed.
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.
SERVICEWIDE SPECIALISTS VS CA AND
PONCE
FACTS:
Sometime in 1975, respondent spouses Atty. Jesus
and Elizabeth Ponce bought on installment a
Holden Torana vehicle from C.R. Tecson
Enterprises. They executed a promissory note and
a chattel mortgage on the vehicle dated December
24, 1975 in favor of the C.R. Tecson Enterprises to
secure payment of the note. The mortgage was
registered both in the Registry of Deeds and the
Land Transportation Office. On the same date,
C.R. Tecson Enterprises, in turn, executed a deed
of assignment of said promissory note and chattel
mortgage in favor of Filinvest Credit Corporation
with the conformity of respondent spouses. The
latter were aware of the endorsement of the note
and the mortgage to Filinvest as they in fact
availed of its financing services to pay for the car.
In 1976, respondent spouses transferred and
delivered the vehicle to Conrado R. Tecson by way
of sale with assumption of mortgage.
Subsequently, in 1978, Filinvest assigned all its
rights and interest over the same promissory note
and chattel mortgage to petitioner Servicewide
Specialists Inc. without notice to respondent
spouses. Due to the failure of respondent spouses
to pay the installments under the promissory note
from October 1977 to March 1978, and despite
demands to pay the same or to return the vehicle,
petitioner was constrained to file before the
Regional Trial Court of Manila on May 22, 1978 a
complaint for replevin with damages against them,
docketed as Civil Case No. 115567. In their
answer, respondent spouses denied any liability
claiming they had already returned the car to
Conrado Tecson pursuant to the Deed of Sale with
Assumption of Mortgage. Thus, they filed a third
party complaint against Conrado Tecson praying
that in case they are adjudged liable to petitioner,
Conrado Tecson should reimburse them.
After trial, the lower court found respondent
spouses jointly and solidarily liable to petitioner,
however, the third party defendant Conrado Tecson
was ordered to reimburse the respondent spouses
for the sum that they would pay to petitioner. 1 On
appeal, the Court of Appeals reversed and set aside
the judgment of the court a quo on the principal
ground that respondent spouses were not notified
of the assignment of the promissory note and
chattel mortgage to petitioner.
ISSUE:
The resolution of the petition hinges on whether
the assignment of a credit requires notice to the
debtor in order to bind him. More specifically, is
the debtor-mortgagor who sold the property to
another entitled to notice of the assignment of
credit made by the creditor to another party such
that if the debtor was not notified of the
assignment, he can no longer be held liable since
he already alienated the property? Conversely, is
the consent of the creditor-mortgagee necessary
when the debtor-mortgagor alienates the property
to a third person?
HELD:
In the case at bar, what is relevant is not the
assignment of credit between petitioner and its
assignor, but the knowledge or consent of the
creditor's assignee to the debtor-mortgagor's sale
of the property to another.
When the credit was assigned to petitioner, only
notice to but not the consent of the debtor-
mortgagor was necessary to bind the latter.
Applying Article 1627 of the Civil Code, 3 the
assignment made to petitioner includes the
accessory rights such as the mortgage. Article
2141, on the other hand, states that the
provisions concerning a contract of pledge shall
be applicable to a chattel mortgage, such as the
one at bar, insofar as there is no conflict with
Act No. 1508, the Chattel Mortgage Law. As
provided in Article 2096 in relation to Article
2141 of the Civil Code, 4 a thing pledged may
be alienated by the pledgor or owner "with the
consent of the pledgee." This provision is in
accordance with Act No. 1508 which provides
that "a mortgagor of personal property shall
not sell or pledge such property, or any part
thereof, mortgaged by him without the consent
of the mortgagee in writing on the back of the
mortgage and on the margin of the record
thereof in the office where such mortgage is
recorded." 5 Although this provision in the
chattel mortgage has been expressly repealed by
Article 367 of the Revised Penal Code, yet
under Article 319 (2) of the same Code, the sale
of the thing mortgaged may be made provided
that the mortgagee gives his consent and that
the same is recorded. 6 In any case, applying by
analogy Article 2128 of the Civil Code 7 to a
chattel mortgage, it appears that a mortgage
credit may be alienated or assigned to a third
person. Since the assignee of the credit steps
into the shoes of the creditor-mortgagee to
whom the chattel was mortgaged, it follows that
the assignee's consent is necessary in order to
bind him of the alienation of the mortgaged
thing by the debtor-mortgagor. This is
tantamount to a novation. As the new assignee,
petitioner's consent is necessary before
respondent spouses' alienation of the vehicle
can be considered as binding against third
persons. Petitioner is considered a third person
with respect to the sale with mortgage between
respondent spouses and third party defendant
Conrado Tecson.
PERFECTO DY VS CA AND GELAC
TRADING AND ANTONIO GONZALES
FACTS:
The petitioner, Perfecto Dy and Wilfredo Dy are
brothers. Sometime in 1979, Wilfredo Dy
purchased a truck and a farm tractor through
financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and
tractor were mortgaged to Libra as security for the
loan.
The petitioner wanted to buy the tractor from his
brother so on August 20, 1979, he wrote a letter to
Libra requesting that he be allowed to purchase
from Wilfredo Dy the said tractor and assume the
mortgage debt of the latter.
In a letter dated August 27, 1979, Libra thru its
manager, Cipriano Ares approved the petitioner's
request.
Thus, on September 4, 1979, Wilfredo Dy
executed a deed of absolute sale in favor of the
petitioner over the tractor in question.
At this time, the subject tractor was in the
possession of Libra Finance due to Wilfredo Dy's
failure to pay the amortizations.
Despite the offer of full payment by the petitioner
to Libra for the tractor, the immediate release
could not be effected because Wilfredo Dy had
obtained financing not only for said tractor but also
for a truck and Libra insisted on full payment for
both.
The petitioner was able to convince his sister,
Carol Dy-Seno, to purchase the truck so that full
payment could be made for both. On November
22, 1979, a PNB check was issued in the amount
of P22,000.00 in favor of Libra, thus settling in
full the indebtedness of Wilfredo Dy with the
financing firm. Payment having been effected
through an out-of-town check, Libra insisted that it
be cleared first before Libra could release the
chattels in question.
Meanwhile, Civil Case No. R-16646 entitled
"Gelac Trading, Inc. v. Wilfredo Dy", a collection
case to recover the sum of P12,269.80 was
pending in another court in Cebu.
an alias writ of execution issued on December 27,
1979, the provincial sheriff was able to seize and
levy on the tractor which was in the premises of
Libra in Carmen, Cebu. The tractor was
subsequently sold at public auction where Gelac
Trading was the lone bidder.
It was only when the check was cleared on January
17, 1980 that the petitioner learned about GELAC
having already taken custody of the subject tractor.
Consequently, the petitioner filed an action to
recover the subject tractor against GELAC
Trading. RTC ruled in favor of petitioner. CA
reversed
ISSUE:
WHETHER OR NOT THE HONORABLE
COURT OF APPEALS MISAPPREHENDED
THE FACTS AND ERRED IN NOT AFFIRMING
THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD
ALREADY PASSED TO HEREIN PETITIONER
WHEN SAID TRACTOR WAS LEVIED ON BY
THE SHERIFF PURSUANT TO AN ALIAS
WRIT OF EXECUTION ISSUED IN ANOTHER
CASE IN FAVOR OF RESPONDENT GELAC
TRADING INC.
HELD:
The mortgagor who gave the property as
security under a chattel mortgage did not part
with the ownership over the same. He had the
right to sell it although he was under the
obligation to secure the written consent of the
mortgagee or he lays himself open to criminal
prosecution and even if no consent was obtained
from the mortgagee, the validity of the sale
would still not be affected.
Thus, we see no reason why Wilfredo Dy, as the
chattel mortgagor can not sell the subject
tractor. There is no dispute that the consent of
Libra Finance was obtained in the instant case.
In the instant case, actual delivery of the subject
tractor could not be made. However, there was
constructive delivery already upon the
execution of the public instrument pursuant to
Article 1498 and upon the consent or agreement
of the parties when the thing sold cannot be
immediately transferred to the possession of the
vendee. (Art. 1499)
While it is true that Wilfredo Dy was not in
actual possession and control of the subject
tractor, his right of ownership was not divested
from him upon his default. Neither could it be
said that Libra was the owner of the subject
tractor because the mortgagee can not become
the owner of or convert and appropriate to
himself the property mortgaged. (Article 2088,
Civil Code) Said property continues to belong to
the mortgagor. The only remedy given to the
mortgagee is to have said property sold at
public auction and the proceeds of the sale
applied to the payment of the obligation secured
by the mortgagee. (See Martinez v. PNB, 93 Phil.
765, 767 [1953]) There is no showing that Libra
Finance has already foreclosed the mortgage and
that it was the new owner of the subject tractor.
Undeniably, Libra gave its consent to the sale of
the subject tractor to the petitioner. It was aware of
the transfer of rights to the petitioner.
Where a third person purchases the mortgaged
property, he automatically steps into the shoes
of the original mortgagor. (See Industrial Finance
Corp. v. Apostol, 177 SCRA 521 [1989]). His
right of ownership shall be subject to the
mortgage of the thing sold to him. In the case at
bar, the petitioner was fully aware of the
existing mortgage of the subject tractor to
Libra. In fact, when he was obtaining Libra's
consent to the sale, he volunteered to assume the
remaining balance of the mortgage debt of
Wilfredo Dy which Libra undeniably agreed to.
The payment of the check was actually intended to
extinguish the mortgage obligation so that the
tractor could be released to the petitioner. It was
never intended nor could it be considered as
payment of the purchase price because the
relationship between Libra and the petitioner is not
one of sale but still a mortgage. The clearing or
encashment of the check which produced the effect
of payment determined the full payment of the
money obligation and the release of the chattel
mortgage. It was not determinative of the
consummation of the sale. The transaction between
the brothers is distinct and apart from the
transaction between Libra and the petitioner. The
contention, therefore, that the consummation of the
sale depended upon the encashment of the check is
untenable.
The sale of the subject tractor was consummated
upon the execution of the public instrument on
September 4, 1979. At this time constructive
delivery was already effected. Hence, the
subject tractor was no longer owned by
Wilfredo Dy when it was levied upon by the
sheriff in December, 1979. Well settled is the
rule that only properties unquestionably owned
by the judgment debtor and which are not
exempt by law from execution should be levied
upon or sought to be levied upon. For the power
of the court in the execution of its judgment
extends only over properties belonging to the
judgment debtor. (Consolidated Bank and Trust
Corp. v. Court of Appeals, G.R. No. 78771,
January 23, 1991).
PAMECA WOOD TREATMENT PLANT INC.
VS CA AND DEVELOPMENT BANK OF PH
FACTS:
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. RTC ruled in favor of plaintiffs.
CA affirmed.
ISSUE:
HELD:
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.
Since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of
the sale proceeds there is a corollary obligation
on the part of the debtor-mortgagee to pay the
deficiency in case of a reduction in the price at
public auction. As explained in Manila Trading
and Supply Co. vs. Tamaraw Plantation Co. 17,
cited in Ablaza vs. Ignacio, supra:
While it is true that section 3 of Act No. 1508
provides that "a chattel mortgage is a conditional
sale", it further provides that it "is a conditional
sale of personal property as security for the
payment of a debt, or for the performance of some
other obligation specified therein." The lower
court overlooked the fact that the chattels
included in the chattel mortgage are only given
as security and not as a payment of the debt, in
case of a failure of payment.
The theory of the lower court would lead to the
absurd conclusion that if the chattels mentioned
in the mortgage, given as security, should sell
for more than the amount of the indebtedness
secured, that the creditor would be entitled to
the full amount for which it might be sold, even
though that amount was greatly in excess of the
indebtedness. Such a result certainly was not
contemplated by the legislature when it adopted
Act No. 1508. There seems to be no reason
supporting that theory under the provision of
the law. The value of the chattels changes
greatly from time to time, and sometimes very
rapidly. If for example, the chattels should
greatly increase in value and a sale under that
condition should result in largely overpaying
the indebtedness, and if the creditor is not
permitted to retain the excess, then the same
token would require the debtor to pay the
deficiency in case of a reduction in the price of
the chattels between the date of the contract
and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his
Commentaries, as well as other authors on the
question of chattel mortgages, have said, that "in
case of a sale under a foreclosure of a chattel
mortgage, there is no question that the mortgagee
or creditor may maintain an action for the
deficiency, if any should occur." And the. fact that
Act No. 1508 permits a private sale, such sale is
not, in fact, a satisfaction of the debt, to any
greater extent than the value of the property at the
time of the sale. The amount received at the time
of the sale, of course, always requiring good faith
and honesty in the sale, is only a payment, pro
tanto, and an action may be maintained for a
deficiency in the debt.
We find no reason to disturb the ruling in Ablaza
vs Ignacio, and the cases reiterating it. 18
Neither do We find tenable the application by
analogy of Article 1484 of the Civil Code to the
instant case. As correctly pointed out by the trial
court, the said article applies clearly and solely to
the sale of personal property the price of which is
payable in installments. Although Article 1484,
paragraph (3) expressly bars any further action
against the purchaser to recover an unpaid balance
of the price, where the vendor opts to foreclose the
chattel mortgage on the thing sold, should the
vendee's failure to pay cover two or more
installments, this provision is specifically
applicable to a sale on installments.
Magna Financial vs. Colarina, G.R. No. 158635
December 9, 2005
Facts:
Respondent bought a Multicab from petitioner. To
secure the obligation, respondent executed a
promissory note and a chattel mortgage of the
vehicle in favor of the petitioner. Respondent then
defaulted in payment. Petitioner filed a complaint
for foreclosure of chattel mortgage with replevin.
A writ of replevin was issued and the vehicle was
turned over to Magna financial. The trial court and
RTC decided in favor of petitioner and ordered
respondent to pay the unpaid balance and foreclose
the chattel mortgage. The Court of Appeals
reversed the decision.

Issue:
Whether MFS can avail of the two remedies,
payment of unpaid balance and foreclosure of
chattel mortgage?
Held:
No. Petitioner, having elected the foreclosure of
chattel mortgage, is not entitled to be paid the
balance even though it did not actually foreclose
the chattel mortgage. Article 1484, paragraph 3,
provides that if the vendor has availed himself
of the right to foreclose the chattel mortgage, he
shall have no further action against the
purchaser to recover any unpaid balance of the
purchase price. Any agreement to the contrary
shall be void. In other words, in all proceedings
for the foreclosure of chattel mortgages
executed on chattels which have been sold on
the installment plan, the mortgagee is limited to
the property included in the mortgage. The
petitioners prayer contains two remedies,
payment of unpaid balance and foreclosure of
chattel mortgage. Such a scheme is not only
irregular but is a flagrant circumvention of the
prohibition of the law. By praying for the
foreclosure of the chattel, Magna Financial
Services Group, Inc. renounced whatever claim
it may have under the promissory note.
TA-OCTA VS SHERIFF EGUIA
FACTS:
In a complaint, dated 20 March 2000, filed with
the Office of the Executive Judge of the Regional
Trial Court (RTC) of Iloilo City, Criste Ta-Octa
charged respondent sheriffs Winston Eguia and
Edwin Torres with grave abuse of authority in
connection with a petition for foreclosure of
chattel mortgage instituted by AC (Iloilo) Lenders,
Inc.
Complainant claimed that the petition for
foreclosure of chattel mortgage had been served by
respondent sheriffs on the same day it was filed
with the Office of Provincial/City Sheriff of Iloilo,
without any raffle being first conducted and sans
the approval of the trial court. He asserted that no
notice or demand from either AC (Iloilo) Lenders,
Inc., or respondents had been made before
possession of the motor vehicle was taken away
from him nor did respondents issue any receipt on
the accessories of the vehicle. Complainant said
that respondents, after taking possession of the
subject vehicle, hid it instead of having it parked at
the grounds of the Hall of Justice. Complainant
added that respondents had made erasures on the
entry in the foreclosure book at the Office of the
Sheriff when the petition for foreclosure of
mortgage was filed and recorded.
Executive Judge Tito A. Gustilo required
respondents to submit their respective answers to
the complaint.
In their joint comment, respondents averred that
they had complied with the procedure for
extrajudicial foreclosures of mortgages. The
petition was filed and docketed, and the filing fees
were duly paid with the Office of the Clerk of
Court. Respondents, however, admitted that the
petition was immediately served, without a raffle
having first been conducted because of the fear,
entertained by AC Lenders, Inc., that complainant
might abscond. In fact, respondents already found
the subject vehicle at the house of a relative of
complainant. Respondents were informed that
complainant had pending criminal cases before the
municipal trial courts for violation of Batas
Pambansa Blg. 22. Respondents denied having
made erasures on the entries in the foreclosure
book and, by way of substantiating the denial,
submitted the affidavits of Josephine Marie Lagura
and Jonalyn Gasataya, employees both assigned at
the Office of the Clerk of Court ("OCC") of the
Regional Trial Court of Iloilo City and tasked with
receiving, docketing and updating the entries in the
Sheriff and Notary Public Foreclosure cases filed
before the OCC. In her affidavit, Josephine Lagura
attested that on 22 February 2000 (the date when
petition was filed), the Rural Bank of Guimbal,
through its counsel, had filed notarial foreclosure
incidents which she erroneously docketed in the
Sheriff's Foreclosure Book, and the mistake was
only discovered when Atty. Gerry Sumaculub,
Assistant Clerk of Court, reviewed the book. She
claimed that the erasures and erroneous entries
were done in good faith. The Executive Judge
conducted an investigation pursuant to
Administrative Order No. 6, dated 30 June
1975. The Investigating Judge recommended that
the penalty of one month suspension, without pay,
be imposed on respondents.
The Office of the Court Administrator, in its
memorandum of 02 March 2001, adopted in toto
the findings and recommendation of the
Investigating Judge.

The Court sees the findings of the Investigating
Judge and the Office of the Court Administrator to
be well-taken but finds the recommended penalty
of suspension, given the circumstances, a bit too
harsh.
PANDO VS GIMENEZ
RULING:
From all these circumstances it follows
that the administration of the property
in question assumed by the plaintiff
toward the end of October, 1925 is
antichretic in character, and therefore
justice and equity demand that
application be here made of the Civil
Code provisions touching the
obligations of the antichretic creditor, to
wit:
The creditor is obliged to pay the taxes
and charges which burden the estate, in
the absence of an agreement to the
contrary.
He shall also be obliged to pay any
expenses necessary for its preservation
and repair.
Any sums he may expend for such
purposes shall be chargeable against the
fruits. (Art. 1882, Civil Code.)
The right which the creditor acquires by
virtue of antichresis to enjoy the fruits of
the property delivered to him, carries
two obligations which are a necessary
consequence of the contract, because
they arise from its very nature.
And the plaintiff having failed in his
obligation to pay the tax on the house and
the rent of the lot, he is by law required to
pay indemnity for damages (article 1101,
Civil Code).
BARAYOGA VS APT
RULING:
This Court has ruled in a long line of
cases[24] that under Articles 2241 and
2242 of the Civil Code, a mortgage
credit is a special preferred credit that
enjoys preference with respect to a
specific/determinate property of the
debtor. On the other hand, the workers
preference under Article 110 of the
Labor Code is an ordinary preferred
credit. While this provision raises the
workers money claim to first priority in
the order of preference established
under Article 2244 of the Civil Code,
the claim has no preference over special
preferred credits.
Thus, the right of employees to be paid
benefits due them from the properties
of their employer cannot have any
preference over the latters mortgage
credit. In other words, being a
mortgage credit, APTs lien on
BISUDECOs mortgaged assets is a
special preferred lien that must be
satisfied first before the claims of the
workers.
ATLANTIC ERECTORS VS HERBAL
COVE REALTY CORP
RULING:
As a general rule, the only instances in
which a notice of lis pendens may be
availed of are as follows: (a) an action to
recover possession of real estate; (b) an
action for partition; and (c) any other
court proceedings that directly affect the
title to the land or the building thereon or
the use or the occupation thereof.[10]
Additionally, this Court has held that
resorting to lis pendens is not necessarily
confined to cases that involve title to or
possession of real property. This
annotation also applies to suits seeking to
establish a right to, or an equitable estate
or interest in, a specific real property; or to
enforce a lien, a charge or an encumbrance
against it.[11]
Apparently, petitioner proceeds on the
premise that its money claim involves the
enforcement of a lien. Since the money
claim is for the nonpayment of materials
and labor used in the construction of
townhouses, the lien referred to would
have to be that provided under Article
2242 of the Civil Code. This provision
describes a contractors lien over an
immovable property as follows:
Art. 2242. With reference to specific
immovable property and real rights of
the debtor, the following claims,
mortgages and liens shall be preferred,
and shall constitute an encumbrance on
the immovable or real right:
xxxxxxxxx
(3) Claims of laborers, masons, mechanics
and other workmen, as well as of
architects, engineers and contractors,
engaged in the construction,
reconstruction or repair of buildings,
canals or other works, upon said
buildings, canals or other works;
(4) Claims of furnishers of materials used
in the construction, reconstruction, or
repair of buildings, canals or other works,
upon said buildings, canals or other
works[.] (Emphasis supplied)
However, a careful examination of
petitioners Complaint, as well as the
reliefs it seeks, reveals that no such lien
or interest over the property was ever
alleged. The Complaint merely asked for
the payment of construction services and
materials plus damages, without
mentioning -- much less asserting -- a lien
or an encumbrance over the property.
Verily, it was a purely personal action and
a simple collection case. It did not contain
any material averment of any enforceable
right, interest or lien in connection with
the subject property.
As it is, petitioners money claim cannot be
characterized as an action that involves
the enforcement of a lien or an
encumbrance, one that would thus warrant
the annotation of the Notice of Lis
Pendens. Indeed, the nature of an action is
determined by the allegations of the
complaint.[12]
Even assuming that petitioner had
sufficiently alleged such lien or
encumbrance in its Complaint, the
annotation of the Notice of Lis Pendens
would still be unjustified, because a
complaint for collection and damages is
not the proper mode for the enforcement
of a contractors lien.
In J.L. Bernardo Construction v. Court of
Appeals,[13] the Court explained the
concept of a contractors lien under
Article 2242 of the Civil Code and the
proper mode for its enforcement as
follows:
Articles 2241 and 2242 of the Civil
Code enumerates certain credits which
enjoy preference with respect to specific
personal or real property of the debtor.
Specifically, the contractors lien
claimed by the petitioners is granted
under the third paragraph of Article
2242 which provides that the claims of
contractors engaged in the
construction, reconstruction or repair
of buildings or other works shall be
preferred with respect to the specific
building or other immovable property
constructed.
However, Article 2242 finds application
when there is a concurrence of credits,
i.e., when the same specific property of
the debtor is subjected to the claims of
several creditors and the value of such
property of the debtor is insufficient to
pay in full all the creditors. In such a
situation, the question of preference will
arise, that is, there will be a need to
determine which of the creditors will be
paid ahead of the others. Fundamental
tenets of due process will dictate that
this statutory lien should then only be
enforced in the context of some kind of
a proceeding where the claims of all the
preferred creditors may be bindingly
adjudicated, such as insolvency
proceedings.[14] (Emphasis supplied)
Clearly then, neither Article 2242 of the
Civil Code nor the enforcement of the
lien thereunder is applicable here,
because petitioners Complaint failed to
satisfy the foregoing requirements.
Nowhere does it show that respondents
property was subject to the claims of
other creditors or was insufficient to
pay for all concurring debts. Moreover,
the Complaint did not pertain to
insolvency proceedings or to any other
action in which the adjudication of
claims of preferred creditors could be
ascertained.
DBP VS CA
RULING:
The Court of Appeals also held that there
exists in Remington's favor a "lien" on the
unpaid purchases of Marinduque Mining,
and as transferee of these purchases, DBP
should be held liable for the value thereof.
In the absence of liquidation proceedings,
however, the claim of Remington cannot
be enforced against DBP. Article 2241
of the Civil Code provides:
ARTICLE 2241. With reference to
specific movable property of the debtor,
the following claims or liens shall be
preferred:
xxx xxx xxx
(3) Claims for the unpaid price of
movables sold, on said movables, so long
as they are in the possession of the debtor,
up to the value of the same; and if the
movable has been resold by the debtor and
the price is still unpaid, the lien may be
enforced on the price; this right is not lost
by the immobilization of the thing by
destination, provided it has not lost its
form, substance and identity, neither is the
right lost by the sale of the thing together
with other property for a lump sum, when
the price thereof can be determined
proportionally;
(4) Credits guaranteed with a pledge so
long as the things pledged are in the hands
of the creditor, or those guaranteed by a
chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
xxx xxx xxx
In Barretto vs. Villanueva,16 the Court
had occasion to construe Article 2242,
governing claims or liens over specific
immovable property. The facts that gave
rise to the case were summarized by this
Court in its resolution as follows:
x x x Rosario Cruzado sold all her right,
title, and interest and that of her children
in the house and lot herein involved to
Pura L. Villanueva for P19,000.00. The
purchaser paid P1,500 in advance, and
executed a promissory note for the
balance of P17,500.00. However, the
buyer could only pay P5,500 on account
of the note, for which reason the vendor
obtained judgment for the unpaid balance.
In the meantime, the buyer Villanueva was
able to secure a clean certificate of title
(No. 32626), and mortgaged the property
to appellant Magdalena C. Barretto,
married to Jose C. Baretto, to secure a
loan of P30,000.03, said mortgage having
been duly recorded.
Pura Villanueva defaulted on the mortgage
loan in favor of Barretto. The latter
foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming
final asked for execution on 31 July 1958.
On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's
lien" in the amount of P12,000.00, plus
legal interest, invoking Articles 2242,
2243, and 2249 of the new Civil Code.
After hearing, the court below ordered the
"lien" annotated on the back of Certificate
of Title No. 32526, with the proviso that
in case of sale under the foreclosure
decree the vendor's lien and the mortgage
credit of appellant Barretto should be paid
pro rata from the proceeds. Our original
decision affirmed this order of the Court
of First Instance of Manila.
In its decision upholding the order of
the lower court, the Court ratiocinated
thus:
Article 2242 of the new Civil Code
enumerates the claims, mortgages and
liens that constitute an encumbrance on
specific immovable property, and
among them are:
"(2)For the unpaid price of real
property sold, upon the immovable
sold"; and
"(5)Mortgage credits recorded in the
Registry of Property."
Article 2249 of the same Code provides
that "if there are two or more credits
with respect to the same specific real
property or real rights, they shall be
satisfied pro-rata, after the payment of
the taxes and assessments upon the
immovable property or real rights."
Application of the above-quoted
provisions to the case at bar would
mean that the herein appellee Rosario
Cruzado as an unpaid vendor of the
property in question has the right to
share pro-rata with the appellants the
proceeds of the foreclosure sale.
xxx xxx xxx
As to the point made that the articles of
the Civil Code on concurrence and
preference of credits are applicable only
to the insolvent debtor, suffice it to say
that nothing in the law shows any such
limitation. If we are to interpret this
portion of the Code as intended only for
insolvency cases, then other creditor-
debtor relationships where there are
concurrence of credits would be left
without any rules to govern them, and it
would render purposeless the special
laws on insolvency.17
Upon motion by appellants, however, the
Court reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court,
explained the reasons for the reversal:
A. The previous decision failed to take
fully into account the radical changes
introduced by the Civil Code of the
Philippines into the system of priorities
among creditors ordained by the Civil
Code of 1889.
Pursuant to the former Code, conflicts
among creditors entitled to preference as
to specific real property under Article
1923 were to be resolved according to an
order of priorities established by Article
1927, whereby one class of creditors could
exclude the creditors of lower order until
the claims of the former were fully
satisfied out of the proceeds of the sale of
the real property subject of the preference,
and could even exhaust proceeds if
necessary.
Under the system of the Civil Code of the
Philippines, however, only taxes enjoy a
similar absolute preference. All the
remaining thirteen classes of preferred
creditors under Article 2242 enjoy no
priority among themselves, but must be
paid pro rata, i.e., in proportion to the
amount of the respective credits. Thus,
Article 2249 provides:
"If there are two or more credits with
respect to the same specific real
property or real rights, they shall be
satisfied pro rata, after the payment of
the taxes and assessments upon the
immovable property or real rights."
But in order to make this prorating
fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article
2242 (or such of them as have credits
outstanding) must necessarily be
convened, and the import of their
claims ascertained. It is thus apparent
that the full application of Articles 2249
and 2242 demands that there must be
first some proceeding where the claims
of all the preferred creditors may be
bindingly adjudicated, such as
insolvency, the settlement of decedent's
estate under Rule 87 of the Rules of
Court, or other liquidation proceedings
of similar import.
This explains the rule of Article 2243 of
the new Civil Code that
"The claims or credits enumerated in
the two preceding articles shall be
considered as mortgages or pledges of
real or personal property, or liens
within the purview of legal provisions
governing insolvency x x x (Italics
supplied).
And the rule is further clarified in the
Report of the Code Commission, as
follows
"The question as to whether the Civil
Code and the Insolvency Law can be
harmonized is settled by this Article
(2243). The preferences named in
Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance
with the Insolvency Law." (Italics
supplied)
Thus, it becomes evident that one
preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding
contemplated by law for the enforcement
of preferences under Article 2242, unless
the claimant were enforcing a credit for
taxes that enjoy absolute priority. If none
of the claims is for taxes, a dispute
between two creditors will not enable the
Court to ascertain the pro rata dividend
corresponding to each, because the rights
of the other creditors likewise enjoying
preference under Article 2242 can not be
ascertained. Wherefore, the order of the
Court of First Instance of Manila now
appealed from, decreeing that the
proceeds of the foreclosure sale be
apportioned only between appellant and
appellee, is incorrect, and must be
reversed.
CORDOVA VS BERNARDO
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.

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

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:
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.

xxx xxx xxx

(2) Claims arising from misappropriation,

breach of trust, or malfeasance by public
officials committed in the performance of
their duties, on the movables, money or
securities obtained by them;

xxx xxx xxx

(Emphasis supplied)
He asserts that, as a preferred creditor,
he was entitled to the entire monetary
value of his shares.

Petitioners argument is incorrect.

Article 2241 refers only to specific
movable property. His claim was for the
payment of money, which, as already
discussed, is generic property and not
specific or determinate.

Considering that petitioner did not fall