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In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its
complaint. The RTC ruled that the lease agreement must be presumed
valid as the law between the parties even if some of its provisions
constituted unjust enrichment on the part of PCILF. The dispositive portion
of its Decision reads:
1.
Ordering the plaintiff to be entitled to the possession of herein
machineries.
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 USIclearing 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 VicePresident, 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, spouses Dizon, and John Doe
(collectively referred to as respondents hereon) for recovery of sum of
money and personal property with prayer for the issuance of a writ of
replevin, docketed as Civil Case No. Q-99-37559.
On 7 September 1999, the RTC issued the writ of replevin14 PCILF prayed
for, directing the sheriff to take custody of the leased equipment. Not long
after, PCILF sold the leased equipment to a third party and collected the
proceeds amounting to P1,025,000.00.15
2.
Ordering the defendants to pay the remaining rental obligation in
the amount of Php 888,434.48 plus legal interest from the date of filing of
the complaint;
3.
Ordering defendant to pay an attorneys fees in the amount of Php
50,000.00;
4.
SO ORDERED.17
Respondents appealed to the Court of Appeals alleging that the RTC erred
in ruling that PCILF was entitled to the possession of TMIs equipment and
that respondents still owed PCILF the balance of P888,423.48.
The Court of Appeals ruled that the sale with lease agreement was in fact
a loan secured by chattel mortgage. The Court of Appeals held that since
PCILF sold the equipment to a third party for P1,025,000.00 and TMI paid
PCILF a guaranty deposit of P1,030,000.00, PCILF had in its hands the sum
of P2,055,250.00, as against TMIs remaining obligation of P888,423.48, or
an excess of P1,166,826.52, which should be returned to TMI in
accordance with Section 14 of the Chattel Mortgage Law.
Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the
Decision of the RTC. The Court of Appeals entered a new one dismissing
PCILFs complaint and directing PCILF to pay TMI, by way of refund, the
amount of P1,166,826.52. The decretal part of its Decision reads:
SO ORDERED.18
In their answer,16 respondents claimed that the sale with lease
agreement was a mere scheme to facilitate the financial lease between
PCILF and TMI. Respondents explained that in a simulated financial lease,
property of the debtor would be sold to the creditor to be repaid through
rentals; at the end of the lease period, the property sold would revert
back to the debtor. Respondents prayed that they be allowed to reform
the lease agreement to show the true agreement between the parties,
which was a loan secured by a chattel mortgage.
The Issues
The issues for resolution are (1) whether the sale with lease agreement
the parties entered into was a financial lease or a loan secured by chattel
mortgage; and (2) whether PCILF should pay TMI, by way of refund, the
amount of P1,166,826.52.
the lessee in exchange for the latters periodic payment of a fixed amount
of rental.
The Courts Ruling
PCILF contends that the transaction between the parties was a sale and
leaseback financing arrangement where the client sells movable property
to a financing company, which then leases the same back to the client.
PCILF insists the transaction is not financial leasing, which contemplates
extension of credit to assist a buyer in acquiring movable property which
the buyer can use and eventually own. PCILF claims that the sale and
leaseback financing arrangement is not contrary to law, morals, good
customs, public order, or public policy. PCILF stresses that the guaranty
deposit should be forfeited in its favor, as provided in the lease
agreement. PCILF points out that this case does not involve mere failure
to pay rentals, it deals with a flagrant violation of the lease agreement.
Since the lease agreement in this case was executed on 8 April 1997,
Republic Act No. 5980 (RA 5980), otherwise known as the Financing
Company Act, governs as to what constitutes financial leasing. Section 1,
paragraph (j) of the New Rules and Regulations to Implement RA 598019
defines financial leasing as follows:
In this case, however, TMI already owned the subject equipment before it
transacted with PCILF. Therefore, the transaction between the parties in
this case cannot be deemed to be in the nature of a financial leasing as
defined by law.
The facts in the instant case are analogous to those in Cebu Contractors
Consortium Co. v. Court of Appeals.21 There, Cebu Contractors
Consortium Co. (CCCC) approached Makati Leasing and Finance
Corporation (MLFC) to obtain a loan. MLFC agreed to extend financial
assistance to CCCC but, instead of a loan with collateral, MLFC induced
CCCC to adopt a sale and leaseback scheme. Under the scheme, several
of CCCCs equipment were made to appear as sold to MLFC and then
leased back to CCCC, which in turn paid lease rentals to MLFC. The rentals
were treated as installment payments to repurchase the equipment.
In the present case, since the transaction between PCILF and TMI involved
equipment already owned by TMI, it cannot be considered as one of
financial leasing, as defined by law, but simply a loan secured by the
various equipment owned by TMI.
Articles 1359 and 1362 of the Civil Code provide:
Art. 1359. When, there having been a meeting of the minds of the parties
to a contract, their true intention is not expressed in the instrument
purporting to embody the agreement, by reason of mistake, fraud,
inequitable conduct, or accident, one of the parties may ask for the
reformation of the instrument to the end that such true intention may be
expressed.
Art. 1362. If one party was mistaken and the other acted fraudulently or
inequitably in such a way that the instrument does not show their true
intention, the former may ask for the reformation of the instrument.
Under Article 1144 of the Civil Code, the prescriptive period for actions
based upon a written contract and for reformation of an instrument is ten
years.25 The right of action for reformation accrued from the date of
execution of the lease agreement on 8 April 1997. TMI timely exercised its
right of action when it filed an answer26 on 14 February 2000 asking for
the reformation of the lease agreement.
Hence, had the true transaction between the parties been expressed in a
proper instrument, it would have been a simple loan secured by a chattel
mortgage, instead of a simulated financial leasing. Thus, upon 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. However, in
reckoning the amount of the principal obligation, the Court of Appeals
should have taken into account the proceeds of the sale to PCILF less the
guaranty deposit paid by TMI. After deducting payments made by TMI to
PCILF, the balance plus applicable interest should then be applied against
the aggregate cash already in PCILFs hands.
2.
When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded may
be imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.
3.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by
then an equivalent to a forbearance of credit. (Emphasis supplied)
Applying the rules in the computation of interest, the remaining balance
of the principal loan subject of the chattel mortgage must earn the legal
interest of 12% per annum, which interest, as long as unpaid, also earns
legal interest of 12% per annum, computed from the filing of the
complaint on 7 May 1999.
In accordance with the rules laid down in Eastern Shipping Lines, Inc. v.
Court of Appeals,32 we derive the following formula for the RTCs
guidance:
Interest = remaining balance x 12% per annum x no. of years from due
date (8 December 1998 when demand was made) until date of sale to a
third party
Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.
1.
When an obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be 12%
per annum to be computed from default, i.e., from judicial or extrajudicial
demand under and subject to the provisions of Article 1169 of the Civil
Code.
Section 14 of the Chattel Mortgage Law expressly entitles the debtormortgagor to the balance of the proceeds, upon satisfaction of the
principal loan and costs. Prevailing jurisprudence33 also holds that the
Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds.
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.
Upon the issue thus raised by the pleadings, the two causes were tried
together by agreement of the parties. After hearing the evidence adduced
during the trial and on July 17, 1930, the Honorable Mariano Albert, judge,
in a very carefully prepared opinion, arrived at the conclusion (a) that the
defendant defaulted in the payment of interest on the loans secured by
the mortgages, in violation of the terms thereof; (b) that by reason of said
failure said mortgages became due, and (c) that the plaintiffs, as
mortgagees, were entitled to the possession of the drug stores Farmacia
Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy at Nos. 7173 Escolta. Accordingly, a judgment was rendered in favor of the plaintiffs
and against the defendant, confirming the attachment of said drug stores
by the sheriff of the City of Manila and the delivery thereof to the
plaintiffs. The dispositive part of the decision reads as follows:
En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en
todas sus partes los ordenes de fechas 16 y 17 de abril de presente ano,
dictadas en las causas Nos. 37096 y 37097, respectivamente, y declara
definitiva la entrega hecha a los demandantes por el Sheriff de Manila de
las boticas en cuestion. Se condena en costas al demandado en ambas
causas.
From the judgment the defendant appealed, and now makes the following
assignments of error:
I.
The lower court erred in failing to make a finding on the
question of the sufficiency of the description of the chattels mortgaged
and in failing to hold that the chattel mortgages were null and void for
lack of particularity in the description of the chattels mortgaged.
II.
The lower court erred in refusing to allow the defendant to
introduce evidence tending to show that the stock of merchandise found
in the two drug stores was not in existence or owned by the mortgagor at
the time of the execution of the mortgages in question.
III.
The lower court erred in holding that the administrator of the
deceased is now estopped from contesting the validity of the mortgages
in question.
IV.
The lower court erred in failing to make a finding on the
counterclaims of the defendant.
With reference to the first assignment of error, we deem it unnecessary to
discuss the question therein raised, inasmuch as according to our view on
the question of estoppel, as we shall hereinafter set forth in our discussion
of the third assignment of error, the defendant is estopped from
questioning the validity of these chattel mortgages.
In his second assignment of error the appellant attacks the validity of the
stipulation in said mortgages authorizing the mortgagor to sell the goods
covered thereby and to replace them with other goods thereafter
acquired. He insists that a stipulation authorizing the disposal and
substitution of the chattels mortgaged does not operate to extend the
mortgage to after-acquired property, and that such stipulation is in
have been dismissed, but as the trial court decided both cases in favor of
the plaintiffs and confirmed and ratified the orders directing the sheriff to
take possession of the chattels on behalf of the plaintiffs, there was, in
effect, a dismissal of the defendant's counterclaims.
For all of the foregoing, we are of the opinion and so hold that the
judgment appealed from is in accordance with the facts and the law, and
the same should be and is hereby affirmed, with costs. So ordered
ACME SHOE RUBBER AND PLASTIC V. CA 1996
Would it be valid and effective to have a clause in a chattel mortgage that
purports to likewise extend its coverage to obligations yet to be
contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner
"Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for
and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way
of security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to
this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well
and truly perform the full obligation or obligations above-stated according
to the terms thereof, then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or notes
either as a renewal of the former note, as an extension thereof, or as a
new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases of
import shipments on Trust Receipts, etc., this mortgage shall also stand as
security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and
this mortgage shall have the same force and effect as if the said
promissory note or notes and/or accommodations were existing on the
date thereof. This mortgage shall also stand as security for said
obligations and any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this
mortgage."[1]
"x x x (the) mortgage is made for the purpose of securing the obligation
specified in the conditions thereof, and for no other purpose, and that the
same is a just and valid obligation, and one not entered into for the
purpose of fraud."[13]
makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract
was the P3,000,000.00 loan which petitioner corporation later fully paid.
By virtue of Section 3 of the Chattel Mortgage Law, the payment of the
obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press,
Inc., et al.,[14] the Court said -
The significance of the ruling to the instant problem would be that since
the 1978 chattel mortgage had ceased to exist coincidentally with the full
payment of the P3,000,000.00 loan,[16] there no longer was any chattel
mortgage that could cover the new loans that were concluded thereafter.
While Chua Pac is included in the case, the complaint, however, clearly
states that he has merely been so named as a party in representation of
petitioner corporation.
"In simply quoting in toto the patently erroneous decision of the trial
court, respondent Court of Appeals should be required to justify its
decision which completely disregarded the basic laws on obligations and
contracts, as well as the clear provisions of the Chattel Mortgage Law and
well-settled jurisprudence of this Honorable Court; that in the event that
its explanation is wholly unacceptable, this Honorable Court should
impose appropriate sanctions on the erring justices. This is one positive
step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction."[21] (Italics supplied.)
The statement is not called for. The Court invites counsel's attention to
the admonition in Guerrero vs. Villamor;[22] thus:
On March 20, 1985, Alberto Villafranca moved for the dismissal of the
complaint on the ground that there is another action pending between the
same parties before the Regional Trial Court of Makati, Branch 140,
docketed as Civil Case No. 8310, involving the seizure of subject motor
vehicle and the indemnity bond posted by Servicewide (Motion to Dismiss
with Annexes; pp. 57-110, ibid.) On March 28, 1985, the court granted the
aforesaid motion (p. 122, ibid.), but subsequently the order of dismissal
was reconsidered and set aside (pp. 135-136, ibid.). For failure to file his
Answer as required by the court a quo, Alberto Villafranca was declared in
default and plaintiffs evidence was received ex parte.
"(L)awyers x x x should bear in mind their basic duty `to observe and
maintain the respect due to the courts of justice and judicial officers and x
x x (to) insist on similar conduct by others.' This respectful attitude
towards the court is to be observed, `not for the sake of the temporary
incumbent of the judicial office, but for the maintenance of its supreme
importance.' And it is `through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect
due to the courts and judicial officers x x x.'"[23]
The virtues of humility and of respect and concern for others must still live
on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal
recourse by private respondent as may still be warranted as an unsecured
creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.
SERVICEWIDE SPECIALIST V. CA 1999
DY V. CA 1991
"On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a
Colt Galant xxx from Fortune Motors (Phils.) Corporation. On the same
date, she executed a promissory note for the amount of P56,028.00,
inclusive of interest at 12% per annum, payable within a period of 48
months starting August, 1976 at a monthly installment of P1,167.25 due
and demandable on the 17th day of each month (Exhibit A, pp. 144, Orig.
Records,). It was agreed upon, among others, that in case of default in the
payment of any installment the total principal sum, together with the
interest, shall become immediately due and payable (Exhibit A; p. 144,
Orig. Records). As a security for the promissory note, a chattel mortgage
was constituted over the said motor vehicle (Exhibit B, ibid.), with a deed
of assignment incorporated therein such that the credit and mortgage
rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit
Corporation with the consent of the mortgagor-debtor Leticia Laus
(Exhibits B-1 and B-2; p. 147, ibid.). The vehicle was then registered in the
name of Leticia L. Laus with the chattel mortgage annotated on said
certificate. (Exhibit "H"; p. 154, ibid.)
On September 25, 1978, Filinvest Credit Corporation in turn assigned the
credit in favor of Servicewide Specialists, Inc. (Servicewide, for brevity)
transferring unto the latter all its rights under the promissory note and the
chattel mortgage (Exhibit B-3; p. 149, ibid.) with the corresponding notice
of assignment sent to the registered car owner (Exhibit C; p. 150, Ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installment for
that month. The installments for the succeeding 17 months were not
likewise fully paid, hence on September 25, 1978, pursuant to the
provisions of the promissory note, Servicewide demanded payment of the
entire outstanding balance of P46,775.24 inclusive of interests (Exhibits D
and E; pp. 151-152, ibid.). Despite said formal demand, Leticia Laus failed
to pay all the monthly installments due until July 18, 1980.
On July 25, 1984, Servicewide sent a statement of account to Leticia Laus
and demanded payment of the amount of P86,613.32 representing the
outstanding balance plus interests up to July 25, 1985, attorneys fees,
liquidated damages, estimated repossession expense, and bonding fee
(Exhibit F; p. 153, ibid.)
As a result of the failure of Leticia Laus to settle her obligation, or at least
to surrender possession of the motor vehicle for the purpose of
foreclosure, Servicewide instituted a complaint for replevin, impleading
Hilda Tee and John Dee in whose custody the vehicle was believed to be at
the time of the filing of the suit.
In its complaint, plaintiff alleged that it had superior lien over the
mortgaged vehicle; that it is lawfully entitled to the possession of the
same together with all its accessories and equipments; (sic) that Hilda Tee
was wrongfully detaining the motor vehicle for the purpose of defeating
its mortgage lien; and that a sufficient bond had been filed in court.
(Complaint with Annexes, pp. 1-13, ibid.). On July 30, 1984, the court
approved the replevin bond (p. 20, ibid.)
On August 1, 1984, Alberto Villafranca filed a third party claim contending
that he is the absolute owner of the subject motor vehicle duly evidenced
xxx
The officer making the sale shall, within thirty days thereafter, make in
writing a return of his doings and file the same in the office of the Registry
of Deeds where the mortgage is recorded, and the Register of Deeds shall
record the same. The fees of the officer for selling the property shall be
the same as the case of sale on execution as provided in Act Numbered
One Hundred and Ninety, and the amendments thereto, and the fees of
the Register of Deeds for registering the officers return shall be taxed as a
part of the costs of sale, which the officer shall pay to the Register of
Deeds. The return shall particularly describe the articles sold, and state
the amount received for each article, and shall operate as a discharge of
the lien thereon created by the mortgage. The proceeds of such sale shall
be applied to the payment, first, of the costs and expenses of keeping and
sale, and then to the payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding under him on
demand. (Emphasis supplied)
It is clear from the above provision that the effects of foreclosure under
the Chattel Mortgage Law run inconsistent with those of pledge under
Article 2115. Whereas, in pledge, the sale of the thing pledged
extinguishes the entire principal obligation, such that the pledgor may no
longer recover proceeds of the sale in excess of the amount of the
principal obligation, Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the proceeds, upon satisfaction of
the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee from
retaining the excess of the sale proceeds there is a corollary obligation on
the part of the 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.
Petitioners never assailed the validity of the sale in the RTC, and only in
the Court of Appeals did they attempt to prove inadequacy of price
through the documents, i.e., the Open-End Mortgage on Inventory and
inventory dated March 31, 1980, likewise attached to their Petition before
this Court. Basic is the rule that parties may not bring on appeal issues
that were not raised on trial.
Having nonetheless examined the inventory and chattel mortgage
document as part of the records, We are not convinced that they
effectively prove that the mortgaged properties had a market value of at
least P2,000,000.00 on January 18, 1984, the date of the foreclosure sale.
At best, the chattel mortgage contract only indicates the obligation of the
mortgagor to maintain the inventory at a value of at least P2,000,000.00,
but does not evidence compliance therewith. The inventory, in turn, was
as of March 31, 1980, or even prior to April 17, 1980, the date when the
parties entered into the contracts of loan and chattel mortgage, and is far
from being an accurate estimate of the market value of the properties at
the time of the foreclosure sale four years thereafter. Thus, even
assuming that the inventory and chattel mortgage contract were duly
submitted as evidence before the trial court, it is clear that they cannot
suffice to substantiate petitioners allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole bidder for
the mortgaged properties in the public sale does not warrant the
conclusion that the transaction was attended with fraud. Fraud is a serious
allegation that requires full and convincing evidence,[20] and may not be
inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. The sparseness of petitioners
evidence in this regard leaves Us no discretion but to uphold the
presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability with
petitioner corporation in the loan. As found by the trial court and the
Court of Appeals, the terms of the promissory note unmistakably set forth
the solidary nature of private petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA WOOD
TREATMENT PLANT, INC., a corporation organized and existing under the
laws of the Philippines, with principal office at 304 El Hogar Filipina
Building, San Juan, Manila, promise to pay to the order of DEVELOPMENT
BANK OF THE PHILIPPINES at its office located at corner Buendia and
Makati Avenues, Makati, Metro Manila, the principal sum of TWO
HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE &
67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three
per cent (3%) per annum over DBPs borrowing rate for these funds.
Before the date of maturity, we hereby bind ourselves, jointly and
severally, to make partial payments as follows:
xxx
In case of default in the payment of any installment above, we bind
ourselves to pay DBP for advances xxx
xxx
We further bind ourselves to pay additional interest and penalty charges
on loan amortizations or portion thereof in arrears as follows:
xxx
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.
"In addition to the above, we also bind ourselves to pay for bank
advances for insurance premiums, taxes xxx
xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis for all
costs incurred by DBP on the foreign currency borrowings from where the
loan shall be drawn xxx
xxx
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
vendees failure to pay cover two or more installments, this provision is
specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity would be
to expand the application of the provisions of Article 1484 to situations
beyond its specific purview, and ignore the language and intent of the
Chattel Mortgage Law. Equity, which has been aptly described as justice
outside legality, is applied only in the absence of, and never against,
statutory law or judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that the public
auction sale is void on grounds of fraud and inadequacy of price.
subject vehicle and at the same time claim against the defendant for the
unpaid balance of its purchase price. In such a case, the respondent
would luckily have its cake and eat it too. Unfortunately for the defendant,
the lower courts had readily, probably unwittingly, made themselves
abettors to respondents devise to the detriment of the defendant.
...
WHEREFORE, finding error in the assailed decision, the instant petition is
hereby GRANTED and the assailed decision is hereby REVERSED AND SET
ASIDE. Let the records be remanded to the court of origin. Accordingly,
the foreclosure of the chattel mortgage over the subject vehicle as prayed
for by the respondent in its complaint without any right to seek the
payment of the unpaid balance of the purchase price or any deficiency
judgment against the petitioners pursuant to Article 1484 of the Civil
Code of the Philippines, is hereby ORDERED.[10]
Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch
4, where the case was docketed as Civil Case No. 10013. During the
pendency of his appeal before the RTC, Colarina died and was substituted
in the case by his heirs.[7] In a decision dated 30 January 2002, the RTC
affirmed in toto the decision of the MTCC.[8]
Colarina filed a Petition for Review before the Court of Appeals, docketed
as CA-G.R. SP No. 69481. On 21 January 2003, the Court of Appeals
rendered its decision[9] holding:
. . . We find merit in petitioners assertion that the MTC and the RTC erred
in ordering the defendant to pay the unpaid balance of the purchase price
of the subject vehicle irrespective of the fact that the instant complaint
was for the foreclosure of its chattel mortgage. The principal error
committed by the said courts was their immediate grant, however
erroneous, of relief in favor of the respondent for the payment of the
unpaid balance without considering the fact that the very prayer it had
sought was inconsistent with its allegation in the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial foreclosure
of the chattel mortgage. The fact that the respondent had unconscionably
sought the payment of the unpaid balance regardless of its complaint for
the foreclosure of the said mortgage is glaring proof that it intentionally
devised the same to deprive the defendant of his rights. A judgment in its
favor will in effect allow it to retain the possession and ownership of the
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendees failure to pay cover two or more
installments;
(3) Foreclose the chattel mortgage or the thing sold, if one has been
constituted, should the vendees failure to pay cover two or more
installments. In this case, he shall have no further action against the
purchaser to recover any unpaid balance of the price. Any agreement to
the contrary shall be void.
himself minus the property and still owing practically the full amount of
his original indebtedness.
In its Complaint, Magna Financial Services Group, Inc. made the following
prayer:
In its Memorandum before us, petitioner resolutely declared that it has
opted for the remedy provided under Article 1484(3) of the Civil Code,[17]
that is, to foreclose the chattel mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred
to avail itself of the first and third remedies under Article 1484, at the
same time suing for replevin. For this reason, the Court of Appeals
justifiably set aside the decision of the RTC. Perusing the Complaint, the
petitioner, under its prayer number 1, sought for the payment of the
unpaid amortizations which is a remedy that is provided under Article
1484(1) of the Civil Code, allowing an unpaid vendee to exact fulfillment
of the obligation. At the same time, petitioner prayed that Colarina be
ordered to surrender possession of the vehicle so that it may ultimately be
sold at public auction, which remedy is contained under Article 1484(3).
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.[18]
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.[19]
Contrary to petitioners claim, a contract of chattel mortgage, which is the
transaction involved in the present case, is in the nature of a conditional
sale of personal property given as a security for the payment of a debt, or
the performance of some other obligation specified therein, the condition
being that the sale shall be void upon the seller paying to the purchaser a
sum of money or doing some other act named.[20] If the condition is
performed according to its terms, the mortgage and sale immediately
become void, and the mortgagee is thereby divested of his title.[21] On
the other hand, in case of non payment, foreclosure is one of the
remedies available to a mortgagee by which he subjects the mortgaged
property to the satisfaction of the obligation to secure that for which the
mortgage was given. Foreclosure may be effected either judicially or
extrajudicially, that is, by ordinary action or by foreclosure under power of
sale contained in the mortgage. It may be effected by the usual methods,
including sale of goods at public auction.[22] Extrajudicial foreclosure, as
chosen by the petitioner, is attained by causing the mortgaged property
to be seized by the sheriff, as agent of the mortgagee, and have it sold at
public auction in the manner prescribed by Section 14 of Act No. 1508, or
the Chattel Mortgage Law.[23] This rule governs extrajudicial foreclosure
of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of
foreclosure under Article 1484(3) of the Civil Code, it is bound by its
election and thus may not be allowed to change what it has opted for nor
to ask for more. On this point, the Court of Appeals correctly set aside the
trial courts decision and instead rendered a judgment of foreclosure as
prayed for by the petitioner.
The next issue of consequence is whether or not there has been an actual
foreclosure of the subject vehicle.
In the case at bar, there is no dispute that the subject vehicle is already in
the possession of the petitioner, Magna Financial Services Group, Inc.
However, actual foreclosure has not been pursued, commenced or
concluded by it.
Where the mortgagee elects a remedy of foreclosure, the law requires the
actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v.
Fernandez,[24] our Supreme Court said that it is actual sale of the
mortgaged chattel in accordance with Sec. 14 of Act No. 1508 that would
bar the creditor (who chooses to foreclose) from recovering any unpaid
balance.[25] And it is deemed that there has been foreclosure of the
mortgage when all the proceedings of the foreclosure, including the sale
of the property at public auction, have been accomplished.[26]
That there should be actual foreclosure of the mortgaged vehicle was
reiterated in the case of De la Cruz v. Asian Consumer and Industrial
Finance Corporation:[27]
Be that as it may, although no actual foreclosure as contemplated under
the law has taken place in this case, since the vehicle is already in the
possession of Magna Financial Services Group, Inc. and it has persistently
and consistently avowed that it elects the remedy of foreclosure, the
Court of Appeals, thus, ruled correctly in directing the foreclosure of the
said vehicle without more.
A.M. No. 99-10-05-0, issued by the Court En Banc on 07 August 2001 and
made effective on 01 September 2001, provides for the procedure in the
extra-judicial foreclosure of mortgage, thusly:
"1. All applications for extra-judicial foreclosure of mortgage whether
under the direction of the sheriff or a notary public, pursuant to Act 3135,
as amended by Act 4118, and Act 1508, as amended, shall be filed with
the Executive Judge, through the Clerk of Court who is also the Ex-Officio
Sheriff.
1. That on the 27th day of October, 1924, said defendant Gimenez was
indebted to the plaintiff in the sum of P8,000, and to secure the payment
of the said amount duly made, executed and delivered a real estate
mortgage in favor of the said plaintiff over the properties and leasehold
rights mentioned in paragraph VIII of the plaintiff's complaint, and which
contract of mortgage is evidenced by the document, Exhibit A attached to
the complaint.
2. That owing to the fact that said defendant was leaving the City of
Manila in order to attend to his business in the Province of Cagayan, and
at the special instance and request of the herein plaintiff, said defendant
gave to the plaintiff the full control, and complete and absolute
administration of the building and the parcel of land on which said
building was erected, situated in Santa Mesa, District of Santa Mesa,
mortgaged to the plaintiff, under the condition that said plaintiff would
attend to the administration, care and preservation of the said building
and the property leased from the Hacienda Tuason on which said building
was erected, the payment of the premium on the insurance of this
building, the payment of the taxes might become due on the said
building, the payment to the lessor Hacienda Tuason of the rents of the
leased property, and to collect the rents from the tenants of the said
building.
3. That the rents that would be collected from the said building, the
plaintiff would apply the same to the payment of all the expenses
necessary for the preservation and maintenance of the said building, the
rents of the leased property, and the balance to be applied in payment on
account of the interest that may become due in favor of the plaintiff under
the mortgage.
4. That in accordance with this agreement, the defendant gave, and the
plaintiff took absolute control and possession and entered in the full
administration of the said building and land since October 27, 1924, and
up to the present time.
5. That in the course of the administration by the plaintiff of the said
building and land leased from the Hacienda Tuason, said plaintiff failed
and neglected to pay to the government of the City of Manila taxes due
for several years on the said building and has also failed and neglected to
pay to the lessor Hacienda Tuason the rents due for several years on the
land leased and on which said building was erected.
6. That by reason of this failure, neglect and abandonment by the plaintiff
to pay the taxes due on the said building, the City of Manila, on November
23, 1926, sold at public auction the said building was sold for the sum of
P244.50, and was bought by the other defendant Massy Teague, and since
that time the said building was lost to the defendant Gimenez.
7. That by reason of the failure, neglect and abandonment of the plaintiff
to pay the Hacienda Tuason the rents due for several years on the leased
property on which the building in question is erected, the said lessor
cancelled the contract of lease of the defendant Gimenez, and has
brought a suit against the said defendant Gimenez for desahucio in the
municipal court of the City of Manila.
As a second special defense, alleges that the building which was sold to
the defendant Massy Teague is worth P11,000, and the leasehold right of
the defendant which was cancelled by the Hacienda Tuason as above
stated is worth P3,000.
As a third special defense, alleges that by reason of the negligence,
failure and abandonment of the plaintiff to properly administer the
building and land in question and to pay the taxes due to the government
and the rents due the lessor Hacienda Tuason, and as a result of which the
defendant Gimenez has been deprived of the building, and his leasehold
right was cancelled, said defendant has suffered irreparable damages in
the sum of P14,000.
And as a fourth special defense and by way of counter-claim and set-off
against the claim of the said plaintiff, the defendant Gimenez alleges that
he reproduces herein the first three special defenses heretofore
mentioned, and that by reason of the negligent acts committed by the
plaintiff in the administration of the said building and land which caused
irreparable damage and prejudice to the defendant Gimenez, said
defendant has suffered damages in the sum of P14,000.
Wherefore, the defendant Gimenez by the undersigned attorneys,
respectfully prays the court to render judgment in his favor and against
the plaintiff, condemning the latter to pay the former the sum of fourteen
thousand pesos (P14,000), as damages suffered by the defendant
Gimenez; and that should this court find that the said defendant Gimenez
is liable to pay to plaintiff any sum of money under the mortgage, that
this amount of P14,000 be set-off against the amount that might rightfully
be found by the court to be due and owing by the defendant Gimenez to
plaintiff, and that should there be a difference in favor of the defendant
Gimenez that the plaintiff be condemned to pay to the said defendant
Gimenez the amount of such difference and for the costs of this action;
and also asks for such other and further relief as may be proper and
equitable under the premises. (Pages 23, 24, 25, 26 and 27, Bill of
Exceptions.)
After trial, the Court of First Instance of Manila rendered a decision,
dismissing the counterclaim presented by the defendant Antonio
Gimenez, the dispositive part of which reads as follows:
For the foregoing considerations, the court renders judgment, ordering
Antonio Gimenez to pay Recaredo Pando eight thousand pesos (P8,000),
Philippine currency, with annual interest at twelve per centum from June
1, 1928, until fully paid; two thousand three hundred and forty-four pesos
and sixty centavos (P2,344.60) as accrued interest with legal interest
thereon from the date of the complaint, May 19, 1928, until fully paid; and
eight hundred pesos (P800) as the stipulated attorney's fees, and the
costs; all of said sums to be paid within three months from the date
hereof.
Defendant Massy Teague is hereby authorized to pay to the plaintiff the
amounts set forth in the preceding paragraph, if he so desires, in order to
obtain the cancellation of the plaintiff's mortgage, and to acquire the
properties of defendant Gimenez free of all liens and encumbrances,
within the same three-month period from the date hereof.
In case neither of the defendants pay to the plaintiff the foregoing
amounts within the period named, the mortgaged properties shall be sold
at public auction in accordance with the law, and from the proceeds of the
sale, the aggregate sum of the aforementioned amounts shall be paid to
the plaintiff, and the balance, if any, delivered to defendant Massy
Teague, the present owner of the mortgaged property. (Pages 40 and 41,
Bill of Exceptions.)
Antonio Gimenez, defendant, appealed from this decision and now makes
the following assignments of error:
I. The lower court erred in not finding that, after the execution of the
contract of mortgage, Exhibit A, and just before the time said mortgage
matured, the appellee and the appellant entered into an agreement by
virtue of which:
(a) The appellee assumed and took over the general administration
(administracion directa) of the house No. 655 Santa Mesa, Manila, with
the right to collect the rents of the said house;
(b) But with the duty and obligation, that said appellee should pay the
taxes owing or accruing on the said house to the City of Manila;
(c) Should pay the rentals owing or accruing on the land occupied by said
house to the owners of said land the "Hacienda de Santa Mesa y Diliman",
in accordance with the terms of the contract of lease; and
(d) Should pay all other expenses necessary for the proper preservation
and maintenance of said house, such as repairs and so forth, including the
premium of the policy of insurance thereon and that the balance of said
rents should be applied by him toward the liquidation of interest accruing
under the mortgage.
II. The lower court erred in not finding that the appellee violated his duty
by neglecting and failing to pay the taxes on the house No. 655 Santa
Mesa, to the Government of the City of Manila, which became due during
the years 1925 and 1926, while said house was under his general
administration, and that by reason of that failure to pay said taxes, said
house was sold by public auction by the City of Manila to satisfy said
taxes, and finally adjudicated to the defendant Massy Teague, the
immediate consequence thereof being the loss to the appellant of all his
rights, legal and equitable in the said house.
III. The lower court erred in not finding that the appellant had suffered
damages for the loss of his said house No. 655 Santa Mesa, and that the
appellee should be responsible to the appellant for all damages suffered
by him.
IV. The lower court erred in not finding that the appellee violated his duty
by neglecting and failing to pay the rentals for the land occupied by said
house No. 655 Santa Mesa, to the owners thereof, which rentals became
due during the years 1925, 1926, 1927 and 1928, while the said land and
house were under his general administration, and that by reason of that
failure to pay said rentals, the owners of the land cancelled the contract of
lease of the appellant, the immediate consequence thereof being that the
appellant lost all his rights, use and enjoyment of said land for the
remaining unexpired period of 26 years.
V. The lower court erred in not finding that the appellant had suffered
damages for the loss of his leasehold right, the improvements on the land
and the use and enjoyment of said land for the remaining unexpired
The NLRC affirmed APTs liability for petitioners money claims. While no
employer-employee relationship existed between members of the
petitioner union and APT, at the time of the employees illegal dismissal,
the assets of BISUDECO had been transferred to the national government
through APT. Moreover, the NLRC held that APT should have treated
petitioners claim as a lien on the assets of BISUDECO. The Commission
opined that APT should have done so, considering its awareness of the
pending complaint of petitioners at the time BISUDECO sold its assets to
BAPCI, and APT started paying separation pay to the workers.
Finding their computation to be in order, the NLRC awarded to petitioners
their money claims for underpayment, labor-standard benefits, and
ECOLA. It also awarded them their back wages, computed at the
prevailing minimum wage, for the period May 1, 1991 (the date of their
illegal dismissal) until October 30, 1992 (the sale of BISUDECO assets to
the BAPCI). On the other hand, the NLRC ruled that petitioners were not
entitled to separation pay because of the huge business losses incurred
by BISUDECO, which had resulted in its bankruptcy.
Respondent sought relief from the CA via a Petition for Certiorari under
Rule 65 of the Rules of Court.
Ruling of the Court of Appeals
The CA ruled that APT should not be held liable for petitioners claims for
unfair labor practice, illegal dismissal, illegal deduction and underpayment
of wages, as well as other labor-standard benefits plus damages. As found
by the NLRC, APT was not the employer of petitioners, but was impleaded
only for possessing BISUDECOs mortgaged properties as trustee and,
later, as the highest bidder in the foreclosure sale of those assets.
Citing Batong Buhay Gold Mines v. Dela Serna,[8] the CA concluded that
petitioners claims could not be enforced against APT as mortgagee of the
foreclosed properties of BISUDECO.
Hence, this Petition.[9]
Issues
In brief, the main issue raised is whether Respondent APT is liable for
petitioners monetary claims.
The Courts Ruling
The Petition has no merit.
Main Issue:
Whether APT Is Liable for the Claims of
Petitioners Against Their Former Employer
It was only in April 1991 that APT foreclosed the assets and chattels of
BISUDECO because of the latters continued failure to pay outstanding
loan obligations to PNB/APT. The properties were sold at public auction to
APT, the highest bidder, as indicated in the Sheriffs Certificate of Sale
issued on April 2, 1991. It was only in September 1992 (after the
expiration of the lease/management Contract with Philsucor in August
1992), however, when APT took over BISUDECO assets, preparatory to the
latters privatization.
In the present case, petitioner-unions members who were not recalled to
work by Philsucor in May 1991 seek to hold APT liable for their monetary
claims and allegedly illegal dismissal. Significantly, prior to the actual sale
of BISUDECO assets to BAPCI on October 30, 1992, the APT board of
trustees had approved a Resolution on September 23, 1992. The
Resolution authorized the payment of separation benefits to the
employees of the corporation in the event of its privatization. Not included
in the Resolution, though, were petitioner-unions members who had not
been recalled to work in May 1991.
The question now before the Court is whether APT is liable to pay
petitioners monetary claims, including back wages from May 1, 1991, to
October 30, 1992 (the date of the sale of BISUDECO assets to BAPCI).
We rule in the negative. The duties and liabilities of BISUDECO, including
its monetary liabilities to its employees, were not all automatically
assumed by APT as purchaser of the foreclosed properties at the auction
sale. Any assumption of liability must be specifically and categorically
agreed upon. In Sundowner Development Corp. v. Drilon,[13] the Court
ruled that, unless expressly assumed, labor contracts like collective
bargaining agreements are not enforceable against the transferee of an
enterprise. Labor contracts are in personam and thus binding only
between the parties.
No succession of employment rights and obligations can be said to have
taken place between the two. Between the employees of BISUDECO and
APT, there is no privity of contract that would make the latter a substitute
employer that should be burdened with the obligations of the corporation.
To rule otherwise would result in unduly imposing upon APT an
unwarranted assumption of accounts not contemplated in Proclamation
No. 50 or in the Deed of Transfer between the national government and
PNB.
Furthermore, under the principle of absorption, a bona fide buyer or
transferee of all, or substantially all, the properties of the seller or
transferor is not obliged to absorb the latters employees.[14] The most
that the purchasing company may do, for reasons of public policy and
social justice, is to give preference of reemployment to the selling
companys qualified separated employees, who in its judgment are
necessary to the continued operation of the business establishment.[15]
In any event, the national government (in whose trust APT previously held
the mortgage credits of BISUDECO) is not the employer of petitionerunions members, who had been dismissed sometime in May 1991, even
before APT took over the assets of the corporation. Hence, under existing
law and jurisprudence, there is no reason to expect any kind of bailout by
the national government.[16] Even the NLRC found that no employeremployee relationship existed between APT and petitioners. Thus, the
Commission gravely abused its discretion in nevertheless holding that
APT, as the transferee of the assets of BISUDECO, was liable to
petitioners.
In other words, the liabilities of the previous owner to its employees are
not enforceable against the buyer or transferee, unless (1) the latter
unequivocally assumes them; or (2) the sale or transfer was made in bad
faith. Thus, APT cannot be held responsible for the monetary claims of
petitioners who had been dismissed even before it actually took over
BISUDECOs assets.
Moreover, it should be remembered that APT merely became a transferee
of BISUDECOs assets for purposes of conservation because of its lien on
those assets -- a lien it assumed as assignee of the loan secured by the
corporation from PNB. Subsequently, APT, as the highest bidder in the
auction sale, acquired ownership of the foreclosed properties.
Relevant to this transfer of assets is Article 110 of the Labor Code, as
amended by Republic Act No. 6715, which reads:
Article 110. Workers preference in case of bankruptcy. In the event of
bankruptcy or liquidation of the employers business, his workers shall
enjoy first preference as regards their unpaid wages and other monetary
claims shall be paid in full before the claims of the Government and other
creditors may be paid.[23]
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.
Development Bank of the Philippines v. NLRC[25] explained the rationale
of this ruling as follows:
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution AFFIRMED. Costs against petitioners
In his July 30, 1998 Order, [Judge Ranada] granted [respondents] Motion
to Cancel Notice of Lis Pendens x x x:
Setting aside the Orders of the RTC dated November 4, 1998 and October
22, 1999, the CA reinstated the formers July 30, 1998 Order[6] granting
Herbal Coves Motion to Cancel the Notice of Lis Pendens. According to the
appellate court, the re-annotation of those notices was improper for want
of any legal basis. It specifically cited Section 76 of Presidential Decree
No. 1529 (the Property Registration Decree). The decree provides that the
registration of such notices is allowed only when court proceedings
directly affect the title to, or the use or the occupation of, the land or any
building thereon.
The CA opined that the Complaint filed by petitioner in Civil Case No. 972707 was intended purely to collect a sum of money and to recover
damages. The appellate court ruled that the Complaint did not aver any
ownership claim to the subject land or any right of possession over the
buildings constructed thereon. It further declared that absent any claim
on the title to the buildings or on the possession thereof, the notices of lis
pendens had no leg to stand on.
Likewise, the CA held that Judge Ranada should have maintained the
notice cancellations, which he had directed in his July 30, 1998 Order.
Those notices were no longer necessary to protect the rights of petitioner,
inasmuch as it could have procured protective relief from the Construction
Industry Arbitral Commission (CIAC), where provisional remedies were
available. The CA also mentioned petitioners admission that there was
already a pending case before the CIAC, which in fact rendered a decision
on March 11, 1999.
The appellate court further explained that the re-annotation of the Notice
of Lis Pendens was no longer warranted after the court a quo had ruled
that the latter had no jurisdiction over the case. The former held that the
rationale behind the principle of lis pendens -- to keep the subject matter
of the litigation within the power of the court until the entry of final
judgment -- was no longer applicable. The reason for such inapplicability
was that the Makati RTC already declared that it had no jurisdiction or
power over the subject matter of the case.
Finally, the CA opined that petitioners Complaint had not alleged or
claimed, as basis for the continued annotation of the Notice of Lis
Pendens, the lien of contractors and laborers under Article 2242 of the
New Civil Code. Moreover, petitioner had not even referred to any lien of
whatever nature. Verily, the CA ruled that the failure to allege and claim
the contractors lien did not warrant the continued annotation on the
property titles of Respondent Herbal Cove.
Hence, this Petition.[7]
The Issues
Petitioner raises the following issues for our consideration:
I. Whether or not money claims representing cost of materials [for] and
labor [on] the houses constructed on a property [are] a proper lien for
annotation of lis pendens on the property title[.]
II. Whether or not the trial court[,] after having declared itself without
jurisdiction to try the case[,] may still decide on [the] substantial issue of
the case.[8]
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.
First Issue:
Proper Basis for a
Notice of Lis Pendens
Petitioner avers that its money claim on the cost of labor and materials for
the townhouses it constructed on the respondents land is a proper lien
that justifies the annotation of a notice of lis pendens on the land titles.
According to petitioner, the money claim constitutes a lien that can be
enforced to secure payment for the said obligations. It argues that, to
preserve the alleged improvement it had made on the subject land, such
annotation on the property titles of respondent is necessary.
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.
On the other hand, Respondent Herbal Cove argues that the annotation is
bereft of any factual or legal basis, because petitioners Complaint[9] does
not directly affect the title to the property, or the use or the possession
thereof. It also claims that petitioners Complaint did not assert ownership
of the property or any right to possess it. Moreover, respondent attacks as
baseless the annotation of the Notice of Lis Pendens through the
enforcement of a contractors lien under Article 2242 of the Civil Code. It
points out that the said provision applies only to cases in which there are
several creditors carrying on a legal action against an insolvent debtor.
Another factor negates the argument of petitioner that its money claim
involves the enforcement of a lien or the assertion of title to or possession
of the subject property: the fact that it filed its action with the RTC of
Makati, which is undisputedly bereft of any jurisdiction over respondents
property in Tagaytay City. Certainly, actions affecting title to or possession
of real property or the assertion of any interest therein should be
commenced and tried in the proper court that has jurisdiction over the
area, where the real property involved or a portion thereof is situated.[15]
If petitioner really intended to assert its claim or enforce its supposed lien,
interest or right over respondents subject properties, it would have
instituted the proper proceedings or filed a real action with the RTC of
Tagaytay City, which clearly had jurisdiction over those properties.[16]
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
By express provision of law, the doctrine of lis pendens does not apply to
attachments, levies of execution, or to proceedings for the probate of
wills, or for administration of the estate of deceased persons in the Court
of First Instance. Also, it is held generally that the doctrine of lis pendens
has no application to a proceeding in which the only object sought is the
recovery of a money judgment, though the title or right of possession to
property be incidentally affected. It is essential that the property be
directly affected, as where the relief sought in the action or suit includes
the recovery of possession, or the enforcement of a lien, or an
adjudication between conflicting claims of title, possession, or the right of
possession to specific property, or requiring its transfer or sale[17]
(Emphasis supplied)
Pea adds that even if a party initially avails itself of a notice of lis pendens
upon the filing of a case in court, such notice is rendered nugatory if the
case turns out to be a purely personal action. We quote him as follows:
It may be possible also that the case when commenced may justify a
resort to lis pendens, but during the progress thereof, it develops to be
purely a personal action for damages or otherwise. In such event, the
notice of lis pendens has become functus officio.[18] (Emphasis supplied)
Thus, when a complaint or an action is determined by the courts to be in
personam, the rationale for or purpose of the notice of lis pendens ceases
to exist. To be sure, this Court has expressly and categorically declared
that the annotation of a notice of lis pendens on titles to properties is not
proper in cases wherein the proceedings instituted are actions in
personam.[19]
Second Issue:
Jurisdiction of the Trial Court
Petitioner argues that the RTC had no jurisdiction to issue the Order
canceling the Notice of Lis Pendens as well as the Order reinstating it.
Supposedly, since both Orders were issued by the trial court without
jurisdiction, the annotation made by the Register of Deeds of Tagaytay
City must remain in force.
Petitioner avers that the trial court finally declared that the latter had no
jurisdiction over the case on July 27, 1998, in an Order denying the
formers Motion for Reconsideration of the March 17, 1998 Order
dismissing the Complaint. Petitioner insists that the subsequent July 30,
1998 Order cancelling the subject Notice of Lis Pendens is void, because it
was issued by a court that had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from
regional trial courts, expressly provides that RTCs lose jurisdiction over a
case when an appeal is filed. The rule reads thus:
SEC. 9. Perfection of appeal; effect thereof. -- A partys appeal by notice of
appeal is deemed perfected as to him upon the filing of the notice of
appeal in due time.
xxxxxxxxx
In appeals by notice of appeal, the court loses jurisdiction over the case
upon the perfection of the appeals filed in due time and the expiration of
the time to appeal of the other parties. (Emphasis supplied)
On the basis of the foregoing rule, the trial court lost jurisdiction over the
case only on August 31, 1998, when petitioner filed its Notice of Appeal.
[20] Thus, any order issued by the RTC prior to that date should be
considered valid, because the court still had jurisdiction over the case.
Accordingly, it still had the authority or jurisdiction to issue the July 30,
1998 Order canceling the Notice of Lis Pendens. On the other hand, the
November 4, 1998 Order that set aside the July 30, 1998 Order and
reinstated that Notice should be considered without force and effect,
because it was issued by the trial court after it had already lost
jurisdiction.
In any case, even if we were to adopt petitioners theory that both the July
30, 1998 and the November 4, 1998 Orders were void for having been
issued without jurisdiction, the annotation is still improper for lack of
factual and legal bases.
As discussed previously, erroneously misplaced is the reliance of
petitioner on the premise that its money claim is an action for the
enforcement of a contractors lien. Verily, the annotation of the Notice of
Lis Pendens on the subject property titles should not have been made in
the first place. The Complaint filed before the Makati RTC -- for the
collection of a sum of money and for damages -- did not provide sufficient
legal basis for such annotation.
Finally, petitioner vehemently insists that the trial court had no jurisdiction
to cancel the Notice. Yet, the former filed before the CA an appeal,
docketed as CA-GR CV No. 65647,[21] questioning the RTCs dismissal of
the Complaint for lack of jurisdiction. Moreover, it must be remembered
that it was petitioner which had initially invoked the jurisdiction of the trial
court when the former sought a judgment for the recovery of money and
damages against respondent. Yet again, it was also petitioner which
assailed that same jurisdiction for issuing an order unfavorable to the
advantage or preference over other creditors. They can not thus take
advantage of their fiduciary relation and deal directly with themselves, to
the injury of others in equal right. If they do, equity will set aside the
transaction at the suit of creditors of the corporation or their
representatives, without reference to the question of any actual
fraudulent intent on the part of the directors, for the right of the creditors
does not depend upon fraud in fact, but upon the violation of the fiduciary
relation to the directors. xxx. (page 106 of the Appellees Brief.)
We also concede that x x x directors of insolvent corporation, who are
creditors of the company, can not secure to themselves any preference or
advantage over other creditors in the payment of their claims. It is not
good morals or good law. The governing body of officers thereof are
charged with the duty of conducting its affairs strictly in the interest of its
existing creditors, and it would be a breach of such trust for them to
undertake to give any one of its members any advantage over any other
creditors in securing the payment of his debts in preference to all others.
When validity of these mortgages, to secure debts upon which the
directors were indorsers, was questioned by other creditors of the
corporation, they should have been classed as instruments rendered void
by the legal principle which prevents directors of an insolvent corporation
from giving themselves a preference over outside creditors. x x x (page
106-107 of the Appellees Brief.)[12]
The Court of Appeals made reference to two principles in corporation law.
The first pertains to transactions between corporations with interlocking
directors resulting in the prejudice to one of the corporations. This rule
does not apply in this case, however, since the corporation allegedly
prejudiced (Remington) is a third party, not one of the corporations with
interlocking directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves directors who
are creditors which is also inapplicable herein. Here, the creditor of
Marinduque Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of
Nonoc Mining, Maricalum and Island Cement. As Remington itself
concedes, DBP is not authorized by its charter to engage in the mining
business.[13] The creation of the three corporations was necessary to
manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value. In the absence of any entity
willing to purchase these assets from the bank, what else would it do with
these properties in the meantime? Sound business practice required that
they be utilized for the purposes for which they were intended.
(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
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 foreclousre 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."
Remington also asserted in its third amended complaint that the use of
Nonoc Mining, Maricalum and Island Cement of the premises of
Marinduque Mining and the hiring of the latters officers and personnel
also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those
acquired by DBP in the foreclosure sale, convenience and practicality
dictated that the corporations so created occupy the premises where
these assets were found instead of relocating them. No doubt, many of
these assets are heavy equipment and it may have been impossible to
move them. The same reasons of convenience and practicality, not to
mention efficiency, justified the hiring by Nonoc Mining, Maricalum and
Island Cement of Marinduque Minings personnel to manage and operate
the properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies
only when such corporate fiction is used to defeat public convenience,
justify wrong, protect fraud or defend crime.[14] To disregard the separate
juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed.[15] In this case, the
Court finds that Remington failed to discharge its burden of proving bad
faith on the part of Marinduque Mining and its transferees in the mortgage
and foreclosure of the subject properties to justify the piercing of the
corporate veil.
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
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:
The Court of Appeals also held that there exists in Remingtons 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.
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.
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 xxx (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)
representing 15% of the monetary value of his CSPI shares plus interest at
the legal rate from the time of their unauthorized sale.
On October 27, 1999, the SEC issued an order clarifying its September 24,
1999 resolution. While it reiterated its earlier order to pay petitioner the
amount of P5,062,500, it deleted the award of legal interest. It clarified
that it never meant to award interest since this would be unfair to the
other claimants.
On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed
the owner of the CSPI shares but the recovery of such shares had become
impossible. It also declared that the clarificatory order merely harmonized
the dispositive portion with the body of the resolution. Petitioners motion
for reconsideration was denied.
Hence this petition raising the following issues:
1)
whether petitioner should be considered as a preferred (and
secured) creditor of Philfinance;
2)
whether petitioner can recover the full value of his CSPI
shares or merely 15% thereof like all other ordinary creditors of
Philfinance and
3)
whether petitioner is entitled to legal interest.[14]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin,
Jr., etc., et al.,[18] and in two cases both entitled Development Bank of
the Philippines vs. NLRC.[19]
The SEC, after holding that petitioner was the owner of the shares, stated:
There is no dispute that petitioner was the owner of the CSPI shares.
However, private respondents, as liquidators of Philfinance, illegally
withdrew said certificates of stock without the knowledge and consent of
petitioner and authority of the SEC.[15] After selling the CSPI shares,
private respondents added the proceeds of the sale to the assets of
Philfinance.[16] Under these circumstances, did the petitioner become a
creditor of Philfinance? We rule in the affirmative.
Petitioner is seeking the return of his CSPI shares which, for the present, is
no longer possible, considering that the same had already been sold by
the respondents, the proceeds of which are ADMITTEDLY commingled with
the assets of PHILFINANCE.
This being the case, [petitioner] is now but a claimant for the value of
those shares. As a claimant, he shall be treated as an ordinary creditor in
so far as the value of those certificates is concerned.[17]
I. When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of the
Civil Code govern in determining the measure of recoverable damages.
We agree with the public respondent that the word claim as used in Sec.
6(c) of P.D. 902-A,[25] as amended, refers to debts or demands of a
pecuniary nature. It means "the assertion of a right to have money paid. It
is used in special proceedings like those before [the administrative court]
on insolvency."
Under this ruling, petitioner was not entitled to legal interest of 12% per
annum (from demand) because the amount owing to him was not a
loan[31] or forbearance of money.[32]
Neither was he entitled to legal interest of 6% per annum under Article
2209 of the Civil Code[33] since this provision applies only when there is a
delay in the payment of a sum of money.[34] This was not the case here.
In fact, petitioner himself manifested before the CA that the SEC (as
liquidator) had already paid him P5,062,500 representing 15% of
P33,750,000.[35]
Accordingly, petitioner was not entitled to interest under the law and
current jurisprudence.
Considering that petitioner had already received the amount of
P5,062,500, the obligation of the SEC as liquidator of Philfinance was
totally extinguished.[36]
We note that there is an undisputed finding by the SEC and CA that
private respondents sold the subject shares without authority from the