PCI LEASING AND FINANCE, INC

- versus -

TROJAN METAL INDUSTRIES

INCORPORATED

Facts:

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner
PCI Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan,
PCILF offered to buy various equipment TMI owned, namely: a Verson double action
hydraulic press with cushion, a Hinohara powerpress 75-tons capacity, a USI-
clearing powerpress 60-tons capacity, a Watanabe powerpress 60-tons capacity, a
YMGP powerpress 30-tons capacity, a YMGP powerpress 15-tons capacity, a lathe
machine, a vertical milling machine, and a radial drill. Hard-pressed for money, TMI
agreed. PCILF and TMI immediately executed deeds of sale 5 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 monthly rental for the Verson double action hydraulic press with
cushion was in the amount of P62,328.00; for the Hinohara powerpress 75-tons
capacity, the USI-clearing powerpress 60-tons capacity, the Watanabe powerpress 60-
tons capacity, the YMGP powerpress 30-tons capacity, and the YMGP powerpress 15-
tons capacity, the monthly rental was in the amount of P49,259.00; and for the lathe
machine, the vertical milling machine, and the radial drill, the monthly rental was in
the amount of P22,205.00.

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 letter 12 for
the payment of the latters outstanding obligation. PCILFs demand remained
unheeded.

PCILF filed an action for recovery of sum of money as well as a prayer for the
issuance of writ of replevin.

In their answer,16 respondents claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCILF and TMI. Respondents
explained that in a simulated financial lease, property of the debtor would be sold to
the creditor to be repaid through rentals; at the end of the lease period, the property
sold would revert back to the debtor. Respondents prayed that they be allowed to
reform the lease agreement to show the true agreement between the parties, which was
a loan secured by a chattel mortgage.

Issue

The issues for resolution are (1) whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by chattel mortgage; and (2)
whether PCILF should pay TMI, by way of refund, the amount of P1,166,826.52.

The Courts Ruling

1. no. 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, but simply a loan secured by the various equipment owned by TMI..

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years. 25 The right of action
for reformation accrued from the date of execution of the lease agreement on 8 April
1997. TMI timely exercised its right of action when it filed an answer 26 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.

Another important consideration,Section 14 of the Chattel Mortgage Law expressly

entitles the debtor-mortgagor to the balance of the proceeds, upon satisfaction of the
principal loan and costs. Prevailing jurisprudence 33 also holds that the Chattel
Mortgage Law bars the creditor-mortgagee from retaining the excess of the sale
proceeds.

RIZAL COMMERCIAL
BANKING CORPORATION,
Petitioner,
- versus -
ROYAL CARGO
CORPORATION,
Respondent.

Facts:
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]
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 Terrymanilas personal properties on March 5,
1991 to secure the satisfaction of a judgment award of P296,662.16, exclusive of
interests and attorneys fees.[4]

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

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 .

Issue:
1. Whether the respondent is entitled to a 10-day prior notice

Ruling:
 On respondents 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.

Unmistakably, the redemption cited in Section 13 partakes of an equity of

redemption, which is the right of the mortgagor to redeem the mortgaged
property after his default in the performance of the conditions of the mortgage
but before the sale of the property[37] to clear it from the encumbrance of the
mortgage.[38] It is not the same as right of redemption which is the right of the
mortgagor to redeem the mortgaged property after registration of the foreclosure
sale,[39] and even after confirmation of the sale.[40]

While respondent had attached some of Terrymanilas assets to secure the

satisfaction of a P296,662.16 judgment rendered in another case, what it effectively
attached was Terrymanilas equity of redemption. That respondents claim is much
lower than the P1.5 million actual bid of petitioner at the auction sale does not
defeat respondents equity of redemption.

Having thus attached Terrymanilas 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.

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 courts 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]

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 respondents.[45]

In any event, even if respondent would have participated in the auction sale
and matched petitioners bid, the superiority of petitioners lien over the mortgaged
assets would preclude respondent from recovering the chattels.

It has long been settled by this Court that the right of those who
acquire said properties should not and can not be superior to that of the
creditor who has in his favor an instrument of mortgage executed with the
formalities of the law, in good faith, and without the least indication of
fraud. x x x. In purchasing it, with full knowledge that such circumstances
existed, it should be presumed that he did so, very much willing to respect the
lien existing thereon, since he should not have expected that with the purchase,
he would acquire a better right than that which the vendor then had.

G.R. No. 82040 August 27, 1991

BA FINANCE CORPORATION, petitioner,

vs.
HON. COURT OF APPEALS, Hon. Presiding Judge of Regional Trial Court of Manila, Branch
43, MANUEL CUADY and LILIA CUADY, respondents.

On July 15, 1977, private respondents Manuel Cuady and Lilia Cuady obtained from Supercars, Inc.
a credit of P39,574.80, which amount covered the cost of one unit of Ford Escort 1300, four-door
sedan. Said obligation was evidenced by a promissory note executed by private respondents in
favor of Supercars, Inc., obligating themselves to pay the latter or order the sum of P39,574.80,
inclusive of interest at 14% per annum, payable on monthly installments of P1,098.00 starting
August 16, 1977, and on the 16th day of the next 35 months from September 16, 1977 until full
payment thereof. There was also stipulated a penalty of P10.00 for every month of late installment
payment. To secure the faithful and prompt compliance of the obligation under the said promissory
note, the Cuady spouses constituted a chattel mortage on the aforementioned motor vehicle. On
July 25, 1977, Supercars, Inc. assigned the promissory note, together with the chattel mortgage, to
B.A. Finance Corporation. The Cuadys paid a total of P36,730.15 to the B.A. Finance Corporation,
thus leaving an unpaid balance of P2,344.65 as of July 18, 1980. In addition thereto, the Cuadys
owe B.A. Finance Corporation P460.00 representing penalties or surcharges for tardy monthly
installments (Rollo, pp. 27-29).

Parenthetically, the B.A. Finance Corporation, as the assignee of the mortgage lien obtained the
renewal of the insurance coverage over the aforementioned motor vehicle for the year 1980 with
Zenith Insurance Corporation, when the Cuadys failed to renew said insurance coverage
themselves. Under the terms and conditions of the said insurance coverage, any loss under the
policy shall be payable to the B.A. Finance Corporation (Memorandum for Private Respondents, pp.
3-4).

On April 18, 1980, the aforementioned motor vehicle figured in an accident and was badly damaged.
The unfortunate happening was reported to the B.A. Finance Corporation and to the insurer, Zenith
Insurance Corporation. The Cuadys asked the B.A. Finance Corporation to consider the same as a
total loss, and to claim from the insurer the face value of the car insurance policy and apply the
same to the payment of their remaining account and give them the surplus thereof, if any. But
instead of heeding the request of the Cuadys, B.A. Finance Corporation prevailed upon the former to
just have the car repaired. Not long thereafter, however, the car bogged down. The Cuadys wrote
B.A. Finance Corporation requesting the latter to pursue their prior instruction of enforcing the total
loss provision in the insurance coverage. When B.A. Finance Corporation did not respond favorably
to their request, the Cuadys stopped paying their monthly installments on the promissory note

On June 29, 1982, in view of the failure of the Cuadys to pay the remaining installments on the note,
B.A. Finance Corporation sued them in the Regional Trial Court of Manila, Branch 43, for the
recovery of the said remaining installments

Issue

whether or not B.A. Finance Corporation has waived its right to collect the unpaid balance of the
Cuady spouses on the promissory note for failure of the former to enforce the total loss provision in
the insurance coverage of the motor vehicle subject of the chattel mortgage.

Ruling:

B.A. Finance Corporation was deemed subrogated to the rights and obligations of Supercars, Inc.
when the latter assigned the promissory note, together with the chattel mortgage constituted on the
motor vehicle in question in favor of the former. Consequently, B.A. Finance Corporation is bound by
the terms and conditions of the chattel mortgage executed between the Cuadys and Supercars, Inc.
Under the deed of chattel mortgage, B.A. Finance Corporation was constituted attorney-in-fact with
full power and authority to file, follow-up, prosecute, compromise or settle insurance claims; to sign
execute and deliver the corresponding papers, receipts and documents to the Insurance Company
as may be necessary to prove the claim, and to collect from the latter the proceeds of insurance to
the extent of its interests, in the event that the mortgaged car suffers any loss or damage (Rollo, p.
89). In granting B.A. Finance Corporation the aforementioned powers and prerogatives, the Cuady
spouses created in the former's favor an agency. Thus, under Article 1884 of the Civil Code of the
Philippines, B.A. Finance Corporation is bound by its acceptance to carry out the agency, and is
liable for damages which, through its non-performance, the Cuadys, the principal in the case at bar,
may suffer.

Unquestionably, the Cuadys suffered pecuniary loss in the form of salvage value of the motor vehicle
in question, not to mention the amount equivalent to the unpaid balance on the promissory note,
when B.A. Finance Corporation steadfastly refused and refrained from proceeding against the
insurer for the payment of a clearly valid insurance claim, and continued to ignore the yearning of the
Cuadys to enforce the total loss provision in the insurance policy, despite the undeniable fact that
Rea Auto Center, the auto repair shop chosen by the insurer itself to repair the aforementioned
motor vehicle, misrepaired and rendered it completely useless and unserviceable (Ibid., p. 31).

Accordingly, there is no reason to depart from the ruling set down by the respondent appellate court.
In this connection, the Court of Appeals said:

... Under the established facts and circumstances, it is unjust, unfair and inequitable to
require the chattel mortgagors, appellees herein, to still pay the unpaid balance of their
mortgage debt on the said car, the non-payment of which account was due to the stubborn
refusal and failure of appellant mortgagee to avail of the insurance money which became
due and demandable after the insured motor vehicle was badly damaged in a vehicular
accident covered by the insurance risk. ... (Ibid.)

On the allegation that the respondent court's findings that B.A. Finance Corporation failed to claim
for the damage to the car was not supported by evidence, the records show that instead of acting on
the instruction of the Cuadys to enforce the total loss provision in the insurance policy, the petitioner
insisted on just having the motor vehicle repaired, to which private respondents reluctantly acceded.
As heretofore mentioned, the repair shop chosen was not able to restore the aforementioned motor
vehicle to its condition prior to the accident. Thus, the said vehicle bogged down shortly thereafter.
The subsequent request of the Cuadys for the B.A. Finance Corporation to file a claim for total loss
with the insurer fell on deaf ears, prompting the Cuadys to stop paying the remaining balance on the
promissory note (Memorandum for the Respondents, pp. 4-5).

CEBU INTERNATIONAL FINANCE CORPORATION, petitioner,

vs. COURT OF APPEALS, ROBERT ONG and ANG
TAY, respondents.
On 4 March 1987, Jacinto Dy executed a Special Power of Attorney in [1]

favor of private respondent Ang Tay, authorizing the latter to sell the cargo
vessel owned by Dy and christened LCT "Asiatic."
On 28 April 1987, through a Deed of Absolute Sale, Ang Tay sold the [2]

subject vessel to private respondent Robert Ong (Ong) for P900,000.00. Ong
paid the purchase price by issuing three (3) checks in the following
amounts: P150,000.00, P600,000.00 and P150,000.00. However, since the
payment was not made in cash, it was specifically stipulated in the deed of
sale that the "LCT Asiatic shall not be registered or transferred to Robert Ong
until complete payment." Thereafter, Ong obtained possession of the subject
[3]

vessel so he could begin deriving economic benefits therefrom. He, likewise,

obtained copies of the unnotarized deed of sale allegedly to be shown to the
banks to enable him to acquire a loan to replenish his (Ong's) capital. The
aforequoted condition, however, which was handwritten on the original deed
of sale does not appear on Ong's copies.
Contrary to the aforementioned agreements and without the knowledge of
Ang Tay, Ong had his copies of the deed of sale (on which the aforementioned
prohibition does not appear) notarized on 18 May 1987. Ong presented the
[4]

notarized deed to the Philippine Coast Guard which subsequently issued him
a Certificate of Ownership and a Certificate of Philippine Register over the
[5] [6]

subject vessel on 27 May 1987. Ong also succeeded in having the name of
the vessel changed to LCT "Orient Hope." 

On 29 October 1987, Ong acquired a loan from petitioner in the amount

of P496,008.00 to be paid in installments as evidenced by a promissory note
of even date.[7]

As security for the loan, Ong executed a chattel mortgage over the subject
vessel, which mortgage was registered with the Philippine Coast Guard and
[8]

annotated on the Certificate of Ownership. [9]

Ong defaulted in the payment of the monthly installments. Consequently,

on 11 May 1988, petitioner sent him a letter demanding delivery of the
[11]

mortgaged vessel for foreclosure or in the alternative to pay the balance

of P437,802.00 pursuant to paragraph 11 of the deed of chattel mortgage. [12]

Meanwhile, the two checks (worth P600,000.00 and P150,000.00) paid by

Ong to Ang Tay for the Purchase of the subject vessel bounced. Ang Tay's
search for the elusive Ong and all attempts to confer with him proved to be
futile. A subsequent investigation and inquiry with the Office of the Coast
Guard revealed that the subject vessel was already in the name of Ong, in
violation of the express undertaking contained in the original deed of sale.
As a result thereof, on 13 January 1988, Ang Tay and Jacinto Dy filed a
civil case for rescission and replevin with damages against Ong and his wife
(docketed as Civil Case No. CEB-6565) with the Regional Trial Court of Cebu
City, Branch 10. The trial court issued a writ of replevin and the subject vessel
was seized and subsequently delivered to Ang Tay.
Issue:
Whether the chattel mortgage was valid
Ruling:
The Court of Appeals nullified the chattel mortgage contract between
petitioner and Ong because paragraph 3 of the said contract (where it
appeared that petitioner sold the subject vessel to Ong on installment basis
and that the amount supposedly loaned to Ong represented the balance due
on the purchase price) seemed to indicate that the owner of the vessel
mortgaged was petitioner although it had been duly established that another
party (Jacinto Dy) was the true owner thereof. [18]
 We disagree with the aforequoted ruling of the Court of Appeals. The
chattel mortgage contract should not be viewed in such a myopic context. The
key lies in the certificate of ownership issued in Ong's name (which, along with
the deed of sale, he submitted to petitioner as proof that he is the owner of the
ship he gave as security for his loan). It was plainly stated therein that the ship
LCT "Orient Hope" ex "Asiatic," by means of a Deed of Absolute Sale dated
28 April 1987, was "sold and transferred by Jacinto Dy to Robert Ong." There
[19]

can be no dispute then that it was Dy who was the seller and Ong the buyer of
the subject vessel. Coupled with the fact that there is no evidence of any
transaction between Jacinto Dy or Ang Tay and petitioner, it follows, therefore,
that petitioner's role in the picture is properly and logically that of a creditor-
mortgagee and not owner-seller. It is paragraph 2 of the mortgage
contract which accurately expresses the true nature of the transaction
[20]

between petitioner and Ong -- that it is a simple loan with chattel mortgage.
The amount petitioner loaned to Ong does not represent the balance of any
purchase price since, as we have previously discussed, the aforementioned
documents state that Ong is already the absolute owner of the subject vessel.
Obviously, therefore, paragraph 3 of the said contract was filled up by mistake.
Considering that petitioner used a form contract, it is not improbable that such
an oversight may have been committed -- negligently but unintentionally and
without malice.
Accordingly, the chattel mortgage contract between petitioner and Ong is valid
and subsisting.
The next issue for our determination is whether or not petitioner is a
mortgagee in good faith whose lien over the mortgaged vessel should be
respected.
The prevailing jurisprudence is that a mortgagee has a right to rely in good
faith on the certificate of title of the mortgagor to the property given as security
and in the absence of any sign that might arouse suspicion, has no obligation
to undertake further investigation. Hence, even if the mortgagor is not the
rightful owner of or does not have a valid title to the mortgaged property, the
mortgagee or transferee in good faith is nonetheless entitled to protection.
Although this rule generally pertains to real property, particularly registered
[23]

land, it may also be applied by analogy to personal property, in this case

specifically, since shipowners are, likewise, required by law to register their
vessels with the Philippine Coast Guard.
As previously discussed, paragraph 3 of the chattel mortgage contract was
erroneously but unintentionally filled up. The failure of petitioner to exercise
due care in filling up the necessary provisions in the chattel mortgage contract
does not, however, amount to bad faith. It was a mere oversight and not a
deliberate and malicious act.
As to the disclosure requirement in Sec. 6 of the Ship Mortgage Decree,
it was intentional on Ong's part not to inform petitioner that he had yet to pay
[31]

in full the purchase price of the subject vessel. Ong presented himself to
petitioner as the absolute owner of the LCT "Orient Hope" ex "Asiatic." The
Certificate of Ownership in Ong's name showed that the ship was conveyed to
him by means of a Deed of Absolute Sale which gave the idea that the
purchase price had been fully paid and the sale completed.
Petitioner had every right to rely on the Certificate of Ownership and
Certificate of Philippine Register duly issued by the Philippine Coast Guard in
Ong's name. Petitioner had no reason to doubt Ong's ownership over the
subject vessel. The documents presented by Ong, upon petitioner's insistence
before accepting the said vessel as loan security, were all in order and
properly issued by the duly constituted authorities. There was no circumstance
that might have aroused petitioner's suspicion or alerted it to any infirmity
committed by Ong. It had no participation in and was not privy to the sale
transaction between Jacinto Dy (through Ang Tay) and Ong. Petitioner, thus,
had no obligation to undertake further investigation since it had the necessary
documents to prove Ong's ownership. In addition, petitioner even took pains
to inspect the subject vessel which was in Ong's possession.

G.R. No. L-62415 August 20, 1990

BICOL SAVINGS & LOAN ASSOCIATION, petitioner,

vs.
JAIME GUINHAWA and THE HON. PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE
OF CAMARINES SUR (10th JUDICIAL DISTRICT), BRANCH III, respondents.

Sometime on June 19, 1980, Victorio Depositario together with private respondent Jaime Guinhawa, acting as solidary co-maker, took a loan
from petitioner Bicol Savings and Loan Association (BISLA for brevity) in the sum of P10,622.00, payable at P535.45 every 19th day of each
month beginning July 1980 until maturity on June 19, 1982.

To secure the payment of the foregoing loan obligation, the principal borrower Victorio Depositario
put up as security a chattel mortgage which was a Yamaha Motorcycle. Said motorcycle was
eventually foreclosed by reason of the failure of Depositario and private respondent Guinhawa to
pay the loan. As a result of the foreclosure, there was a deficiency in the amount of P5,158.06 as of
July 31, 1981, where BISLA made a demand to pay the same.

Thus, on August 6, 1981, petitioner BISLA (plaintiff therein) filed in the City Court of Naga, Branch II,
a complaint for the recovery of a sum of money constituting the deficiency after foreclosure of the
chattel mortgage put up by the principal borrower Depositario against the latter and his solidary co-
maker Guinhawa (herein private respondent) as defendants.
Issue:

Whether respondent is liable for the deficiency

Ruling:

In a number of cases, We already held that if in an extrajudicial foreclosure of a chattel mortgage a

deficiency exists, an independent civil action may be instituted for the recovery of said deficiency. If
the mortgagee has foreclosed the mortgage judicially, he may ask for the execution of the judgment
against any other property of the mortgagor for the payment of the balance. To deny to the
mortgagee the right to maintain an action to recover the deficiency after foreclosure of the chattel
mortgage would be to overlook the fact that the chattel mortgage is only given as a security and not
as payment for the debt in case of failure of payment. (Bank of the Philippine Islands vn Olutanga
Lumber Co., 47 Phil. 20; Manila Trading & Supply Co. v. Tamaraw Plantation Co., 47 Phil. 513.)

The case of Pascual, as cited by the respondent court, is not applicable in this instant case because
it was a case of sale on installment, where after foreclosure of the units the plaintiff guarantors who
had likewise executed a real estate mortgage of up to P50,000, cannot be held answerable anymore
for the deficiency. The conclusion therefore reached by the lower court was erroneous because in
the case at bar, the obligation contracted by the principal debtor (Depositario) with a solidary co-
maker (private respondent herein), was one of loan secured by a chattel mortgage, executed by the
principal debtor, and not a sale where the price is payable on installments and where a chattel
mortgage on the thing sold was constituted by the buyer and, further, the obligation to pay the
installments having been guaranteed by another.

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.

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.

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. 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.

Issue:

The next and the more crucial question to be resolved in this Petition is whether the machinery in
suit is real or personal property

Ruling:

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 personality.
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 personality.

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.

G.R. No. L-25771 March 29, 1982

URBANO JACA and BONIFACIO JACA, petitioners,

vs.
DAVAO LUMBER COMPANY and HONORABLE MANASES REYES, as Judge of the Court of

The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee of a logging
concession located in the City of Davao, and together with his co-plaintiff, Bonifacio Jaca, engaged
in the logging business of producing timber and logs for export and/or domestic purposes; that the
defendant is a business corporation with which plaintiffs had business dealings covering the sale
and/or exportation of their logs; that sometime in 1954, the herein parties-litigants entered into an
agreement whereby plaintiffs may secure, by way of advances, either cash or materials, foodstuffs,
and/or equipment's from the defendant corporation; that the payment of such account was to be
made either in cash and/or by plaintiff's turning over all the logs that they produce in the aforesaid
concession to the defendant, and in the latter case, the current prices, either export or domestic, of
the logs at the time of their delivery was to be considered; that while the aforesaid business
relationship between the parties was subsisting, defendant made plaintiff Urbano Jaca execute in its
favor a chattel mortgage, a copy of which instrument. however, plaintiffs were never furnished but
that as far as they can recollect the primary conditions of such chattel mortgage were that plaintiffs
would turn over to defendant corporation all the logs they may produce from the aforesaid
concession the same to be priced either as export or domestic and their value to be applied by
defendant to, and be credited for, the account of plaintiff's indebtedness, and further that in case of
need, plaintiffs may secure, by way of advances, either cash, foodstuffs, materials or equipment's,
under an "open credit account"; that under the aforementioned "open credit account" relationship
between the plaintiffs and defendant, orders were secured by plaintiffs, by way of advances, from the
defendant, this to be paid by them with plaintiffs' production from their concession, liquidating those
old accounts and keeping all accounts current; that in pursuance to the agreement, as aforestated,
plaintiff Urbano Jaca executed assignments of letters of credit in favor of the defendant, in order that
the latter may be able to use, as defendant corporation did in fact use, the said letters of credit for
bank negotiations of the former in the exportation of logs; that the plaintiffs and the defendant had
this business relationship, as aforementioned, from 1954 up to sometime in August, 1963; that
during this whole period of time, the plaintiffs had been faithfully delivering all their log production to
the defendant for export or domestic purposes; that before the filing of this complaint, the plaintiff
made repeated demands on the defendant for a formal accounting of their business relationship
from 1954 up to August, 1963, but that the defendant failed and refused, and still fails and refuses, to
effect such formal accounting, asserting that it had no time as yet to examine into all the details of
the accounting; that sometime on October 30, 1963, much to their surprise, plaintiffs received letters
of demand from the defendant in which they were requested to pay their accounts in favor of
defendant, which according to the latter had long been overdue; that plaintiffs are no longer indebted
to the defendant, and as a matter of act it is their belief that, if a formal accounting be made, there
would still appear a claim in their favor in the amount of P250,000.00 more or less, representing the
price differentials of logs which they delivered to the defendant from 1954 up to August, 1963; and
that further, there was a deliberate fraud practiced by the defendant on them, especially in
defendant's under grading and/or reclassification of logs delivered to it by plaintiffs; that further, there
were many errors committed in the monthly statements submitted to the plaintiffs, arising from the
fact that there were charges of cash, equipment's, materials and foodstuffs in said statements never
ordered and/or received by the plaintiffs; and still further that the proceeds of the letter of credit were
not fully applied and/or credited to the account of plaintiffs; that defendant has up to the present
denied the plaintiffs the benefits of a formal accounting and inasmuch as the invoices, receipts,
vouchers, requisition slips and other pertinent papers and document of their business transactions
are in the possession of defendant, it is difficult for plaintiffs to ascertain with accuracy the ledger
balance between the parties, unless a detailed examination of the matter is had; that plaintiffs have
thereby been constrained to file this case in Court in order to compel defendant to have a formal
accounting between them, and that it is the desire of plaintiffs that pending the formal hearing of this
case, three commissioners, constituting accountants be judicially appointed for the purpose of
examining all the books, pertinent papers and documents and all other data in relation with their
business transaction; that in order to protect their interest and to litigate this case, the plaintiffs were
compelled to secure and retain the services of attorneys, and that they have thereby suffered
damages in the sum of Twenty Thousand Pesos (P20,000.00) by way of attorney's fees. 2

The lower court favored Davao Lumber. In September, 1965, the Davao Lumber Company filed a
motion for execution pending appeal

The respondent judge granted the motion for execution pending appeal in an order dated November 29,
1965. 7

Urbano Jaca and Bonifacio Jaca filed a motion for reconsideration of the order granting execution
pending appeal in December, 1965, 8 but the same was denied in an order dated January 10, 1966. 9

Issue:

The basic issue in this case is whether or not there are good reasons justifying the issuance of an
order granting premature execution.

Ruling:

Section 2, Rule 39 of the Rules of Court provides that on motion of the prevailing party with notice to
the adverse party the court may, in its discretion, order execution to issue even before the expiration
of the time to appeal, upon good reasons to be stated in a special order. If a record on appeal is filed
thereafter, the motion and the special order shall be included therein. The discretionary power of the
Court of First Instance to grant or deny a motion for execution before the expiration of the time to
appeal will not be interfered with by the appellate court, unless it be shown that there has been an
abuse thereof or a subsequent change of conditions. 12

As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of good reasons is what
confers discretionary power on a court of first instance to issue a writ of execution pending
appeal. 13 The reasons allowing execution must constitute superior circumstances demanding urgency
which will outweigh the injury or damage should the losing party secure a reversal of the judgment on
appeal. 14
The facts of record show that the petitioner's appeal is not frivolous and not intended for delay. The
findings of the respondent judge that the petitioners are indebted to the respondent Davao Lumber
Company are based solely on the report submitted by Estanislao R. Lagman, the commissioner
appointed by the court. This report was assailed by the petitioners as null and void in a motion to
strike out the report from the records of the case. According to petitioners, the report is null and void
because the judge failed to conduct a hearing on such report which deprived the petitioners of their
day in court.

The respondent judge's refusal to order the commissioner to conduct a hearing in accordance with
Section 5, Rule 33 was fatal to the cause of the petitioners. Under Section 10 of Rule 33, objections
to the report based upon grounds which were available to the parties during the proceedings before
the commissioner other than objections to the findings and conclusions therein set forth shall not be
considered by the court, unless they were made before the commissioner. Objections to the report
which were available to the parties during the proceedings refer to objections to the admissibility or
non-admissibility of evidence to be considered by the commissioner. Since no meeting was held
before the commissioner, petitioners never had the opportunity to object to the admissibility of
evidence of cash, equipment, materials and foodstuff, which they alleged in their complaint, were
never received by them. Also, they failed to question the failure of the commissioner to include in his
examination the price quotations of the logs which, as claimed in the complaint, were under
classified and undergraded.

The records show that respondent Davao Lumber Company was able to prove its claim against
petitioners because respondent judge refused to order the commissioner to hold a hearing as
required by the rules. Thus, objections which petitioners may have against the claims of respondent
were never considered. In the same manner, the claim of petitioner that respondent Davao Lumber
Company is indebted to them was not also considered.

There is doubt that petitioners are really indebted to respondent Davao Lumber Company in such a
big amount as found by the trial court. The appeal of the petitioner appears to be meritorious. The
fear of respondent that the judgment of the trial court might not be satisfied if not executed at once is
not well founded. If the judgment is executed now, and on appeal the same is reversed, although
there are provisions for restitution, damages incurred by petitioners can not be fully compensated. 21

The reasons stated in the order of execution pending appeal are not well founded.

The first reason stated in the order was the consistent refusal of petitioner to deliver the mortgaged
chattels to the receiver. 22 The records disclose that respondent Davao Lumber Company is not even
entitled to the appointment of a receiver. It is an established rule that the applicant for receivership must
have an actual and existing interest in the property for which a receiver is sought to be appointed. 23 The
Davao Lumber Company's proof of interest in the property is the deed of chattel mortgage executed by
Urbano Jaca in favor of the Davao Lumber Company on January 24, 1961. This deed of chattel mortgage
is void because it provides that the security stated therein is for the payment of any and all obligations
herein before contracted and which may hereafter be contracted by the Mortgagor in favor of the
Mortgagee. 24 In the case of Belgian Catholic Missionaries vs. Magallanes Press this Court held:

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 (11 CJ, 448; 5 RCL 420-421). ... Where the statute provides that the
parties to a chattel mortgage must make oath that the debt is a just debt, honestly
due and owing from the mortgagor to the mortgagee, it is obvious that a valid
mortgage cannot be made to secure a debt to be thereafter contracted. (11 CJ.
448) 25
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.

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 Española 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.

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.

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.

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. Petitioners 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.
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).

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 unrecovarable 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.