PARAY V RODRIGUEZ

Petitioners: Sps Bonifacio and Faustina Paray and Vidal Espeleta

Respondents: Dra. Abdulia Rodriguez, Miguela Jariol, Leonora Nolasco, Dolores Soberano, Julia
Generoso, Teresita Natividad and Genoveva Soronio

24 Jan 2006 | Tinga, J.

FACTS

Respondents, owners of shares of stock in Quirino-Leonor-Rodriguez Realty. Sometime during

1979-1980, respondents secured by way of pledge some of their shares to petitioners Paray the
payment of certain loan obligations

Parays attempted to foreclose the pledges because of respondents' failure to pay their loans.

Respondents then filed with RTC which sought the declaration of nullity of pledge agreements.

-> RTC dismissed the complaint and gave due course to the foreclosure and sale at public
auction of the various pledges.

Respondents then received Notices of Sale indicating that the pledged shares were to be sold at
public auction. But before the auction, all of respondents caused the consignation with the RTC of
various amounts. It was claimed that respondents had attempted to tender these payments to
the Parays but had been rebuffed.

Notwithstanding the consignation, the auction took place where Vidal Espeleta won. None of
respondents participated at the auction.

Instead, respondents sought the declaration of nullity of the auction.

-> they argued that their tender of payment and subsequent consignations served to
extinguish their loan obligations and discharged the pledge contracts.

-> Petitioners argue that the tender of payment and consignations were made long after
their obligations had become due.
RTC ruled in favor of Parays

-> respondents failed to tender or consign payments within a reasonable period after
default; proper remedy was to participate in the auction sale.

CA reversed, ruling that the consignations extinguished the loan and that the auction was null.

-> there was a need to individually sell the shares of stock as they had belonged to different
pledgors.

W/N the consignation extinguished the pledge - NO

CA, in ruling in favor of respondents concluded that:

(1) act of consigning should be deemed done in the exercise of their right of
redemption

(2) the buyer at public auction does not ipso facto become the owner of the
pledged shares pending the lapse of redemption period

(3) the collective sale of the shares of stock belonging to several individual owners without
specification of the apportionment deprives the individual owners of the opportunity

CA was incorrect in dwelling on the right of redemption. It involves payments made by

debtors AFTER the foreclosure of their properties, not those made or attempted
BEFORE the foreclosure sale.

The subject sale of pledged shares was an extrajudicial sale, specifically a notarial sale, as
distinguished from a judicial sale as typified by an execution sale.

CC provides that the foreclosure of a pledge occurs extrajudicially, without intervention by the
courts. All the creditor needs to do, if the credit has not been satisfied in due time, is to proceed
before a Notary Public to the sale of the thing pledged.

In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the
sale of the pledged shares by public auction. However, extrajudicial sale was stayed
with the filing of civil cases which sought to annul the pledge contracts. The final and
executory judgment in those cases affirmed the pledge contracts and disposed them

(1) Declaring the various pledges covered valid and effective; and
(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject
of these two cases.

While this decision authorized the sale by public auction, it stands that the sale is actually
extrajudicial in character. The final judgment in the cases expressly did not direct the
sale by public auction of the pledged shares, but instead upheld the right of the Prays
to conduct the sale at their own volition.

If the sale were truly in compliance with a final judgment or order, the Parays would have no
choice but to stage the sale for then the order directing the sale arises from judicial compulsion.
But nothing in the dispositive portion directed the sale at public auction as a mandatory
recourse, and properly so since the sale of pledged property in public auction is, by virtue of the
Civil Code.

The right of redemption over mortgaged real property sold extrajudicially is

established by Act No. 3135, as amended. The said law does not extend the same
benefit to personal property. In fact, there is no law in our statute books which vests
the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law,
ostensibly could have served as the vehicle for any legislative intent to bestow a right of
redemption over personal property, since that law governs the extrajudicial sale of mortgaged
personal property, but the statute is definitely silent on the point. And Section 39 of the 1997
Rules of Civil Procedure, extensively relied upon by the Court of Appeals, starkly
utters that the right of redemption applies to real properties, not personal properties,
sold on execution.

If the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of
the Civil Code provides that the right of the creditor to retain possession of the pledged
item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the
debtor cannot ask for the return of the thing pledged against the will of the creditor,
unless and until he has paid the debt and its interest. At the same time, the right of the
pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not
been satisfied in due time, the creditor may proceed with the sale by public auction under the
procedure provided under Article 2112 of the Code.

Petitioners point out that while the amounts consigned by respondents could answer for their
respective principal loan obligations, they were not sufficient to cover the interests due on these
loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court,
respondents, save for Dolores Soberano, do not contest this interest rate as alleged by
petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."
The 5% monthly interest rate was noted in the RTC decision which had become final. Usury is
already legally inexistent. The Court agrees with petitioners that in order that the consignation
could have the effect of extinguishing the pledge contracts, amounts should also cover the
interest, aside from the principal loan.

Court of Appeals also ruled that respondents had satisfied the requirements under Section 18,
Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount
required by the execution and the costs that have been incurred therein. 19 However, the provision
applies only to execution sales, and not extra-judicial sales, as evidenced by the use of the
phrases "sale of property on execution" and "judgment obligor." The reference is inapropos, and
even if it were applicable, the failure of the payment to cover the interests due renders it
insufficient to stay the sale.

PCI V TMI

Petitioner: PCI

Respondents: Trojan, Walfrido Dizon, Elizabeth Dizon and John Doe

15 Dec 2010 | Carpio, J.

TMI sought a loan from PCI but instead of granting such, PCI offered to buy various equipment
TMI owned. TMI agreed and deeds of sale were executed. Then, PCI and TMI entered into a lease
agreement where TMI leased those equipment it previously owned. In this lease agreement, TMI
was required to give PCI a guaranty deposit to serve as security for the timely performance of
TMI's obligations under the lease agreement which is to be automatically forfeited should TMI
return the equipment before the expiration of the agreement.

Respondent TMI came to petitioner PCI to seek a loan

-> instead of a loan, PCI offered to buy various equipment TMI owned - hydraulic press,
power press, lathe machine, milling machine, radial drill

-> TMI agreed; deeds of sale executed

PCI and TMI then entered into a lease agreement

-> TMI leased various equipment it previously owned

 -> postdated checks were issued.

-> lease agreement required TMI to give PCI a guaranty deposit to serve as security for the
timely performance of TMI's obligations under the lease agreement to be automatically
forfeited should TMI return the equipment before the expiration of the agreement.

Sps Dizon, TMI's Pres and VP, executed in favor of PCI a continuing guaranty of lease obligations

-> they agreed to immediately pay obligations that would be due PCI in case TMI failed to
meet its obligations

TMI used the leased equipment as temporary collateral

-> PCI considered the second mortgage a violation of the lease agreement

-> demand letter was sent but was unheeded

PCI filed complaint in RTC for recovery of sum of money and personal property with prayer for
replevin which was issued by the RTC, directing the sheriff to take custody of the leased
equipment. Not long after, the equipment was sold to a third party.

Respondents claimed that the sale with lease agreement was a mere scheme to facilitate the
financial lease.

-> simulated financial lease, property of the debtor would be sold to the creditor to be
repaid through rentals

-> at the end of the lease period, the property sold would revert to the debtor

Respondents prayed that they be allowed to reform the lease agreement to show the true
agreement between the parties, which was a loan secured by a chattel mortgage

RTC ruled that the lease agreement must be presumed valid as the law between parties.

CA ruled that the sale with lease agreement was in fact, a loan secured by chattel mortgage.

W/N sale with agreement was a chattel mortgage -

SC:

PCI contends that the transaction was a sale and leaseback financing arrangement where the
client sells movable property to a financing company which then leases the same back to the
client

-> not financial leasing, which contemplates extension of credit to assist a buyer in
acquiring movable property which the buyer can use and eventually own.

-> does not involve mere failure to pay rentals, it deals with a flagrant violation of the lease
agreement

Respondents: from the beginning, transfer to PCI of ownership was never the intention of the
parties.

-> under the lease agreement, the guaranty deposit would be forfeited if TMI returned the
leased equipment before the expiration of the lease agreement

-> since TMI never returned the leased equipment voluntarily, guaranty deposit should not
be forfeited.

LEASING shall refer to financial leasing which is a mode of extending credit through a non-
cancelable contract under which the lessor purchases or acquires at the instance of the lessee
heavy equipment, motor vehicles, industrial machinery, appliances, business and office
machines, and other movable property in consideration of the periodic payment by the lessee of
a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit, over the lease period. The
contract shall extend over an obligatory period during which the lessee has the right to hold and
use the leased property and shall bear the cost of repairs, maintenance, insurance, and
preservation thereof, but with no obligation or option on the part of the lessee to purchase the
leased property at the end of the lease contract.

In a true financial leasing, 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.
Finance company then leases the equipment to the lessee in exchange for the latter's periodic
payment of a fixed amount of rental.

NOT FINANCIAL LEASING. TMI already owned the subject equipment before it transacted with
PCI.

[Cebu Contractors Consortium Co. v CA}

 -> transaction was a loan secured by a chattel mortgage

-> where the client already owned the equipment but needed additional working capital and
the finance company purchased such equipment with the intention of leasing it back to him,
the lease was simulated to disguise the true transaction that was a loan with security.

[Investors Finance Corp v CA]

True financial leasing - extension of credit to assist a buyer in acquiring movable property
which he can use and eventually own

If property already belonged to the borrower-lessee, the transaction was a loan with
mortgage in the guise of a lease.

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.

ACME V CA

ACME Shoe, Rubber & Plastic Corp and Chua Pac

CA, Producers Bank of the Philippines and Regional Sheriff of Caloocan City

Vitug, J | 22 Aug 1986

Petitioner Chua, president and GM of ACME executed for and in behalf of the company, a chattel
mortgage in favor of private respondent Producers Bank.

-> mortgage served as security for petitioner's corporate loan (Php3M)

(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

Additional financial accommodations were obtained but were fully paid on due date

Petitioner corp loaned Php1M covered by 4 promissory notes but due to financial constraints, the
loan was not settled a maturity.

-> extra-judicial foreclosure of the mortgage was applied.

-> Petitioner applied for an injunction with damages

->Court dismissed the complaint and ordered the foreclosure of the chattel mortgage.

CA affirmed. MR denied.

W/N

In contracts of personal security (guaranty or suretyship), the faithful performance of the

obligation by the principal debt or is secured by the personal commitment of another

In contracts of real security (pledge, mortgage, antichresis), fulfillment is secured by an

encumbrance of property

Pledge - placing of movable property in the possession of the creditor

Chattel mortgage - execution of the corresponding deed in the form prescribed by the law

REM - execution of a public instrument encumbering the real property covered

Antichresis - written instrument granting to 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
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.
Chattel mortgage can only cover obligations existing at the time the mortgage is constituted

-> although a promise expressed in a chattel to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon the security itself does not come
into existence until after a chattel agreement covering the newly contracted debt is
executed

-> borrower's refusal to execute the agreement to cover the after-incurred obligation can
constitute an act of default

-> foreclosure can only cover the debts extant at the time of constitution and during the life
of the chattel

FORM

Affidavit of good faith -

(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.

In the case at hand, the chattel ceased to exist with the full payment of the orig Php3M.

MAKATI LEASING V WEAREVER

Makati Leasing and Finance Corp

Wearever Textile Mills and CA

16 May 1983 | De Castro, J.

Private Respondent Wearever, to obtain financial accommodations from Makati Leasing,

discounted and assigned several receivables with Makati Leasing under a Receivable Purchase
Agreement.

-> to secure the receivables assigned, Chattel Mortgage was executed over raw materials
inventory as well as a machinery
Upon default, petitioner filed for extrajudicial foreclosure of the proeprties

->Deputy Sheriff failed to enter the premises and was not able to effect the seizure of the
machinery

-> Petitioner then filed for judicial foreclosure

LC eventually issued a writ of seizure to break open the premises of private respondent

CA returned the order of the machinery

-> it cannot be the subject of a chattel mortgage because it is a real property

-> attached to the ground by bolts, the only way to remove it would be to drill out or
destroy the concrete floor.

W/N the machine is real property - NO

[Tumalad v Vicencio]

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.

-> mortgagors intended to treat the house as personality. Estoppel applies

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.

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.
DY V CA

Perfecto Dy, Jr.

CA, Gelac Tradin Inc and Antonio Gonzales

8 July 1991 | Gutierrez, Jr.

Petitioner Perfecto and Wilfredo are brothers. Wilfredo purchased a truck and a farm tractor
through financing extended by Libra Finance and Investment Corp

->truck and tractor were mortgaged to Libra as security for the loan

Petitioner wanted to buy the tractor from his brother

->letter to Libra requesting that he be allowed to purchase the said tractor and assume the
mortgage debt of Wilfredo Dy

Libra approved the request

Wilfredo executed a deed of absolute sale over the tractor

At this time, the tractor was in the possession of Libra due to Wilfredo's failure to pay the
amortizations

Despite the offer of full payment to Libra, the immediate release could not be effected because
Wilfredo obtained financing not only for said tractor but also for a truck

-> Libra insisted on full payment for both

Petitioner was able to convince his sister, Carol Dy-Seno to purchase the truck so that full
payment could be made for both

-> full indebtedness of Wilfredo was settled

But in Gelac Trading v Wilfredo Dy, sum collected from Wilfredo

-> tractor was seized and levied and was subsequently sold at public auction where Gelac
was the lone bidder

-> tractor was later sold to one of its stockholders

It was only when the check was cleared that the petitioner learned about Gelac having already
taken custody of the tractor

RTC ruled in favor of Perfecto, pronouncing him the owner of the tractor

CA reversed.

The respondents claim that at the time of the execution of the deed of sale, no constructive
delivery was effected since the consummation of the sale depended upon the clearance and
encashment of the check which was issued in payment of the subject tractor.

[Servicewide v IAC]

The chattel mortgagor continues to be the owner of the property, and therefore, has the power
to alienate the same; however, he is obliged under pain of penal liability, to secure the written
consent of the mortgagee. The instruments of mortgage are binding, while they subsist, not only
upon the parties executing them but also upon those who later, by purchase or otherwise,
acquire the properties referred to therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged property in favor of a third
person, therefore, affects not the validity of the sale but only the penal liability of the mortgagor under the Revised
Penal Code and the binding effect of such sale on the mortgagee under the Deed of Chattel Mortgage.

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
Wilfredo can sell the subject tractor. The consent of Libra was obtained, allowing the petitioner to
purchase the tractor and assume the mortgage debt. The sale between brothers was valid and
binding.

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.

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.

Petition granted. RTC decision reinstated.

SERVICEWIDE V CA

CA, Jesus Ponce and Elizabeth Ponce

10 Dec 1999 | Ynares-Santiago

Respondent sps Atty Jesus and Elizabeth Ponce bought on installment a vehicle from CR Tecson
Enterprises

->promissory note and chattel executed in favor of CR to secure payment

-> registered in RoD and LTO

-> CR Tecson in turn executed a deed of assignment of promissory note and chattel
mortgage in favor of Filinvest Credit Corp

-> sps were aware of the endorsement of the note and the mortgage to Filinvest, they
availed of its financing services to pay for the car

Respondent sps transferred and delivered the vehicle to Conrado Tecson by way of sale with
assumption of mortgage
Subsequently, Filinvest assigned all its rights and interest over the same promissory note and
chattel mortgage o petitioner Servicewide without notice to respondent sps.

-> They failed to pay installments despite demands to pay or return vehicle

->complaint filed before the RTC for replevin with damages

-> sps denied liabilty, they had already returned the car to Conrado Tecson pursuant to the
Deed of Sale with Assumption of Mortgage

Lower Court found sps jointly and solidarily liable to petitioner

->Tecson ordered to reimburse the sps for the sum that they would pay to Servicewide

CA reversed and set aside the judgment on the ground that respondent spouses were not
notified of the assignment

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?

Only notice to the debtor of the assignment of credit is required

->consent not required

-> Incontrast, consent of the creditor-mortgagee to the alienation of the mortgaged

property is necessary to bind the creditor

Sps invoked 1626 which provided that

"the debtor who, before having knowledge of the assignment, pays his creditor shall be released
from the obligation."

->they argue that they were not notified of the asssignment

->however, this is only applicable where the debtor pays the creditor prior to acquiring
knowledge of the latter's assignment of his credit

-> does not apply to cases of non-payment after debtor knew

In the case at bar, what is relevant is the knowledge or consent of the creditor's assignee to the
debtor-mortgagor's sale of the property

since the alienation by the respondent spouses of the vehicle occurred prior to the assignment of
credit to petitioner, it follows that the former were not bound to obtain the consent of the latter
as it was not yet an assignee of the credit at the time of the alienation of the mortgaged vehicle.

The sale with assumption of mortgage made by respondent spouses is tantamount to a

substitution of debtors. In such case, mere notice to the creditor is not enough, his consent is
always necessary as provided in Article 1293 of the Civil Code. 8 Without such consent by the creditor, the
alienation made by respondent spouses is not binding on the former. On the other hand, Articles 1625, 9 1626 10 and 1627
of the Civil Code on assignment of credits do not require the debtor's consent for the validity thereof and so as to render
him liable to the assignee. The law speaks not of consent but of notice to the debtor, the purpose of which is to inform the
latter that from the date of assignment he should make payment to the assignee and not to the original creditor. Notice is
thus for the protection of the assignee because before said date, payment to the original creditor is valid.

When Tecson Enterprises assigned the promissory note and the chattel mortgage to Filinvest, it
was made with respondent spouses' tacit approval. When Filinvest in turn, as assignee, assigned
it further to petitioner, the latter should have notified the respondent spouses of the assignment
in order to bind them. This, they failed to do.

The consent to the assignment given by respondent spouses to Filinvest cannot be construed as
the spouses' knowledge of the assignment to petitioner precisely because at the time of the
assignment to the latter, the spouses had earlier sold the vehicle to another.

The spouses,

although they are not bound to obtain the consent of the petitioner before alienating the
property, they should have obtained the consent of Filinvest since they were already aware of
the assignment to the latter. So that, insofar as Filinvest is concerned, the debtor is still
respondent spouses because of the absence of its consent to the sale. Worse, Filinvest was not
even notified of such sale. Having subsequently stepped into the shoes of Filinvest, petitioner
acquired the same rights as the former had against respondent spouses. The defenses that could
have been invoked by Filinvest against the spouses can be successfully raised by petitioner.
Therefore, for failure of respondent spouses to obtain the consent of Filinvest thereto, the sale of
the vehicle to Conrado R. Tecson was not binding on the former. When the credit was assigned by
Filinvest to petitioner, respondent spouses stood on record as the debtor-mortgagor.
CA decision reversed and set aside. RTC decision affirmed and reinstated.