JOSE C. CORDOVA, G.R. No.

146555 On June 18, 1981, Philfinance was placed under receivership

by public respondent Securities and Exchange Commission
Petitioner, (SEC). Thereafter, private respondents Reyes Daway Lim
Bernardo Lindo Rosales Law Offices and Atty. Wendell
Present: Coronel (private respondents) were appointed as liquidators.[7]
Sometime in 1991, without the knowledge and consent of
petitioner and without authority from the SEC, private
respondents withdrew the CSPI shares from the custodian
PUNO, C.J., Chairperson, banks.[8] On May 27, 1996, they sold the shares to Northeast
Corporation and included the proceeds thereof in the funds of
SANDOVAL-GUTIERREZ,* Philfinance. Petitioner learned about the unauthorized sale of
his shares only on September 10, 1996.[9] He lodged a
- v e r s u s - CORONA, complaint with private respondents but the latter ignored it[10]
prompting him to file, on May 6, 1997,[11] a formal complaint
AZCUNA and against private respondents in the receivership proceedings
with the SEC, for the return of the shares.
GARCIA, JJ. **

Meanwhile, on April 18, 1997, the SEC approved a 15% rate of

REYES DAWAY LIM BERNARDO recovery for Philfinances creditors and investors.[12] On May
13, 1997, the liquidators began the process of settling the
LINDO ROSALES LAW OFFICES, claims against Philfinance, from its assets.[13]

ATTY. WENDELL CORONEL and

the SECURITIES AND EXCHANGE On April 14, 1998, the SEC rendered judgment dismissing the
petition. However, it reconsidered this decision in a resolution
COMMISSION,*** dated September 24, 1999 and granted the claims of petitioner.
It held that petitioner was the owner of the CSPI shares by
Respondents. Promulgated: virtue of a confirmation of sale (which was considered as a
deed of assignment) issued to him by Philfinance. But since
the shares had already been sold and the proceeds
commingled with the other assets of Philfinance, petitioners
July 3, 2007 status was converted into that of an ordinary creditor for the
value of such shares. Thus, it ordered private respondents to
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - pay petitioner the amount of P5,062,500 representing 15% of
------x the monetary value of his CSPI shares plus interest at the legal
rate from the time of their unauthorized sale.

DECISION
On October 27, 1999, the SEC issued an order clarifying its
September 24, 1999 resolution. While it reiterated its earlier
CORONA, J.: 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.

This is a petition for review on certiorari[1] of a decision[2] and
resolution[3] of the Court of Appeals (CA) dated July 31, 2000
and December 27, 2000, respectively, in CA-G.R. SP No.
55311.
On appeal, the CA affirmed the SEC. It agreed that petitioner
was indeed the owner of the CSPI shares but the recovery of
such shares had become impossible. It also declared that the
clarificatory order merely harmonized the dispositive portion
with the body of the resolution. Petitioners motion for
reconsideration was denied.

Sometime in 1977 and 1978, petitioner Jose C. Cordova

bought from Philippine Underwriters Finance Corporation
(Philfinance) certificates of stock of Celebrity Sports Plaza Hence this petition raising the following issues:
Incorporated (CSPI) and shares of stock of various other
corporations. He was issued a confirmation of sale.[4] The 1) whether petitioner should be considered as a
CSPI shares were physically delivered by Philfinance to the preferred (and secured) creditor of Philfinance;
former Filmanbank[5] and Philtrust Bank, as custodian banks,
to hold these shares in behalf of and for the benefit of 2) whether petitioner can recover the full value of his
petitioner.[6] CSPI shares or merely 15% thereof like all other ordinary
creditors of Philfinance and

3) whether petitioner is entitled to legal interest.[14]

1

To resolve these issues, we first have to determine if petitioner
was indeed a creditor of Philfinance.
There is no dispute that petitioner was the owner of the CSPI
shares. However, private respondents, as liquidators of
Philfinance, illegally withdrew said certificates of stock without
the knowledge and consent of petitioner and authority of the
SEC.[15] After selling the CSPI shares, private respondents
added the proceeds of the sale to the assets of Philfinance.[16]
Under these circumstances, did the petitioner become a
creditor of Philfinance? We rule in the affirmative.
The SEC, after holding that petitioner was the owner of the
shares, stated:
Petitioner is seeking the return of his CSPI shares which, for
the present, is no longer possible, considering that the same
had already been sold by the respondents, the proceeds of
which are ADMITTEDLY commingled with the assets of
PHILFINANCE.
This being the case, [petitioner] is now but a claimant for the
value of those shares. As a claimant, he shall be treated as an
ordinary creditor in so far as the value of those certificates is
concerned.[17]
The CA agreed with this and elaborated:
Much as we find both detestable and reprehensible the grossly
abusive and illicit contrivance employed by private respondents
against petitioner, we, nevertheless, concur with public
respondent that the return of petitioners CSPI shares is well-
nigh impossible, if not already an utter impossibility, inasmuch
as the certificates of stocks have already been alienated or
transferred in favor of Northeast Corporation, as early as May
27, 1996, in consequence whereof the proceeds of the sale
have been transmuted into corporate assets of Philfinance,
under custodia legis, ready for distribution to its creditors
and/or investors. Case law holds that the assets of an
institution under receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver or liquidator, and
shall from the moment of such receivership or liquidation, be
exempt from any order, garnishment, levy, attachment, or
execution.
Concomitantly, petitioners filing of his claim over the subject
CSPI shares before the SEC in the liquidation proceedings
bound him to the terms and conditions thereof. He cannot
demand any special treatment [from] the liquidator, for this flies
in the face of, and will contravene, the Supreme Court dictum
that when a corporation threatened by bankruptcy is taken over
by a receiver, all the creditors shall stand on equal footing. Not
one of them should be given preference by paying one or some
[of] them ahead of the others. This is precisely the philosophy
underlying the suspension of all pending claims against the
corporation under receivership. The rule of thumb is equality in
equity.[18]
We agree with both the SEC and the CA that petitioner had
become an ordinary creditor of Philfinance.
Certainly, petitioner had the right to demand the return of his
CSPI shares.[19] He in fact filed a complaint in the liquidation
proceedings in the SEC to get them back but was confronted
by an impossible situation as they had already been sold.
Consequently, he sought instead to recover their monetary
value.
Petitioners CSPI shares were specific or determinate movable
properties.[20] But after they were sold, the money raised from
the sale became generic[21] and were commingled with the
cash and other assets of Philfinance. Unlike shares of stock,
money is a generic thing. It is designated merely by its class or
genus without any particular designation or physical
segregation from all others of the same class.[22] This means
that once a certain amount is added to the cash balance, one
can no longer pinpoint the specific amount included which then
becomes part of a whole mass of money.
It thus became impossible to identify the exact proceeds of the
sale of the CSPI shares since they could no longer be
particularly designated nor distinctly segregated from the
assets of Philfinance. Petitioners only remedy was to file a
claim on the whole mass of these assets, to which
unfortunately all of the other creditors and investors of
Philfinance also had a claim.
Petitioners right of action against Philfinance was a claim
properly to be litigated in the liquidation proceedings.[23] In
Finasia Investments and Finance Corporation v. CA,[24] we
discussed the definition of claims in the context of liquidation
proceedings:
We agree with the public respondent that the word claim as
used in Sec. 6(c) of P.D. 902-A,[25] as amended, refers to
debts or demands of a pecuniary nature. It means "the
assertion of a right to have money paid. It is used in special
proceedings like those before [the administrative court] on
insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to
judgment, liquidated, unliquidated, fixed, contingent, matured,
unmatured, disputed, undisputed, legal, equitable, secured, or
2
unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured, unsecured.[26]
Undoubtedly, petitioner had a right to the payment of the value
of his shares. His demand was of a pecuniary nature since he
was claiming the monetary value of his shares. It was in this
sense (i.e. as a claimant) that he was a creditor of Philfinance.
The Civil Code provisions on concurrence and preference of
credits are applicable to the liquidation proceedings.[27] The
next question is, was petitioner a preferred or ordinary creditor
under these provisions?
Petitioner argues that he was a preferred creditor because
private respondents illegally withdrew his CSPI shares from the
custodian banks and sold them without his knowledge and
consent and without authority from the SEC. He quotes Article
2241 (2) of the Civil Code:
With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
xxx xxx xxx
(2) Claims arising from misappropriation, breach of trust, or
malfeasance by public officials committed in the performance
of their duties, on the movables, money or securities obtained
by them;
xxx xxx xxx
(Emphasis supplied)
He asserts that, as a preferred creditor, he was entitled to the
entire monetary value of his shares.
Petitioners argument is incorrect. Article 2241 refers only to
specific movable property. His claim was for the payment of
money, which, as already discussed, is generic property and
not specific or determinate.
Considering that petitioner did not fall under any of the
provisions applicable to preferred creditors, he was deemed an
ordinary creditor under Article 2245:
Credits of any other kind or class, or by any other right or title
not comprised in the four preceding articles, shall enjoy no
preference.
This being so, Article 2251 (2) states that:
Common credits referred to in Article 2245 shall be paid pro
rata regardless of dates.
Like all the other ordinary creditors or claimants against
Philfinance, he was entitled to a rate of recovery of only 15% of
his money claim.
One final issue: was petitioner entitled to interest?
The SEC argues that awarding interest to petitioner would
have given petitioner an unfair advantage or preference over
the other creditors.[28] Petitioner counters that he was entitled
to 12% legal interest per annum under Article 2209 of the Civil
Code from the time he was deprived of the shares until fully
paid.
The guidelines for awarding interest were laid down in Eastern
Shipping Lines, Inc. v. CA:[29]
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the
concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of
money, the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of
Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the
rate of 6% per annum. No interest, however, shall be adjudged
3
on unliquidated claims or damages except when or until the
demand can be established with reasonable certainty.

Accordingly, where the demand is established with reasonable

certainty, the interest shall begin to run from the time the claim
is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at
the time the demand is made, the interest shall begin to run
only from the date of the judgment of the court is made (at
which time the quantification of damages may be deemed to
have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount of finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall
be 12% per annum from such finality until its satisfaction, this
interim period being deemed to be by then an equivalent to a
forbearance of credit.[30] (Emphasis supplied)

Under this ruling, petitioner was not entitled to legal interest of

12% per annum (from demand) because the amount owing to
him was not a loan[31] or forbearance of money.[32]

Neither was he entitled to legal interest of 6% per annum under

Article 2209 of the Civil Code[33] since this provision applies
only when there is a delay in the payment of a sum of
money.[34] This was not the case here. In fact, petitioner
himself manifested before the CA that the SEC (as liquidator)
had already paid him P5,062,500 representing 15% of
P33,750,000.[35]

Accordingly, petitioner was not entitled to interest under the law

and current jurisprudence.

Considering that petitioner had already received the amount of

P5,062,500, the obligation of the SEC as liquidator of
Philfinance was totally extinguished.[36]

We note that there is an undisputed finding by the SEC and CA

that private respondents sold the subject shares without
authority from the SEC. Petitioner evidently has a cause of
action against private respondents for their bad faith and
unauthorized acts, and the resulting damage caused to
him.[37]

WHEREFORE, the petition is hereby DENIED.

SO ORDERED.

4
G.R. No. L-14938 December 29, 1962
MAGDALENA C. DE BARRETTO and JOSE G. BARRETTO,
plaintiffs-appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.
Bausa, Ampil and Suarez for plaintiffs-appellants.
Esteban Ocampo and Mariano H. de Joya for defendants-
appellees.
RESOLUTION
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously
urging, for reason to be discussed in the courts of this
resolution, that our decision of 28 January 1961 be
reconsidered and set aside, and a new one entered declaring
that their right as mortgagees remain superior to the
unrecorded claim of herein appellee for the balance of the
purchase price of her rights, title, and interest in the mortgaged
property.
It will be recalled that, with Court authority, 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. 32526), and
mortgaged the property to appellant Magdalena C. Barretto,
married to Jose G. Barretto, to secure a loan of P30,000.03,
said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of
Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for
execution on 31 July 1958. On 14 August 1958, Cruzado filed
a motion for recognition for her "vendor's lien" in the amount of
P12,000.00 plus legal interest, invoking Articles 2242, 2243,
and 2249 of the new Civil Code. After hearing, the court below
ordered the "lien" annotated on the back of Certificate of Title
No. 32526, with the proviso that in case of sale under the
foreclosure decree the vendor's lien and the mortgage credit of
appellant Barretto should be paid pro rata from the proceeds.
Our original decision affirmed this order of the Court of First
Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of the
new Civil Code of the Philippines, can only become effective in
the event of insolvency of the vendee, which has not been
proved to exist in the instant case; and
(2) That the appellee Cruzado is not a true vendor of the
foreclosed property.
We have given protracted and mature consideration to the
facts and law of this case and have reached the conclusion
that our original decision must be reconsidered and set aside,
for the following reasons:
A. The previous decision failed to take fully into account
the radical changes introduced by the Civil Code the
Philippines into the system of priorities among creditors
ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled
to preference as to specific real property under Article 1923
were to be resolved according to an order of priorities
established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the
former were fully satisfied out of the proceeds of the sale of the
real property subject of the preference, and could even exhaust
such proceeds if necessary.
Under the system of the Civil Code of the Philippine 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 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 right.
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 first some proceeding where the
claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of a decedent's
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
—
The claims or credits enumerated in the two preceding
articles1 shall be considered as mortgages or pledges of real
or personal property or liens within the purview of legal
provision governing insolvency . . . . (Emphasis 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 Involvency
Law. (Emphasis supplied.)
Thus, it becomes evident that one preferred creditor's third-
party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by law
for the enforcement of preferences under Article 2242, unless
the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain the
pro rata dividend corresponding to each, because the rights of
the other creditors likewise enjoying preference under Article
2242 can not be ascertained. Wherefore, the order of the Court
of First Instance of Manila now appealed from decreeing that
the proceeds of the foreclosure sale be apportioned only
between appellant and appellee, is incorrect and must be
reversed.
In the absence of insolvency proceedings (or other equivalent
general liquidation of the debtor's estate), the conflict between
5
the parties now before us must be decided pursuant to the well
established principle concerning register lands; that a
purchaser in good faith and for value (as the appellant
concededly is) takes registered property free from liens and
encumbrances other than statutory liens and those recorded in
the certificate of title. There being no insolvency or liquidation,
the claim of the appellee, as unpaid vendor, did not acquire the
character and rank of a statutory lien co-equal to the
mortgagee's recorded encumbrance, and must remain
subordinate to the latter.
We are understandably loath (absent a clear precept of law so
commanding) to adopt a rule that would undermine the faith
and credit to be accorded to registered Torrens titles and nullify
the beneficient objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that if a
person dealing with registered land were to be held to take it in
every instance subject to all the fourteen preferred claims
enumerate in Article 2242 of the new Civil Code, even if the
existence and import thereof can not be ascertained from the
records, all confidence in Torrens titles would be destroyed,
and credit transactions on the faith of such titles would be
hampered, if not prevented, with incalculable results. Loans on
real estate security would become aleatory and risky
transactions, for no prospective lender could accurately
estimate the hidden liens on the property offered as security,
unless he indulged in complicated, tedious investigations. The
logical result might well be contraction of credit to unforeseable
proportions that could lead to economic disaster.lawphil.net
Upon the other hand, it does not appear excessively
burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of Deeds
should they desire to protect their rights even outside of
insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records
casts strong doubt on the proposition that appelle Cruzados
should be regarded as unpaid vendors of the property (land,
buildings, and improvements) involved in the case at bar so as
to be entitled to preference under Article 2242. The record on
appeal, specially the final decision of the Court of First Instance
of Manila in the suit of the Cruzados against Villanueva, clearly
establishes that after her husband's death, and with due court
authority, Rosario Cruzado, for herself and as administratrix of
her husband's estate, mortgaged the property to the
Rehabilitation Finance Corporation (RFC) to secure repayment
of a loan of P11,000, in installments, but that the debtor failed
to pay some of the installment wherefore the RFC, on 24
August 1949, foreclosed the mortgage, and acquired the
property, subject to the debtors right to redeem or repurchase
the said property; and that on 25 September 1950, the RFC
consolidated its ownership, and the certificate of title of the
Cruzados was cancelled and a new certificate issued in the
name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling
back the property to the erstwhile mortgagors and former
owners Cruzados in installments, subject to the condition
(among others) that the title to the property and its
improvements "shall remain in the name of the Corporation
(RFC) until after said purchase price, advances and interest
shall have been fully paid", as of 27 September 1952, Cruzado
had only paid a total of P1,360, and had defaulted on six
monthly amortizations; for which reason the RFC rescinded the
sale, and forfeited the payments made, in accordance with the
terms of the contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L.
Villanueva all "their rights, title, interest and dominion on and
over" the property, lot, house, and improvements for
P19,000.00, the buyer undertaking to assume payment of the
obligation to the RFC, and by resolution of 30 April 1953, the
RFC approved "the transfer of the rights and interests of
Rosario P. Cruzado and her children in their property herein
above-described in favor of Pura L. Villanueva"; and on 7 May
1953 the RFC executed a deed of absolute sale of the property
to said party, who had fully paid the price of P14,269.03.
Thereupon, the spouses Villanueva obtained a new Transfer
Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to
the spouses Barretto, appellants herein.
It is clear from the facts above-stated that ownership of the
property had passed to the Rehabilitation Finance Corporation
since 1950, when it consolidated its purchase at the
foreclosure sale and obtained a certificate of title in its
corporate name. The subsequent contract of resale in favor of
the Cruzados did not revest ownership in them, since they
failed to comply with its terms and conditions, and the contract
itself provided that the title should remain in the name of the
RFC until the price was fully paid.
Therefore, when after defaulting in their payments due under
the resale contract with the RFC the appellant Cruzados sold
to Villanueva "their rights, title, interest and dominion" to the
property, they merely assign whatever rights or claims they
might still have thereto; the ownership of the property rested
with the RFC. The sale from Cruzado to Villanueva, therefore,
was not much a sale of the land and its improvements as it was
a quitclaim deed in favor of Villanueva. In law, operative sale
was that from the RFC to the latter, and it was the RFC that
should be regarded as the true vendor of the property. At the
most, the Cruzados transferred to Villanueva an option to
acquire the property, but not the property itself, and their credit,
therefore, can not legally constitute a vendor's lien on the
corpus of the property that should stand on an equal footing
with mortgaged credit held by appellants Barretto.
IN VIEW OF THE FOREGOING, the previous decision of this
Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered reverse
the judgment appealed from and declaring the appellant
Barrettos entitled to full satisfaction of their mortgage credit out
of the proceeds of the foreclosure sale in the hands of the
Sheriff of the City of Manila. No costs.
6
[G.R. No. L-33929. September 2, 1983.]
PHILIPPINE SAVINGS BANK, Petitioner, v. HON. GREGORIO
T. LANTIN, Presiding Judge, Court of First Instance of Manila,
Branch VII, and CANDIDO RAMOS, Respondents.
Jose Diokno for Petitioner.
Romeo C . Carlos for Private Respondent.
SYLLABUS
1. CIVIL LAW; CREDIT TRANSACTION;
CONCURRENCE AND PREFERENCE OF CREDITS;
INSUFFICIENT ASSETS OF DEBTOR RAISES QUESTION
OF PREFERENCE AS WELL AS QUESTION OF
CONSEQUENCE IN CONCURRENCE OF CREDITS. —
Concurrence of credits occurs when the same specific property
of the debtor or all of his property is subjected to the claims of
several creditors. The concurrence of credits raises no
questions of consequence were the value of the property or the
value of all assets of the debtor is sufficient to pay in fall all the
creditors. However, it becomes material when said assets are
insufficient for then some creditors of necessity will not be paid
or some creditors will not obtain the full satisfaction of their
claims. In this situation, the question of preference will then
arise, that is to say who of the creditors will be paid the all of
the others (Caguioa, Comments and Cases on Civil Law, 1970
ed., Vol. VI, p. 472).
2. ID.; ID.; PREFERENCE OF CREDITS; ARTICLES
2249 AND 2242 OF THE NEW CIVIL CODE OF THE
PHILIPPINES; CONSTRUED. — Under the system
established by Article 2249 of the civil Code of the Philippines,
only taxes and assessments upon immovable property enjoy
absolute preference. All the remaining specified classes of
preferred creditors under Article 2242 enjoy no priority among
themselves. Their credits shall be satisfied pro-rata, i.e., in
proportion to the amount of the respective credits.
3. ID.; ID.; ARTICLE 2249 AND 2242 OF THE NEW
CIVIL CODE; PAIL REQUISITE TO THEIR FULL
APPLICATION UNDER THE DE BARRETO CASE. — Under
the De Barreto decision, the full application of Articles 2242
and 2249 demands that there must first be some proceeding
where the class of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of a decedent’s
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
4. REMEDIAL LAW; INSOLVENCY PROCEEDINGS
AND SETTLEMENT OF A DECEDENT’S ESTATE; BOTH
PROCEEDINGS IN REM, OTHER EQUIVALENT GENERAL
LIQUIDATION OF SIMILAR NATURE. — Insolvency
proceedings end settlement of a decedent’s estate are both
proceedings in rem which are binding the whole world. All
persons having interest in the subject matter involved, whether
they were notified or not, are equally bound. Consequently, a
liquidation of similar import or other equivalent general
liquidation must also necessarily be a proceeding in rem so
that all interested persons whether known to the parties or not
may be bound by such proceeding.
3. ID.; ACTION FOR COLLECTION OF UNPAID
CONTRACTOR’S FEE; NOT AN ACTION IN REM. — The
proceedings in the court below do not partake of the insure of
insolvency proceedings or settlement of a decedent’s estate.
The action filed by Ramos was only to collect the unpaid cost
of the construction of the duplex apartment. It is far from being
a general liquidation of the estate of the Tabligan spouses.
6. CIVIL LAW; CREDIT TRANSACTION; ANNOTATION
OF CLAIMS AND CREDITS AS STATUTORY LIENS;
RELEVANCE TO THE STABILITY OF THE TORRENS
SYSTEM. — In the case at bar, although the lower court found
that "there were no known creditors other than the plaintiff and
the defendant herein," this cannot be conclusive. It will not bar
other creditors in the event they show up and present their
claims State petitioner bank, claiming that they also have
preferred liens against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in favor of the
bank which is supposed to be indefeasible would remain
constantly unstable and questionable. Such could not have
been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory
liens. Neither does the De Barreto case sanction such
instability. In fact, an annotation, as suggested above, would
insure to the benefit of the public, particularly those who may
subsequently wish to buy the property in question or who have
a business transaction in connection therewith. It would
facilitate the enforcement of a legal statutory right which cannot
be barred by laches (See Manila Railroad Co. v. Luzon
Stevedoring Co., 100 Phil. 135).
7. ID.; SALE; BUYER IN GOOD FAITH OF REALTY;
TAKES IT FEE FROM LIENS AND ENCUMBRANCES OTHER
THAN STATUTORY LIENS AND THOSE ANNOTATED IN
THE TITLE; CASE AT BAR. — Since the action filed by the
private respondent is not one which can be considered as
"equivalent general liquidation" having the same import as an
insolvency or settlement of the decedent’s estate proceeding,
the well established principle must be applied that a purchaser
in good faith and for value takes register land free from liens
and encumbrances other than statutory liens and those
recorded in the Certificate of Title. It Is an limited fact that at
the time the deeds of real estate mortgage in favor of the
petitioner bank were constituted, the transfer certificate of title
of the spouses Tabligan was free from any recorded lien and
encumbrances, so that the only registered liens in the title were
deeds in favor of the petitioner.
DECISION
GUTIERREZ, JR., J.:
This is a petition for review of the decision of the Court of First
Instance of Manila, Branch VII, presided over by respondent
Judge Gregorio T. Lantin, in Civil Case No. 79914 entitled
Candido Ramos v. Philippine Savings Bank and of the order
denying a motion for its reconsideration. The dispositive portion
of the decision reads:jgc:chanrobles.com.ph
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant ordering the defendant to
pay the plaintiff the sum of P15,000.00 as his pro-rata share in
the value of the duplex-apartment house which was built by the
plaintiff for the spouses likewise Filomeno Tabligan and
Socorro Espiritu, which is now registered in the name of the
defendant under Transfer Certificate of Title No. 101864 issued
by the Register of Deeds of the City of Manila, on August 6,
1970, with legal interest from the date of the filing of the
complaint until fully paid; to pay the sum of P500.00 as
attorney’s fees; and to pay the costs.
7

"The counterclaim interposed by the defendant is hereby
dismissed."cralaw virtua1aw library
Involved in this case is a duplex-apartment house on a lot
covered by TCT No. 86195 situated at San Diego Street,
Sampaloc, Manila, and owned by the spouses Filomeno and
Socorro Tabligan.
The duplex-apartment house was built for the spouses by
private respondent Candido Ramos, a duly licensed architect
and building contractor, at a total cost of P32,927.00. The
spouses paid private respondent the sum of P7,139.00 only.
Hence, the latter used his own money, P25,788.50 in all, to
finish the construction of the duplex-
apartment.chanrobles.com:cralaw:red
Meanwhile, on December 16, 1966, February 1, 1967, and
February 28, 1967, the spouses Tabligan obtained from
petitioner Philippine Savings Bank three (3) loans in the total
amount of P35,000.00, the purpose of which was to complete
the construction of the duplex-apartment. To secure payment
of the l2oans, the spouses executed in favor of the petitioner
three (3) promissory notes and three (3) deeds of real estate
mortgages over the property subject matter of this litigation.
On December 19, 1966, the petitioner registered the December
16, 1966 deed of real estate mortgage with the Register of
Deeds of Manila. The subsequent mortgages of February 1,
1967, and February 28, 1967, were registered with the
Register of Deeds of Manila on February 2, 1967 and March 1,
1967, respectively. At the time of the registration of these
mortgages, Transfer Certificate of Title No. 86195 was free
from all liens and encumbrances.
The spouses failed to pay their monthly amortizations. As a
result thereof, the petitioner bank foreclosed the mortgages,
and at the public auction held on July 23, 1969, was the
highest bidder.
On August 5, 1969, the petitioner bank registered the
certificate of sale issued in its favor. On August 9, 1970, the
bank consolidated its ownership over the property in question,
and Transfer Certificate of Title No. 101864 was issued by the
Register of Deeds of Manila in the name of the petitioner bank.
Upon the other hand, the private respondent filed an action
against the spouses to collect the unpaid cost of the
construction of the duplex-apartment before the Court of First
Instance of Manila, Branch I, which case was docketed therein
as Civil Case No. 69228. During its pendency, the private
respondent succeeded in obtaining the issuance of a writ of
preliminary attachment, and pursuant thereto, had the property
in question attached. Consequently, a notice of adverse claim
was annotated at the back of Transfer Certificate of Title No.
86195.
On August 26, 1968, a decision was rendered in Civil Case No.
69228 in favor of the private respondent and against the
spouses. A writ of execution was accordingly issued but was
returned unsatisfied.
As the spouses did not have any properties to satisfy the
judgment in Civil Case No. 69228, the private respondent
addressed a letter to the petitioner for the delivery to him
(private respondent) of his pro-rata share in the value of the
duplex-apartment in accordance with Article 2242 of the Civil
Code. The petitioner refused to pay the pro-rata value
prompting the private respondent to file the instant action. As
earlier stated, a decision was rendered in favor of the private
Respondent.chanrobles virtual lawlibrary
The parties are agreed that the only issue is whether or not the
private respondent is entitled to claim a pro-rata share in the
value of the property in question. The applicable provision,
Article 2242 of the Civil Code, reads as
follows:jgc:chanrobles.com.ph
"ART. 2242. With reference to specific immovable
property and real rights of the debtor, the following claims,
mortgages and liens shall be preferred, and shall constitute an
encumbrance on the immovable or real
right:jgc:chanrobles.com.ph
"(1) Taxes due upon the land or building;
"(2) For the unpaid price of real property sold, upon the
immovable sold;
"(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and contractors,
engaged in the construction, reconstruction or repair of
buildings, canals or other works, upon said buildings, canals or
other works;
"(4) Claims of furnishers of materials used in the
construction reconstruction, or repair of buildings, canals or
other works upon said buildings, canals or other works;
"(5) Mortgage credits recorded in the Registry of Property,
upon the real estate mortgaged;
"(6) Expenses for the preservation or improvement of real
property when the law authorizes reimbursement, upon the
immovable preserved or improved;
"(7) Credits annotated in the Registry of Property, in virtue
of a judicial order, by attachments or executions, upon the
property affected, and only as to later credits;
"(8) Claims of co-heirs for warranty in the partition of an
immovable among them, upon the real property thus divided;
"(9) Claims of donors of real property for pecuniary
charges or other conditions imposed upon the donee, upon the
immovable donated;
"(10) Credits of insurers upon the property insured, for the
insurance premium for two years."cralaw virtua1aw library
Both the petitioner bank and private respondent Ramos rely on
the case of De Barreto v. Villanueva (6 SCRA 928).
The petitioner bank would impress upon this Court that the
proceedings had before the court below is not one of the
proceedings contemplated in the De Barreto case that will
sustain the authority of the respondent court to adjudicate the
claims of all preferred creditors under Article 2242 of the Civil
Code. Petitioner argues that for Article 2242 of the Civil Code
to apply, there must have been an insolvency proceeding or
other liquidation proceedings of similar import. And under the
facts then obtaining, there could have been no insolvency
proceeding as there were only two known creditors. **
Consequently, it is argued that private respondent’s unpaid
contractor’s claim did not acquire the character of a statutory
lien equal to the petitioner’s registered mortgage.
8
Upon the other hand, private respondent Ramos maintains that
the proceedings had before the court below can qualify as a
general liquidation of the estate of the spouses Tabligan
because the only existing property of said spouses is the
property subject matter of this litigation.chanrobles
virtualawlibrary chanrobles.com:chanrobles.com.ph
Concurrence of credits occurs when the same specific property
of the debtor or all of his property is subjected to the claims of
several creditors. The concurrence of credits raises no
questions of consequence where the value of the property or
the value of all assets of the debtor is sufficient to pay in full all
the creditors. However, it becomes material when said assets
are insufficient for then some creditors of necessity will not be
paid or some creditors will not obtain the full satisfaction of
their claims. In this situation, the question of preference will
then arise, that is to say who of the creditors will be paid ahead
of the others. (Caguioa, Comments and Cases on Civil Law,
1970 ed., Vol. VI, p. 472.)
Under the system established by Article 2249 of the Civil Code
of the Philippines, only taxes and assessments upon
immovable property enjoy absolute preference. All the
remaining specified classes of preferred creditors under Article
2242 enjoy no priority among themselves. Their credits shall be
satisfied pro-rata, i.e., in proportion to the amount of the
respective credits.
Under the De Barreto decision, the full application of Articles
2242 and 2249 demands that there must first be some
proceeding where the claims of all the preferred creditors may
be bindingly adjudicated, such as insolvency, the settlement of
a decedent’s estate under Rule 87 of the Rules of Court, or
other liquidation proceedings of similar import.
The pertinent ruling reads:jgc:chanrobles.com.ph
"Thus, it becomes evident that one preferred creditor’s third-
party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by law
for the enforcement of preferences under Article 2242, unless
the claimant were enforcing a credit for taxes that enjoy
absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain the
pro rata dividend corresponding to each because the rights of
the other creditors likewise enjoying preference under Article
2242 can not be ascertained. Wherefore, the order of the Court
of First Instance of Manila now appealed from, decreeing that
the proceeds of the foreclosure sale be apportioned only
between appellant and appellee, is incorrect and must be
reversed.
"In the absence of insolvency proceedings (or other equivalent
general liquidation of the debtor’s estate), the conflict between
the parties now before us must be decided pursuant to the well
established principle concerning registered lands; that a
purchaser in good faith and for value (as the appellant
concededly is) takes registered property free from liens and
encumbrances other then statutory liens and those recorded in
the certificate of title. There being no insolvency or liquidation,
the claim of the appellee, as unpaid vendor, did not acquire the
character and rank of a statutory lien co-equal to the
mortgagee’s recorded encumbrance, and must remain
subordinate to the latter."cralaw virtua1aw library
The resolution of this petition, therefore, hinges on the
determination of whether an insolvency proceeding or other
liquidation proceeding of similar import may be considered to
have been conducted in the court below.
The respondent court ruled in the affirmative holding
that:jgc:chanrobles.com.ph
"There were no known creditors, other than the plaintiff and
defendant herein, and the proceedings in the present case may
ascertain and bindingly adjudicate the respective claims of the
plaintiff and the defendant, serving as a substantial compliance
with what the Supreme Court stated:jgc:chanrobles.com.ph
"‘. . . it is thus apparent that the full application of Articles 2242
and 2249 demands that there must be first some proceeding
where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of a decedent’s
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import. (de Barretto v. Villanueva, Et Al.,
G.R. No. L-14938, December 29, 1962).’"
A careful considering of this petition leads us to agree with the
petitioner. The conclusions of the lower court are not supported
by the law and the facts.
The proceedings in the court below do not partake of the
nature of the insolvency proceedings or settlement of a
decedent’s estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of the duplex
apartment. It is far from being a general liquidation of the
estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent’s estate
are both proceedings in rem which are binding against the
whole world. All persons having interest in the subject matter
involved, whether they were notified or not, are equally bound.
Consequently, a liquidation of similar import or "other
equivalent general liquidation’ must also necessarily be a
proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such proceeding.
In the case at bar, although the lower court found that "there
were no known creditors other than the plaintiff and the
defendant herein", this can not be conclusive. It will not bar
other creditors in the event they show up and present their
claims against the petitioner bank, claiming that they also have
preferred liens against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in favor of the
bank which is supposed to be indefeasible would remain
constantly unstable and questionable. Such could not have
been the intention of Article 2243 of the Civil Code although it
considers claims and credits under Article 2242 as statutory
liens. Neither does the De Barretto case sanction such
instability. It emphasized the following:jgc:chanrobles.com.ph
"We are understandably loath (absent a clear precept of law so
commanding) to adopt a rule that would undermine the faith
and credit to be accorded to registered Torrens titles and nullify
the beneficient objectives sought to be obtained by the Land
Registration Act. No argument is needed to stress that if a
person dealing with registered land were to be held to take it in
every instance subject to all the fourteen preferred claims
enumerated in Article 2242 of the new Civil Code, even if the
existence and import thereof can not be ascertained from the
records, all confidence in Torrens titles would be destroyed,
and credit transactions on the faith of such titles would be
hampered, if not prevented, with incalculable results. Loans on
real estate security would become aleatory and risky
transactions, for no prospective lender could accurately
estimate the hidden liens on the property offered as security,
unless he indulged in complicated, tedious investigations. The
9
logical result might well be a contraction of credit to
unforeseable proportions that could lead to economic disaster.

"Upon the other hand, it does not appear excessively

burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of Deeds
should they desire to protect their rights even outside of
insolvency or liquidation proceedings.

In fact, an annotation, as suggested above, would inure to the

benefit of the public, particularly those who may subsequently
wish to buy the property in question or who have a business
transaction in connection therewith. It would facilitate the
enforcement of a legal statutory right which cannot be barred
by laches. (See Manila Railroad Co. v. Luzon Stevedoring Co.,
100 Phil. 135).chanrobles law library

Respondent Ramos admitted in the partial stipulation of facts

submitted by both parties that at the time of the loans to the
spouses, the petitioner’s bank had no actual or constructive
knowledge of any lien against the property in question. The
duplex apartment house was built for P32,927.00. The spouses
Tabligan borrowed P35,000.00 for the construction of the
apartment house. The bank could not have known of any
contractor’s lien because, as far as it was concerned, it
financed the entire construction even if the stated purpose of
the loans was only to "complete" the construction.

Since the action filed by the private respondent is not one

which can be considered as "equivalent general liquidation"
having the same import as an insolvency or settlement of the
decedent’s estate proceeding, the well established principle
must be applied that a purchaser in good faith and for value
takes registered land free from liens and encumbrances other
than statutory liens and those recorded in the Certificate of
Title. It is an admitted fact that at the time the deeds of real
estate mortgage in favor of the petitioner bank were
constituted, the transfer certificate of title of the spouses
Tabligan was free from any recorded lien and encumbrances,
so that the only registered liens in the title were deeds in favor
of the petitioner.

Prescinding from the foregoing, the private respondent’s claim

must remain subordinate to the petitioner bank’s title over the
property evidenced by TCT No. 101864.

WHEREFORE, the petition is granted. The decision of the

Court of First Instance of Manila, Branch VII is, hereby,
reversed and set aside. The complaint and the counterclaim
are dismissed.

SO ORDERED.

10
[G.R. No. 105827. January 31, 2000]
J.L. BERNARDO CONSTRUCTION, represented by attorneys-
in-fact Santiago R. Sugay, Edwin A. Sugay and Fernando S.A.
Erana, SANTIAGO R. SUGAY, EDWIN A. SUGAY and
FERNANDO S. A. ERANA, petitioners, vs. COURT OF
APPEALS and MAYOR JOSE L. SALONGA, respondents.
DECISION
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul and set
aside the following:
1. Decision dated February 6, 1992 issued by the Eleventh
Division of the Court of Appeals in CA-G.R. No. 26336 which
nullified the order of the Regional Trial Court of Cabanatuan
City in Civil Case No. 1016-AF granting plaintiffs (petitioners
herein) a writ of attachment and a contractors lien upon the
San Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the former
Eleventh Division of the Court of Appeals in CA-G.R. No.
26336 denying the motions for reconsideration filed by both
parties.
The factual antecedents of this case, as culled from the
pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio,
Nueva Ecija approved the construction of the San Antonio
Public Market. The construction of the market was to be funded
by the Economic Support Fund Secretariat (ESFS), a
government agency working with the USAID. Under ESFS
"grant-loan-equity" financing program, the funding for the
market would be composed of a (a) grant from ESFS, (b) loan
extended by ESFS to the Municipality of San Antonio, and (c)
equity or counterpart funds from the Municipality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay,
Fernando S.A. Erana and J.L. Bernardo Construction, a single
proprietorship owned by Juanito L. Bernardo, that they entered
into a business venture for the purpose of participating in the
bidding for the public market. It was agreed by petitioners that
Santiago Sugay would take the lead role and be responsible
for the preparation and submission of the bid documents,
financing the entire project, providing and utilizing his own
equipment, providing the necessary labor, supplies and
materials and making the necessary representations and doing
the liaison work with the concerned government agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner
Santiago Sugay, submitted its bid together with other qualified
bidders. After evaluating the bids, the municipal pre-
qualification bids and awards committee, headed by
respondent Jose L. Salonga (then incumbent municipal mayor
of San Antonio) as Chairman, awarded the contract to
petitioners. On June 8, 1990, a Construction Agreement was
entered into by the Municipality of San Antonio thru respondent
Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction
Agreement, the Municipality agreed to assume the expenses
for the demolition, clearing and site filling of the construction
site in the amount of P1,150,000 and, in addition, to provide
cash equity of P767,305.99 to be remitted directly to
petitioners.
Petitioners allege that, although the whole amount of the cash
equity became due, the Municipality refused to pay the same,
despite repeated demands and notwithstanding that the public
market was more than ninety-eight percent (98%) complete as
of July 20, 1991. Furthermore, petitioners maintain that
Salonga induced them to advance the expenses for the
demolition, clearing and site filling work by making
representations that the Municipality had the financial capability
to reimburse them later on. However, petitioners claim that
they have not been reimbursed for their expenses.[1]
On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay,
Edwin Sugay and Fernando Erana, with the latter three
bringing the case in their own personal capacities and also in
representation of J.L. Bernardo Construction, filed a complaint
for breach of contract, specific performance, and collection of a
sum of money, with prayer for preliminary attachment and
enforcement of contractors lien against the Municipality of San
Antonio, Nueva Ecija and Salonga, in his personal and official
capacity as municipal mayor. After defendants filed their
answer, the Regional Trial Court held hearings on the ancillary
remedies prayed for by plaintiffs.[2]
On September 5, 1991, the Regional Trial Court issued the writ
of preliminary attachment prayed for by plaintiffs. It also
granted J.L. Bernardo Construction the right to maintain
possession of the public market and to operate the same. The
dispositive portion of the decision provides:
IN VIEW OF THE FOREGOING DISQUISITION, the Court
finds the auxiliary reliefs of attachment prayed for by the
plaintiffs to be well-taken and the same is hereby GRANTED.
Conformably thereto, let a writ of preliminary attachment be
issued upon the filing by the plaintiffs of a bond in the amount
of P2,653,576.84 to answer for costs and damages which the
defendants may suffer should the Court finally adjudged (sic)
that the plaintiffs are not entitled to the said attachment, and
thereafter, the Deputy Sheriff of this court is hereby ordered to
attach the properties of the defendants JOSE LAPUZ
SALONGA and the MUNICIPALITY OF SAN ANTONIO,
NUEVA ECIJA which are not exempt from execution.
CORROLARILY, the Court grants the plaintiffs J.L.
BERNARDO CONSTRUCTION, represented by SANTIAGO R.
SUGAY, EDWIN A. SUGAY and FERNANDO S.A. ERANA,
the authority to hold on to the possession of the public market
in question and to open and operate the same based on fair
and reasonable guidelines and other mechanics of operation to
be submitted by plaintiffs within fifteen (15) days from their
receipt of this Order which shall be subject to Courts approval
and to deposit the income they may derive therefrom to the
Provincial Treasurer of Nueva Ecija after deducting the
necessary expenses for the operation and management of said
market, subject to further orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs claims that
defendants were guilty of fraud in incurring their contractual
obligations as evidenced by the complaint and the affidavits of
plaintiffs Santiago Sugay and Erana. The court ruled that
defendants acts of "obtaining property, credit or services by
false representations as to material facts made by the
defendant to the plaintiff with intent to deceive constitutes fraud
warranting attachment" and that " a debt is considered
fradulently contracted if at the time of contracting it, the debtor
entertained an intention not to pay."
11
With regards to the contractors lien, the trial court held that
since plaintiffs have not been reimbursed for the cash equity
and for the demolition, clearing and site filling expenses, they
stand in the position of an unpaid contractor and as such are
entitled, pursuant to articles 2242 and 2243 of the Civil Code,
to a lien in the amount of P2,653,576.84 (as of August 1,
1991), excluding the other claimed damages, attorneys fees
and litigation expenses, upon the public market which they
constructed. It was explained that, although the usual way of
enforcing a lien is by a decree for the sale of the property and
the application of the proceeds to the payment of the debt
secured by it, it is more practical and reasonable to permit
plaintiffs to operate the public market and to apply to their
claims the income derived therefrom, in the form of rentals and
goodwill from the prospective stallholders of the market, as
prayed for by plaintiffs.
The trial court made short shrift of defendants argument that
the case was not instituted in the name of the real parties-in-
interest. It explained that the plaintiff in the cause of action for
money claims for unpaid cash equity and demolition and site
filling expenses is J.L. Bernardo Construction, while the
plaintiffs in the claim for damages for violation of their rights
under the Civil Code provisions on human relations are
plaintiffs Santiago Sugay, Edwin Sugay and Erana.[3]
The defendants moved for reconsideration of the trial courts
order, to which the plaintiffs filed an opposition. On October 10,
1991 the motion was denied. The following day, the trial court
approved the guidelines for the operation of the San Antonio
Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his
counterbond which was treated by the trial court in its October
29, 1991 order as a motion to fix counterbond and for which it
scheduled a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion,
respondent Salonga filed with the Court of Appeals a petition
for certiorari under Rule 65 with prayer for a writ of preliminary
injunction and temporary restraining order which case was
docketed as CA-G.R. SP No. 26336.[4] Petitioners opposed
the petition, claming that respondent had in fact a plain, speedy
and adequate remedy as evidenced by the filing of a motion to
approve counter-bond with the trial court.[5]
On February 6, 1992, the Court of Appeals reversed the trial
courts decision and ruled in favor of Salonga. The dispositive
portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as
follows:
1. The respondent judges ORDER dated September 5, 1991
for the issuance of a writ of attachment and for the
enforcement of a contractors lien, is hereby NULLIFIED and
SET ASIDE; the writ of attachment issued pursuant thereto and
the proceedings conducted by the Sheriffs assigned to
implement the same are, as a consequence, also hereby
NULLIFIED and SET ASIDE;
2. The respondent judges ORDER dated October 11, 1991
further enforcing the contractors lien and approving the
guidelines for the operation of the San Antonio Public Market is
also NULLIFIED and SET ASIDE.
Petitioners prayers for the dismissal of Civil Case No. 1016
(now pending before respondent judge) and for his deletion
from said case as defendant in his private capacity are,
however, DENIED.
The respondent judge may now proceed to hearing of Civil
Case No. 1016 on the merits.
SO ORDERED.
The appellate court reasoned that since the Construction
Agreement was only between Juanito Bernardo and the
Municipality of San Antonio, and since there is no sworn
statement by Juanito Bernardo alleging that he had been
deceived or misled by Mayor Salonga or the Municipality of
San Antonio, it is apparent that the applicant has not proven
that the defendants are guilty of inceptive fraud in contracting
the debt or incurring the obligation, pursuant to Rule 57 of the
Rules of Court, and therefore, the writ of attachment should be
struck down for having been improvidently and irregularly
issued.
The filing of a motion for the approval of counter-bond by
defendants did not, according to the Court of Appeals, render
the petition for certiorari premature. The appellate court held
that such motion could not cure the defect in the issuance of
the writ of attachment and that, moreover, the defendants
motion was filed by them "without prejudice to the petition for
certiorari."
As to the contractors lien, the appellate court ruled that Articles
2242 of the Civil Code finds application only in the context of
insolvency proceedings, as expressly stated in Article 2243.
Even if it is conceded that plaintiffs are entitled to retain
possession of the market under its contractors lien, the
appellate court held that the same right cannot be expanded to
include the right to use the building. Therefore, the trial courts
grant of authority to plaintiffs to operate the San Antonio Public
Market amounts to a grave abuse of discretion.
With regard to the allegations of defendants that plaintiffs are
not the proper parties, the Court of Appeals ruled that such
issue should be assigned as an error by defendants later on
should the outcome of the case be adverse to the latter.[6]
Petitioners are now before this Court assailing the appellate
courts decision. In their petition, they make the following
assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT THE
COURT OF APPEALS OVERLOOKED AND/OR
DISREGARDED THE FUNDAMENTAL REQUIREMENT AND
ESTABLISHED SUPREME COURT DECISIONS IN ACTIONS
FOR CERTIORARI CONSIDERING THAT THE FILING OF
THE PETITION BY RESPONDENT SALONGA WITH THE
COURT OF APPEALS IS OBVIOUSLY PREMATURE AND
IMPROPER SINCE THERE ADMITTEDLY EXISTS A PLAIN,
SPEEDY AND ADEQUATE REMEDY AVAILABLE TO
RESPONDENT SALONGA WHICH IS HIS UNRESOLVED
"MOTION TO APPROVE COUNTERBOND" PENDING WITH
THE TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED
JURISPRUDENCE, THE COURT OF APPEALS HAS
SKIRTED AND/OR FAILED TO CONSIDER/DISREGARDED
THE EQUALLY CRUCIAL ISSUE THAT THE QUESTIONED
ORDERS ARE CLEARLY AND ADMITTEDLY
INTERLOCUTORY IN NATURE AND THEREFORE THEY
CANNOT BE THE PROPER SUBJECT OF AN ACTION FOR
CERTIORARI; PROOF THAT THE ORDERS ASSAILED BY
RESPONDENT SALONGA ARE INTERLOCUTORY IN
12
CHARACTER IS THE DISPOSITIVE PORTION OF THE
DECISION WHEN THE COURT OF APPEALS SAID "THE
RESPONDENT JUDGE MAY NOW PROCEED TO HEARING
OF SAID CIVIL CASE NO. 1016 ON THE MERITS"; PETITION
FILED BY RESPONDENT SALONGA WITH THE COURT OF
APPEALS SHOULD HAVE BEEN DISMISSED OUTRIGHTLY
AS SOUGHT BY HEREIN PETITIONERS IN THEIR VARIOUS
UNACTED PLEADINGS.
3. THE DECISION IS BASED ON FINDINGS OF FACTS AND
CONCLUSIONS WHICH ARE NOT ONLY GROSSLY
ERRONEOUS BUT ARE SQUARELY CONTRADICTED BY
THE EVIDENCE ON RECORD.
4. THE COURT OF APPEALS HAS CLEARLY
MISAPPRECIATED, MISREAD AND DISREGARDED HEREIN
PETITIONERS CAUSES OF ACTION AGAINST
RESPONDENT SALONGA AND HIS CO-RESPONDENT
MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA.
5. THE COURT OF APPEALS HAS MADE ERRONEOUS
AND CONTRADICTORY CONCLUSIONS AND FINDINGS ON
THE ISSUE OF "REAL PARTY IN INTEREST" IN COMPLETE
DISREGARD OF THE POWERS AND AUTHORITY
GRANTED BY JUANITO L. BERNARDO CONSTRUCTION
TO HEREIN PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE
IMPORTANT ISSUE OF "AGENCY COUPLED WITH AN
INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE ISSUES
OF THE CERTIORARI CASE AND ITS FINDINGS AND
CONCLUSIONS ON ISSUES NOT RELATED TO THE CASE
FOR CERTIORARI ARE CONTRARY TO THE PLEADINGS
AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE
DISREGARDED THE PRECEPT THAT CONCLUSIONS AND
FINDINGS OF FACT OF THE TRIAL COURT ARE ENTITLED
TO GREAT WEIGHT ON APPEAL AND SHOULD NOT BE
DISTURBED SINCE THERE IS NO STRONG AND COGENT
REASON WHATSOVER TO OVERCOME THE WELL-
WRITTEN AND DETAILED AND ESTABLISHED FACTUAL
FINDINGS OF THE TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO BELIEVE
THAT THE DECISION OF THE COURT OF APPEALS WAS
ISSUED WITH SERIOUS INJUSTICE AND AGAINST THE
TENETS OF FAIR PLAY SINCE THE DECISION HAD BEEN
KNOWN TO AS IT WAS OPENLY AND PUBLICLY
ANNOUNCED BY RESPONDENT SALONGA LONG BEFORE
IT WAS "PROMULGATED" BY THE COURT OF APPEALS.
The various issues raised by petitioners may be restated in a
more summary manner as -
1. Whether or not the Court of Appeals correctly assumed
jurisdiction over the petition for certiorari filed by respondents
herein assailing the trial courts interlocutory orders granting the
writ of attachment and the contractors lien?
2. Whether or not the Court of Appeals committed reversible
errors of law in its decision?
A petition for certiorari may be filed in case a tribunal, board or
officer exercising judicial or quasi-judicial functions has acted
without or in excess of jurisdiction, or with grave abuse of
discretion amounting to lack or excess of jurisdiction, and there
is no appeal, or any plain, speedy, and adequate remedy in the
ordinary course of law.[7]
The office of a writ of certiorari is restricted to truly
extraordinary cases wherein the act of the lower court or quasi-
judicial body is wholly void.[8] We held in a recent case that
certiorari may be issued "only where it is clearly shown that
there is a patent and gross abuse of discretion as to amount to
an evasion of positive duty or to virtual refusal to perform a
duty enjoined by law, or to act at all in contemplation of law, as
where the power is exercised in an arbitrary and despotic
manner by reason of passion or personal hostility."[9]
As a general rule, an interlocutory order is not appealable until
after the rendition of the judgment on the merits for a contrary
rule would delay the administration of justice and unduly
burden the courts.[10] However, we have held that certiorari is
an appropriate remedy to assail an interlocutory order (1) when
the tribunal issued such order without or in excess of
jurisdiction or with grave abuse of discretion and (2) when the
assailed interlocutory order is patently erroneous and the
remedy of appeal would not afford adequate and expeditious
relief.[11]
We hold that the petition for certiorari filed by Salonga and the
Municipality with the Court of Appeals questioning the writ of
attachment issued by the trial court should not have been given
due course for they still had recourse to a plain, speedy and
adequate remedy - the filing of a motion to fix the counter-
bond, which they in fact filed with the trial court, the grant of
which would effectively prevent the issuance of the writ of
attachment. Moreover, they could also have filed a motion to
discharge the attachment for having been improperly or
irregularly issued or enforced, or that the bond is insufficient, or
that the attachment is excessive.[12] With such remedies still
available to the Municipality and Salonga, the filing of a petition
for certiorari with the Court of Appeals insofar as it questions
the order of attachment was clearly premature.
However, with regards to the contractors lien, we uphold the
appellate courts ruling reversing the trial courts grant of a
contractors lien in favor of petitioners.
Articles 2241 and 2242 of the Civil Code enumerates certain
credits which enjoy preference with respect to specific personal
or real property of the debtor. Specifically, the contractors lien
claimed by petitioners is granted under the third paragraph of
Article 2242 which provides that the claims of contractors
engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with respect to the
specific building or other immovable property constructed.[13]
However, Article 2242 only finds application when there is a
concurrence of credits, i.e. when the same specific property of
the debtor is subjected to the claims of several creditors and
the value of such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others.[14]
Fundamental tenets of due process will dictate that this
statutory lien should then only be enforced in the context of
some kind of a proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency
proceedings.[15]
This is made explicit by Article 2243 which states that the
claims and liens enumerated in articles 2241 and 2242 shall be
considered as mortgages or pledges of real or personal
13
property, or liens within the purview of legal provisions
governing insolvency.[16]

The action filed by petitioners in the trial court does not partake
of the nature of an insolvency proceeding. It is basically for
specific performance and damages.[17] Thus, even if it is
finally adjudicated that petitioners herein actually stand in the
position of unpaid contractors and are entitled to invoke the
contractors lien granted under Article 2242, such lien cannot be
enforced in the present action for there is no way of
determining whether or not there exist other preferred creditors
with claims over the San Antonio Public Market. The records
do not contain any allegation that petitioners are the only
creditors with respect to such property. The fact that no third
party claims have been filed in the trial court will not bar other
creditors from subsequently bringing actions and claiming that
they also have preferred liens against the property
involved.[18]

Our decision herein is consistent with our ruling in Philippine

Savings Bank v. Lantin,[19] wherein we also disallowed the
contractor from enforcing his lien pursuant to Article 2242 of
the Civil Code in an action filed by him for the collection of
unpaid construction costs.

It not having been alleged in their pleadings that they have any
rights as a mortgagee under the contracts, petitioners may only
obtain possession and use of the public market by means of a
preliminary attachment upon such property, in the event that
they obtain a favorable judgment in the trial court. Under our
rules of procedure, a writ of attachment over registered real
property is enforced by the sheriff by filing with the registry of
deeds a copy of the order of attachment, together with a
description of the property attached, and a notice that it is
attached, and by leaving a copy of such order, description, and
notice with the occupant of the property, if any.[20] If judgment
be recovered by the attaching party and execution issue
thereon, the sheriff may cause the judgment to be satisfied by
selling so much of the property as may be necessary to satisfy
the judgment.[21] Only in the event that petitioners are able to
purchase the property will they then acquire possession and
use of the same.

Clearly, the trial courts order of September 5, 1991 granting

possession and use of the public market to petitioners does not
adhere to the procedure for attachment laid out in the Rules of
Court. In issuing such an order, the trial court gravely abused
its discretion and the appellate courts nullification of the same
should be sustained.

At this stage of the case, there is no need to pass upon the

question of whether or not petitioners herein are the real
parties-in-interest. In the event that judgment is rendered
against Salonga and the Municipality, this issue may be
assigned as an error in their appeal from such judgment.

WHEREFORE, we UPHOLD the Court of Appeals Decision

dated February 6, 1992 in CA-G.R. SP No. 26336 insofar as it
nullifies the contractors lien granted by the trial court in favor of
petitioners in its September 5, 1991 Order. Consequently, we
also UPHOLD the appellate courts nullification of the trial
courts October 11, 1991 Order approving the guidelines for the
operation of the San Antonio Public Market. However, we
REVERSE the appellate courts order nullifying the writ of
attachment granted by the trial court.

No pronouncement as to costs.

SO ORDERED.

14
[G.R. No. 148568. March 20, 2003]
ATLANTIC ERECTORS, INC., petitioner, vs. HERBAL COVE
REALTY CORPORATION, respondent.
DECISION
PANGANIBAN, J.:
The pendency of a simple collection suit arising from the
alleged nonpayment of construction services, materials,
unrealized income and damages does not justify the annotation
of a notice of lis pendens on the title to a property where
construction has been done.
Statement of the Case
Before the Court is a Petition for Review on Certiorari[1] under
Rule 45 of the Rules of Court, challenging the May 30, 2000
Decision[2] of the Court of Appeals (CA) in CA-GR SP No.
56432. The dispositive portion of the Decision is reproduced as
follows:
WHEREFORE, the petition is granted and the assailed
November 4, 1998 and October 22, 1999 orders annulled and
set aside. The July 30, 1998 order of respondent judge is
reinstated granting the cancellation of the notices of lis
pendens subject of this petition.[3]
In its July 21, 2001 Resolution,[4] the CA denied petitioners
Motion for Reconsideration.
The Facts
The factual antecedents of the case are summarized by the CA
in this wise:
On June 20, 1996, [respondent] and [petitioner] entered into a
Construction Contract whereby the former agreed to construct
four (4) units of [townhouses] designated as 16-A, 16-B, 17-A
and 17-B and one (1) single detached unit for an original
contract price of P15,726,745.19 which was late[r] adjusted to
P16,726,745.19 as a result of additional works. The contract
period is 180 days commencing [on] July 7, 1996 and to
terminate on January 7, 1997. [Petitioner] claimed that the said
period was not followed due to reasons attributable to
[respondent], namely: suspension orders, additional works,
force majeure, and unjustifiable acts of omission or delay on
the part of said [respondent]. [Respondent], however, denied
such claim and instead pointed to [petitioner] as having
exceeded the 180 day contract period aggravated by defective
workmanship and utilization of materials which are not in
compliance with specifications.
xxxxxxxxx
On November 21, 1997, [petitioner] filed a complaint for sum of
money with damages (Civil Case No. 97-2707) with the
Regional Trial Court of Makati entitled Atlantic Erectors,
Incorporated vs. Herbal Cove Realty Corp. and Ernest C.
Escal[e]r. This case was raffled to Branch 137, x x x Judge
Santiago J. Ranada presiding. In said initiatory pleading,
[petitioner] AEI asked for the following reliefs:
AFTER DUE NOTICE AND HEARING, to order x x x defendant
to:
1. Pay plaintiff the sum of P4,854,229.94 for the unpaid
construction services already rendered;
2. To x x x pay plaintiff the sum of P1,595,551.00 for the
construction materials, equipment and tools of plaintiff held by
defendant;
3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss]
x x x of expected income from the construction project;
4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of
income by way of rental from the equipment of plaintiff held by
defendants;
5. To x x x pay plaintiff the sum of P5,000,000.00 for moral
damages;
6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary
damages;
7. To x x x pay plaintiff the sum equivalent of 25% of the total
money claim plus P200,000.00 acceptance fee and P2,500.00
per court appearance;
8. To x x x pay the cost of suit.
On the same day of November 21, 1997, [petitioner] filed a
notice of lis pendens for annotation of the pendency of Civil
Case No. 97-707 on titles TCTs nos. T-30228, 30229, 30230,
30231 and 30232. When the lots covered by said titles were
subsequently subdivided into 50 lots, the notices of lis pendens
were carried over to the titles of the subdivided lots, i.e.,
Transfer Certificate of Title Nos. T-36179 to T-36226 and T-
36245 to T-36246 of the Register of Deeds of Tagaytay City.
On January 30, 1998, [respondent] and x x x Ernest L. Escaler,
filed a Motion to Dismiss [petitioners] Complaint for lack of
jurisdiction and for failure to state a cause of action. They
claimed [that] the Makati RTC has no jurisdiction over the
subject matter of the case because the parties Construction
Contract contained a clause requiring them to submit their
dispute to arbitration.
xxxxxxxxx
On March 17, 1998, [RTC Judge Ranada] dismissed the
Complaint as against [respondent] for [petitioners] failure to
comply with a condition precedent to the filing of a court action
which is the prior resort to arbitration and as against x x x
Escaler for failure of the Complaint to state a cause of action x
x x.
[Petitioner] filed a Motion for Reconsideration of the March 17,
1998 dismissal order. [Respondent] filed its Opposition thereto.
On April 24, 1998, [respondent] filed a Motion to Cancel Notice
of Lis Pendens. It argued that the notices of lis pendens are
without basis because [petitioners] action is a purely personal
action to collect a sum of money and recover damages and x x
x does not directly affect title to, use or possession of real
property.
In his July 30, 1998 Order, [Judge Ranada] granted
[respondents] Motion to Cancel Notice of Lis Pendens x x x:
[Petitioner] filed a Motion for Reconsideration of the aforesaid
July 30, 1998 Order to which [respondent] filed an Opposition.
In a November 4, 1998 Order, [Judge Ranada,] while finding
no merit in the grounds raised by [petitioner] in its Motion for
15
Reconsideration, reversed his July 30, 1998 Order and
reinstated the notices of lis pendens, as follows:
1. The Court finds no merit in plaintiffs contention that in
dismissing the above-entitled case for lack of jurisdiction, and
at the same time granting defendant Herbal Coves motion to
cancel notice of lis pendens, the Court [took] an inconsistent
posture. The Rules provide that prior to the transmittal of the
original record on appeal, the court may issue orders for the
protection and preservation of the rights of the parties which do
not involve any matter litigated by the appeal (3rd par., Sec.
10, Rule 41). Even as it declared itself without jurisdiction, this
Court still has power to act on incidents in this case, such as
acting on motions for reconsideration, for correction, for lifting
of lis pendens, or approving appeals, etc.
As correctly argued by defendant Herbal Cove, a notice of lis
pendens serves only as a precautionary measure or warning to
prospective buyers of a property that there is a pending
litigation involving the same.
The Court notes that when it issued the Order of 30 July 1998
lifting the notice of lis pendens, there was as yet no appeal filed
by plaintiff. Subsequently, on 10 September 1998, after a
notice of appeal was filed by plaintiff on 4 September 1998, the
Branch Clerk of Court was ordered by the Court to elevate the
entire records of the above-entitled case to the Court of
Appeals. It therefore results that the above-entitled case is still
pending. After a careful consideration of all matters relevant to
the lis pendens, the Court believes that justice will be better
served by setting aside the Order of 30 July 1998.
On November 27, 1998, [respondent] filed a Motion for
Reconsideration of the November 4, 1998 Order arguing that
allowing the notice of lis pendens to remain annotated on the
titles would defeat, not serve, the ends of justice and that
equitable considerations cannot be resorted to when there is
an applicable provision of law.
xxxxxxxxx
On October 22, 1999, [Judge Ranada] issued an order denying
[respondents] Motion for Reconsideration of the November 4,
1998 Order for lack of sufficient merit.[5]
Thereafter, Respondent Herbal Cove filed with the CA a
Petition for Certiorari.
Ruling of the Court of Appeals
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. 97-2707 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]
This Courts Ruling
The Petition has no merit.
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.
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
16
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.
As a general rule, the only instances in which a notice of lis
pendens may be availed of are as follows: (a) an action to
recover possession of real estate; (b) an action for partition;
and (c) any other court proceedings that directly affect the title
to the land or the building thereon or the use or the occupation
thereof.[10] Additionally, this Court has held that resorting to lis
pendens is not necessarily confined to cases that involve title
to or possession of real property. This annotation also applies
to suits seeking to establish a right to, or an equitable estate or
interest in, a specific real property; or to enforce a lien, a
charge or an encumbrance against it.[11]
Apparently, petitioner proceeds on the premise that its money
claim involves the enforcement of a lien. Since the money
claim is for the nonpayment of materials and labor used in the
construction of townhouses, the lien referred to would have to
be that provided under Article 2242 of the Civil Code. This
provision describes a contractors lien over an immovable
property as follows:
Art. 2242. With reference to specific immovable property and
real rights of the debtor, the following claims, mortgages and
liens shall be preferred, and shall constitute an encumbrance
on the immovable or real right:
xxxxxxxxx
(3) Claims of laborers, masons, mechanics and other
workmen, as well as of architects, engineers and contractors,
engaged in the construction, reconstruction or repair of
buildings, canals or other works, upon said buildings, canals or
other works;
(4) Claims of furnishers of materials used in the construction,
reconstruction, or repair of buildings, canals or other works,
upon said buildings, canals or other works[.] (Emphasis
supplied)
However, a careful examination of petitioners Complaint, as
well as the reliefs it seeks, reveals that no such lien or interest
over the property was ever alleged. The Complaint merely
asked for the payment of construction services and materials
plus damages, without mentioning -- much less asserting -- a
lien or an encumbrance over the property. Verily, it was a
purely personal action and a simple collection case. It did not
contain any material averment of any enforceable right, interest
or lien in connection with the subject property.
As it is, petitioners money claim cannot be characterized as an
action that involves the enforcement of a lien or an
encumbrance, one that would thus warrant the annotation of
the Notice of Lis Pendens. Indeed, the nature of an action is
determined by the allegations of the complaint.[12]
Even assuming that petitioner had sufficiently alleged such lien
or encumbrance in its Complaint, the annotation of the Notice
of Lis Pendens would still be unjustified, because a complaint
for collection and damages is not the proper mode for the
enforcement of a contractors lien.
In J.L. Bernardo Construction v. Court of Appeals,[13] the
Court explained the concept of a contractors lien under Article
2242 of the Civil Code and the proper mode for its enforcement
as follows:
Articles 2241 and 2242 of the Civil Code enumerates certain
credits which enjoy preference with respect to specific personal
or real property of the debtor. Specifically, the contractors lien
claimed by the petitioners is granted under the third paragraph
of Article 2242 which provides that the claims of contractors
engaged in the construction, reconstruction or repair of
buildings or other works shall be preferred with respect to the
specific building or other immovable property constructed.
However, Article 2242 finds application when there is a
concurrence of credits, i.e., when the same specific property of
the debtor is subjected to the claims of several creditors and
the value of such property of the debtor is insufficient to pay in
full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine
which of the creditors will be paid ahead of the others.
Fundamental tenets of due process will dictate that this
statutory lien should then only be enforced in the context of
some kind of a proceeding where the claims of all the preferred
creditors may be bindingly adjudicated, such as insolvency
proceedings.[14] (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code nor the
enforcement of the lien thereunder is applicable here, because
petitioners Complaint failed to satisfy the foregoing
requirements. Nowhere does it show that respondents property
was subject to the claims of other creditors or was insufficient
to pay for all concurring debts. Moreover, the Complaint did not
pertain to insolvency proceedings or to any other action in
which the adjudication of claims of preferred creditors could be
ascertained.
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]
Narciso Pea, a leading authority on the subject of land titles
and registration, gives an explicit exposition on the
inapplicability of the doctrine of lis pendens to certain actions
and proceedings that specifically include money claims. He
explains in this wise:
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,
17
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)
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.

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.
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 formers cause. Indeed, parties
cannot invoke the jurisdiction of a court to secure affirmative
relief, then repudiate or question that same jurisdiction after
obtaining or failing to obtain such relief.[22]
WHEREFORE, the Petition is hereby DENIED and the assailed
Decision AFFIRMED. Costs against petitioner.
SO ORDERED.

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.

18
G.R. No. 108031 March 1, 1995
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and LEONOR
A ANG, respondents.
BELLOSILLO, J.:
Is declaration of bankruptcy or judicial liquidation required
before the worker's preference may be invoked under Art. 110
of the Labor Code?
On 21 March 1977 private respondent Leonor A. Ang started
employment as Executive Secretary with Tropical Philippines
Wood Industries, Inc. (TPWII), a corporation engaged in the
manufacture and sale of veneer, plywood and sawdust panel
boards. In 1982 she was promoted to the position of Personnel
Officer.
In September 1983 petitioner Development Bank of the
Philippines, as mortgagee of TPWII, foreclosed its plant
facilities and equipment. Nevertheless TPWII continued its
business operations interrupted only by brief shutdowns for the
purpose of servicing its plant facilities and equipment. In
January 1986 petitioner took possession of the foreclosed
properties. From then on the company ceased its operations.
As a consequence private respondent was on 15 April 1986
verbally terminated from the service.
On 14 December 1987 aggrieved by the termination of her
employment, private respondent filed with the Labor Arbiter a
complaint for separation pay, 13th month pay, vacation and
sick leave pay, salaries and allowances against TPWII, its
General Manager, and petitioner.
After hearing the Labor Arbiter found TPWII primarily liable to
private respondent but only for her separation pay and vacation
and sick leave pay because her claims for unpaid wages and
13th month pay were later paid after the complaint was filed.1
The General Manager was absolved of any liability. But with
respect to petitioner, it was held subsidiarily liable in the event
the company failed to satisfy the judgment. The Labor Arbiter
rationalized that the right of an employee to be paid benefits
due him from the properties of his employer is superior to the
right of the latter's mortgage, citing this Court's resolution in
PNB v. Delta Motor Workers Union.2
On 16 November 1992 public respondent National Labor
Relations Commission affirmed the ruling of the Labor Arbiter.3
The issue now before us is whether public respondent
committed grave abuse of discretion in holding that Art. 110 of
the Labor Code, as amended, which refers to worker
preference in case of bankruptcy or liquidation of an
employer's business is applicable to the present case
notwithstanding the absence of any formal declaration of
bankruptcy or judicial liquidation of TPWII.
Petitioner argues that the decision of public respondent runs
counter to the consistent rulings of this Court in a long line of
cases emphasizing that the application of Art. 110 of the Labor
Code is contingent upon the institution of bankruptcy or judicial
liquidation proceedings against the employer.
We hold that public respondent gravely abused its discretion in
affirming the decision of the Labor Arbiter. Art. 110 should not
be treated apart from other laws but applied in conjunction with
the pertinent provisions of the Civil Code and the Insolvency
Law to the extent that piece-meal distribution of the assets of
the debtor is avoided. Art. 110, then prevailing, provides:
Art. 110. Worker preference in case of bankruptcy. — In the
event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards wages due
them for services rendered during the period prior to the
bankruptcy or liquidation, any provision to the contrary
notwithstanding. Unpaid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of
the employer.
Complementing Art. 110, Sec. 10, Rule VIII, Book III, of the
Revised Rules and Regulations Implementing the Labor Code
provides:
Sec. 10. Payment of wages in case of bankruptcy. — Unpaid
wages earned by the employees before the declaration of
bankruptcy or judicial liquidation of the employer's business
shall be given first preference and shall be paid in full before
other creditors may establish any claim to a share in the assets
of the employer.
We interpreted this provision in Development Bank of the
Philippines v. Santos4 to mean that —
. . . a declaration of bankruptcy or a judicial liquidation must be
present before the worker's preference may be enforced. Thus,
Article 110 of the Labor Code and its implementing rule cannot
be invoked by the respondents in this case absent a formal
declaration of bankruptcy or a liquidation order . . . . (Emphasis
supplied).
The rationale is that to hold Art. 110 to be applicable also to
extrajudicial proceedings would be putting the worker in a
better position than the State which could only assert its own
prior preference in case of a judicial proceeding.5 Art. 110,
which was amended by R.A. 6715 effective 21 March 1989,
now reads:
Art. 110. Worker preference in case of bankruptcy. — In the
event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards their unpaid
wages and other monetary claims, any provision of law to the
contrary notwithstanding. Such unpaid wages and monetary
claims shall be paid in full before the claims of the Government
and other creditors may be paid.
Obviously, the amendment expanded the concept of "worker
preference" to cover not only unpaid wages but also other
monetary claims to which even claims of the Government must
be deemed subordinate. The Rules and Regulations
Implementing R.A. 6715, approved 24 May 1989, also
amended the corresponding implementing rule, and now reads:
Sec. 10. Payment of wages and other monetary claims in case
of bankruptcy. — In case of bankruptcy or liquidation of the
employer's business, the unpaid wages and other monetary
claims of the employees shall be given first preference and
shall be paid in full before the claims of government and other
creditors may be paid.
Although the terms "declaration" (of bankruptcy) or "judicial"
(liquidation) have been notably eliminated, still in Development
Bank of the Philippines v. NLRC,6 this Court did not alter its
original position that the right to preference given to workers
under Art. 110 cannot exist in any effective way prior to the
time of its presentation in distribution proceedings. In effect, we
19
reiterated our previous interpretation in Development Bank of
the Philippines v. Santos where we said:
It (worker preference) will find application when, in proceedings
such as insolvency, such unpaid wages shall be paid in full
before the "claims of the Government and other creditors" may
be paid. But, for an orderly settlement of a debtor's assets, all
creditors must be convened, their claims ascertained and
inventoried, and thereafter the preferences determined. In the
course of judicial proceedings which have for their object the
subjection of the property of the debtor to the payment of his
debts or other lawful obligations. Thereby, an orderly
determination of preference of creditors' claims is assured
(Philippine Savings Bank vs. Lantin, No. L-33929, September
2, 1983, 124 SCRA 476); the adjudication made will be binding
on all parties-in-interest since those proceedings are
proceedings in rem; and the legal scheme of classification,
concurrence and preference of credits in the Civil Code, the
Insolvency Law, and the Labor Code is preserved in harmony.7
In ruling, as we did, in Development Bank of the Philippines v.
Santos, we took into account the following pronouncements:
In the event of insolvency, a principal objective should be to
effect an equitable distribution of the insolvents property
among his creditors. To accomplish this there must first be
some proceeding where notice to all of the insolvent's creditors
may be given and where the claims of preferred creditors may
be bindingly adjudicated. (De Barreto v. Villanueva, No.
L-14938, December 29, 1962, 6 SCRA 928). The rationale
therefore has been expressed in the recent case of DBP v.
Secretary of Labor (G.R. No. 79351, 28 November 1989),
which we quote:
A preference of credit bestows upon the preferred creditor an
advantage of having his credit satisfied first ahead of other
claims which may be established against the debtor. Logically,
it becomes material only when the properties and assets of the
debtors are insufficient to pay his debts in full; for if the debtor
is amply able to pay his various creditors in full, how can the
necessity exist to determine which of his creditors shall be paid
first or whether they shall be paid out of the proceeds of the
sale (of) the debtor's specific property. Indubitably, the
preferential right of credit attains significance only after the
properties of the debtor have been inventoried and liquidated,
and the claims held by his various creditors have been
established (Kuenzle & Sheriff (Ltd.) v. Villanueva, 41 Phil. 611
[1916]; Barretto v. Villanueva, G.R. No. 14938, 29 December
1962, 6 SCRA 928; Philippine Savings Bank v. Lantin, G.R.
No. 33929, 2 September 1983, 124 SCRA 476).
In the present case, there is as yet no declaration of
bankruptcy nor judicial liquidation of TPWII. Hence, it would be
premature to enforce the worker's preference.
The additional ratiocination of public respondent that "under
Article 110 of the Labor Code complainant enjoys a preference
of credit over the properties of TPWII being held in possession
by DBP," is a dismal misconception of the nature of preference
of credit, a subject matter which we have already discussed in
clear and simple terms and even distinguished from a lien in
Development Bank of the Philippines v. NLRC8 —
. . . A preference applies only to claims which do not attach to
specific properties. A lien creates a charge on a particular
property. The right of first preference as regards unpaid wages
recognized by Article 110 does not constitute a lien on the
property of the insolvent debtor in favor of workers. It is but a
preference of credit in their favor, a preference in application. It
is a method adopted to determine and specify the order in
which credits should be paid in the final distribution of the
proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor
. . . In the words of Republic v. Peralta, supra: Article 110 of the
Labor Code does not purport to create a lien in favor of
workers or employees for unpaid wages either upon all of the
properties or upon any particular property owned by their
employer. Claims for unpaid wages do not therefore fall at all
within the category of specially preferred claims established
under Articles 2241 and 2242 of the Civil Code, except to the
extent that such claims for unpaid wages are already covered
by Article 2241, number 6: "claims for laborers: wages, on the
goods manufactured or the work done;" or by Article 2242,
number 3, "claims of laborers and other workers engaged in
the construction reconstruction or repair of buildings, canals
and other works, upon said buildings, canals and other works .
. . . To the extent that claims for unpaid wages fall outside the
scope of Article 2241, number 6, and 22421 number 3, they
would come within the ambit of the category of ordinary
preferred credits under Article 2244.
The DBP anchors its claim on a mortgage credit. A mortgage
directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of
the obligation for whose security it was constituted (Article
2176, Civil Code). It creates a real right which is enforceable
against the whole world. It is a lien on an identified immovable
property, which a preference is not. A recorded mortgage credit
is a special preferred credit under Article 2242 (5) of the Civil
Code on classification of credits. The preference given by
Article 1l0, when not falling within Article 2241 (6) and Article
2242 (3), of the Civil Code and not attached to any specific
property, is all ordinary preferred credit although its impact is to
move it from second priority to first priority in the order of
preference established by Article 2244 of the Civil Code.
The present controversy could have been easily settled by
public respondent had it referred to ample jurisprudence which
already provides the solution. Stare decisions et non quiet
movere. Once a case is decided by this Court as the final
arbiter of any justifiable controversy one way, then another
case involving exactly the same point at issue should be
decided in the same manner. Public respondent had no choice
on the matter. It could not have ruled any other way. This Court
having spoken in a string of cases against public respondent,
its duty is simply to obey judicial precedents.9 Any further
disregard, if not defiance, of our rulings will be considered a
ground to hold public respondent in contempt.
WHEREFORE, the petition is GRANTED. The decision of
public respondent National Labor Relations Commission
affirming the decision of the Labor Arbiter insofar as it held
petitioner Development Bank of the Philippines liable for the
monetary claims of private respondent Leonor A. Ang is SET
ASIDE. The temporary restraining order we issued on 8
February 1993 10 enjoining the execution of the decision of
public respondent against petitioner is made PERMANENT.
SO ORDERED.
20
G.R. No. 178407, March 18, 2015
METROPOLITAN BANK AND TRUST COMPANY, Petitioner,
v. S.F. NAGUIAT ENTERPRISES, INC., Respondent.
DECISION
LEONEN, J.:
This case calls for the determination of whether the approval
and consent of the insolvency court is required under Act No.
1956, otherwise known as the Insolvency Law, before a
secured creditor like petitioner Metropolitan Bank and Trust
Company can proceed with the extrajudicial foreclosure of the
mortgaged property.
This is a Petition for Review1 under Rule 45, seeking to
reverse and set aside the November 15, 2006 Decision2 and
June 14, 2007 Resolution3 of the Court of Appeals (Sixth
Division) in CA-G.R. SP No. 94968. The questioned Decision
and Resolution dismissed Metropolitan Bank and Trust
Company's Petition for Certiorari and Mandamus4 and denied
its subsequent Motion for Reconsideration and Clarification.5
Sometime in April 1997, Spouses Rommel Naguiat and
Celestina Naguiat and S.F. Naguiat Enterprises, Inc. (S.F.
Naguiat) executed a real estate mortgage6 in favor of
Metropolitan Bank and Trust Company (Metrobank) to secure
certain credit accommodations obtained from the latter
amounting to P17 million. The mortgage was constituted over
the following properties:
(1) TCT No. 586767 - a parcel of land in the Barrio of Pulung
Bulu, Angeles, Pampanga, with an area of 489 square meters;
and
(2) TCT No. 310523 - a parcel of land in Marikina, Rizal, with
an area of 1,200.10 square meters.8
On March 3, 2005, S.F. Naguiat represented by Celestina T.
Naguiat, Eugene T. Naguiat, and Anna N. Africa obtained a
loan9 from Metrobank in the amount of P1,575,000.00. The
loan was likewise secured by the 1997 real estate mortgage by
virtue of the Agreement on Existing Mortgage(s)10 executed
between the parties on March 15, 2004.
On July 7, 2005, S.F. Naguiat filed a Petition for Voluntary
Insolvency with Application for the Appointment of a
Receiver11 pursuant to Act No. 1956, as amended,12 before
the Regional Trial Court of Angeles City and which was raffled
to Branch 56.13 Among the assets declared in the Petition was
the property covered by TCT No. 58676 (one of the properties
mortgaged to Metrobank).14
Presiding Judge Irin Zenaida S. Buan (Judge Buan) issued the
Order15 dated July 12, 2005, declaring S.F. Naguiat insolvent;
directing the Deputy Sheriff to take possession of all the
properties of S.F. Naguiat until the appointment of a
receiver/assignee; and forbidding payment of any debts due,
delivery of properties, and transfer of any of its properties.
Pending the appointment of a receiver, Judge Buan directed
the creditors, including Metrobank, to file their respective
Comments on the Petition.16 In lieu of a Comment, Metrobank
filed a Manifestation and Motion17 informing the court of
Metrobank's decision to withdraw from the insolvency
proceedings because it intended to extrajudicially foreclose the
mortgaged property to satisfy its claim against S.F. Naguiat.18
Subsequently, S.F. Naguiat defaulted in paying its loan.19 On
November 8, 2005, Metrobank instituted an extrajudicial
foreclosure proceeding against the mortgaged property
covered by TCT No. 5867620 and sold the property at a public
auction held on December 9, 2005 to Phoenix Global Energy,
Inc., the highest bidder.21 Afterwards, Sheriff Claude B.
Balasbas prepared the Certificate of Sale22 and submitted it
for approval to Clerk of Court Vicente S. Fernandez, Jr. and
Executive Judge Bernardita Gabitan-Erum (Executive Judge
Gabitan-Erum). However, Executive Judge Gabitan-Erum
issued the Order23dated December 15, 2005 denying her
approval of the Certificate of Sale in view of the July 12, 2005
Order issued by the insolvency court. Metrobank's subsequent
Motion for Reconsideration was also denied in the
Order24dated April 24, 2006.
Aggrieved by both Orders of Executive Judge Gabitan-Erum,
Metrobank filed a Petition25 for certiorari and mandamus
before the Court of Appeals on June 22, 2006. S.F. Naguiat
filed its Manifestation26 stating that it was not interposing any
objection to the Petition and requested that the issues raised in
the Petition be resolved without objection and argument on its
part.27
On November 15, 2006, the Court of Appeals rendered its
Decision dismissing the Petition on the basis of Metrobank's
failure to "obtain the permission of the insolvency court to
extrajudicially foreclose the mortgaged property."28 The Court
of Appeals declared that "a suspension of the foreclosure
proceedings is in order, until an assignee [or receiver,] is
elected or appointed [by the insolvency court] so as to afford
the insolvent debtor proper representation in the foreclosure
[proceedings]."29
Metrobank filed a Motion for Reconsideration and Clarification,
which was denied by the Court of Appeals in its Resolution
dated June 14, 2007.30 The Court of Appeals held that leave
of court must be obtained from the insolvency court whether
the foreclosure suit was instituted judicially or extrajudicially so
as to afford the insolvent estate's proper representation
(through the assignee) in such action31 and "to avoid the
dissipation of the insolvent debtor's assets in possession of the
insolvency court without the latter's knowledge."32
Hence, the present Petition for Review was filed. Petitioner
contends that the Court of Appeals decided questions of
substance in a way not in accord with law and with the
applicable decisions of this court:
A.
By ruling that there must be a motion for leave of court to be
filed and granted by the insolvency court, before the petitioner,
as a secured creditor of an insolvent, can extrajudicially
foreclose the mortgaged property, which is tantamount to a
judicial legislation.
B.
By ruling that the Honorable Executive Judge Bernardita
Gabitan-Erum did not abuse her discretion in refusing to
perform her ministerial duty of approving the subject certificate
of sale, despite the fact that the petitioner and the designated
sheriff complied with all the requirements mandated by Act No.
3135, as amended, circulars, administrative matters and
memorandums issued by the Honorable Supreme Court.
C.
21

By ruling that the action of the Honorable Executive Judge
Bernardita Gabitan-Erum is proper in denying the approval of
the Certificate of Sale on the grounds that the issuance of the
Order dated 12 July 2005 declaring respondent insolvent and
the pendency of the insolvency proceeding forbid the
petitioner, as a secured creditor, to foreclose the subject
mortgaged property.33 (Emphasis supplied)
On October 20, 2007, S.F. Naguiat filed a Manifestation34
stating that it interposed no objection to the Petition and
submitted the issues raised therein without any argument.
On November 28, 2007, the court resolved "to give due course
to the petition [and] to decide the case according to the
pleadings already filed[.]"35
The issues for resolution are:
First, whether the Court of Appeals erred in ruling that prior
leave of the insolvency court is necessary before a secured
creditor, like petitioner Metropolitan Bank and Trust Company,
can extrajudicially foreclose the mortgaged property.
Second, whether the Court of Appeals erred in ruling that
Executive Judge Gabitan-Erum did not abuse her discretion in
refusing to approve the Certificate of Sale.
Petitioner argues that nowhere in Act No. 1956 does it require
that a secured creditor must first obtain leave or permission
from the insolvency court before said creditor can foreclose on
the mortgaged property.36 It adds that this procedural
requirement applies only to civil suits, and not when the
secured creditor opts to exercise the right to foreclose
extrajudicially the mortgaged property under Act No. 3135, as
amended, because extrajudicial foreclosure is not a civil suit.37
Thus, the Court of Appeals allegedly imposed a new condition
that was tantamount to unauthorized judicial legislation when it
required petitioner to file a Motion for Leave of the insolvency
court.38 Said condition, petitioner argues, defeated and
rendered inutile its right or prerogative under Act No. 1956 to
independently initiate extrajudicial foreclosure of the mortgaged
property.39
Nonetheless, petitioner contends that the filing of its
Manifestation before the insolvency court served as sufficient
notice of its intention and, in effect, asked the court's
permission to foreclose the mortgaged property.40
Petitioner further contends that "the powers and responsibilities
of an Executive Judge in extrajudicial foreclosure proceedings,
in line with Administrative Order No. 6, is merely to supervise
the conduct of the extra-judicial foreclosure of the property"41
and to oversee that the procedural requirements are faithfully
complied with;42 and when "the Clerk of Court and Sheriff
concerned complied with their designated duties and
responsibilities under the [administrative] directives and under
Act No. 3135, as amended, and the corresponding filing and
legal fees were duly paid, it becomes a ministerial duty on the
part of the executive judge to approve the certificate of sale."43
Thus, Executive Judge Gabitan-Erum allegedly exceeded her
authority by "exercising judicial discretion in issuing her Orders
dated December 15, 2006 and April 24, 2006 . . . despite the
fact that Sheriff Balasbas complied with all the notices
requirements under Act No. 3135, [as] amended, . . . and the
petitioner and the highest bidder paid all the requisite filing and
legal fees[.]"44
Furthermore, citing Chartered Bank v. C.A. Imperial and
National Bank,45 petitioner submits that the order of insolvency
affected only unsecured creditors and not secured creditors,
like petitioner, which did not surrender its right over the
mortgaged property.46 Hence, it contends that the Court of
Appeals seriously erred in holding as proper Executive Judge
Gabitan-Erum's disapproval of the Certificate of Sale on
account of the Order of insolvency issued by the insolvency
court.47
Finally, petitioner points out that contrary to the Court of
Appeals' ruling, "there is nothing more to suspend because the
extrajudicial foreclosure of the mortgaged property was already
a fait accompli as the public auction sale was conducted on
December 9, 2005 and all the requisite legal fees were paid
and a Certificate of Sale was already prepared."48 "The only
remaining thing to do [was] for the . . . Executive Judge to sign
the Certificate of Sale, which she . . . refused to do."49
The Petition has no merit.
I
A look at the historical background of the laws governing
insolvency in this country will be helpful in resolving the
questions presented before us.
The first insolvency law, Act No. 1956, was enacted on May
20, 1909. It was derived from the Insolvency Act of California
(1895), with a few provisions taken from the United States
Bankruptcy Act of 1898.50 Act No. 1956 was entitled "An Act
Providing for the Suspension of Payments, the Relief of
Insolvent Debtors, the Protection of Creditors, and the
Punishment of Fraudulent Debtors." The remedies under the
law were through a suspension of payment51 (for a debtor who
was solvent but illiquid) or a discharge from debts and liabilities
through the voluntary52 or involuntary53 insolvency
proceedings (for a debtor who was insolvent).
The objective of suspension of payments is the deferment of
the payment of debts until such time as the debtor, which
possesses sufficient property to cover all its debts, is able to
convert such assets into cash or otherwise acquires the cash
necessary to pay its debts. On the other hand, the objective in
insolvency proceedings is "to effect an equitable distribution of
the bankrupt's properties among his creditors and to benefit the
debtor by discharging54 him from his liabilities and enabling
him to start afresh with the property set apart for him as
exempt."55
Act No. 1956 was meant to be a complete law on
insolvency,56 and debts were to be liquidated in accordance
with the order of priority set forth under Chapter VI, Sections 48
to 50 on "Classification and Preference of Creditors"; and
Sections 29 and 59 with respect to mortgage or pledge of real
or personal property, or lien thereon. Jurisdiction over
suspension of payments and insolvency was vested in the
Courts of First Instance (now the Regional Trial Courts).57
The Civil Code58 (effective August 30, 1950) established a
system of concurrence and preference of credits, which finds
particular application in insolvency proceedings.59Philippine
Savings Bank v. Hon. Lantin60 explains this scheme:
Concurrence of credits occurs when the same specific property
of the debtor or all of his property is subjected to the claims of
several creditors. The concurrence of credits raises no
questions of consequence where the value of the property or
22
the value of all assets of the debtor is sufficient to pay in full all
the creditors. However, it becomes material when said assets
are insufficient for then some creditors of necessity will not be
paid or some creditors will not obtain the full satisfaction of
their claims. In this situation, the question of preference will
then arise, that is to say who of the creditors will be paid ahead
of the others. (Caguioa, Comments and Cases on Civil Law,
1970 ed., Vol. VI, p. 472.)61
The credits are classified into three general categories,
namely, "(a) special preferred credits listed in Articles 224162
and 2242,63 (b) ordinary preferred credits listed in Article
2244[,]64and (c) common credits under Article 2245."65
The special preferred credits enumerated in Articles 2241 (with
respect to movable property) and 2242 (with respect to
immovable property) are considered as mortgages or pledges
of real or personal property, or liens within the purview of Act
No. 1956.66 These credits, which enjoy preference with
respect to a specific movable or immovable property, exclude
all others to the extent of the value of the property.67 If there
are two or more liens on the same specific property, the
lienholders divide the value of the property involved pro rata,
after the taxes on the same property are fully paid.68
"Credits which are specially preferred because they constitute
liens (tax or non-tax) in turn, take precedence over ordinary
preferred credits so far as concerns the property to which the
liens have attached. The specially preferred credits must be
discharged first out of the proceeds of the property to which
they relate, before ordinary preferred creditors may lay claim to
any part of such proceeds."69
"In contrast with Articles 2241 and 2242, Article 2244 creates
no liens on determinate property which follow such property.
What Article 2244 creates are simply rights in favor of certain
creditors to have the cash and other assets of the insolvent
applied in a certain sequence or order of priority."70
It was held that concurrence and preference of credits can only
be ascertained in the context of a general liquidation
proceeding that is in rem, such as an insolvency proceeding,
where properties of the debtor are inventoried and liquidated
and the claims of all the creditors may be bindingly
adjudicated.71 The application of this order of priorities
established under the Civil Code in insolvency proceedings
assures that priority of claims are respected and credits
belonging to the same class are equitably treated.
Conformably, it is the policy of Act No. 1956 to place all the
assets and liabilities of the insolvent debtor completely within
the jurisdiction and control of the insolvency court without the
intervention of any other court in the insolvent debtor's
concerns or in the administration of the estate.72 It was
considered to be of prime importance that the insolvency
proceedings follow their course as speedily as possible in order
that a discharge, if the insolvent debtor is entitled to it, should
be decreed without unreasonable delay. "Proceedings of [this]
nature cannot proceed properly or with due dispatch unless
they are controlled absolutely by the court having charge
thereof."73
In 1981, Presidential Decree No. 1758 amended Presidential
Decree No. 902-A, the Securities and Exchange Commission
charter. Under its terms,74 jurisdiction regarding corporations
that sought suspension of payments process was taken away
from the regular courts and given to the Securities and
Exchange Commission.75 In addition, an alternative to
suspension of payments — rehabilitation — was introduced. It
enables a corporation whose assets are not sufficient to cover
its liabilities to apply to the Securities and Exchange
Commission for the appointment of a rehabilitation receiver
and/or management committee76 and then to develop a
rehabilitation plan with a view to rejuvenating a financially
distressed corporation. However, the procedure to avail of the
remedy was not spelled out until 20 years later when the
Securities and Exchange Commission finally adopted the
Rules of Procedure on Corporate Recovery on January 4,
2000.
Shortly thereafter, with the passage of Republic Act No. 8799
or The Securities Regulation Code on July 19, 2000,
jurisdiction over corporation rehabilitation cases was reverted
to the Regional Trial Courts designated as commercial courts
or rehabilitation courts.77 This legal development was
implemented by the Interim Rules of Procedure on Corporate
Rehabilitation (made effective in December 2000), which was
later replaced by A.M. 00-8-10-SC or the Rules of Procedure
on Corporate Rehabilitation of 2008.
Act No. 1956 continued to remain in force and effect until its
express repeal on July 18, 2010 when Republic Act No.
10142,78 otherwise known as the Financial Rehabilitation and
Insolvency Act of 2010, took effect. Republic Act No. 10142
now provides for court proceedings in the rehabilitation or
liquidation of debtors, both juridical and natural persons, in a
"timely, fair, transparent, effective and efficient"79 manner. The
purpose of insolvency proceedings is "to encourage debtors . .
. and their creditors to collectively and realistically resolve and
adjust competing claims and property rights"80 while
"maintaining] certainty and predictability in commercial affairs,
preserving] and maximizing] the value of the assets of these
debtors, recognizing] creditor rights and respecting] priority of
claims, and ensuring] equitable treatment of creditors who are
similarly situated."81 It has also been provided that whenever
rehabilitation is no longer feasible, "it is in the interest of the
State to facilitate a speedy and orderly liquidation of [the]
debtors' assets and the settlement of their obligations."82
Unlike Act No. 1956, Republic Act No. 10142 provides a broad
definition of the term, "insolvent":
SEC. 4. Definition of Terms. - As used in this Act, the term:
....
(p) Insolvent shall refer to the financial condition of a debtor
that is generally unable to pay its or his liabilities as they fall
due in the ordinary course of business or has liabilities that are
greater than its or his assets.
Republic Act No. 10142 also expressly categorizes different
forms of debt relief available to a corporate debtor in financial
distress. These are out-of-court restructuring agreements;83
pre-negotiated rehabilitation;84 court-supervised
rehabilitation;85 and liquidation (voluntary and involuntary).86
An insolvent individual debtor can avail of suspension of
payments,87 or liquidation.88
During liquidation proceedings, a secured creditor may waive
its security or lien, prove its claim, and share in the distribution
of the assets of the debtor, in which case it will be admitted as
an unsecured creditor; or maintain its rights under the security
or lien,89 in which case:
[T]he value of the property may be fixed in a manner agreed
upon by the creditor and the liquidator. When the value of the
property is less than the claim . . . the [creditor] will be admitted
23
... as a creditor for the balance. If its value exceeds the claim . .
. the liquidator may convey the property to the creditor and
waive the debtor's right of redemption upon receiving the
excess from the creditor;
[T]he liquidator may sell the property and satisfy the secured
creditor's entire claim from the proceeds of the sale; or
[T]he secured creditor may enforce the lien or foreclose on the
property pursuant to applicable laws.90
A secured creditor, however, is subject to the temporary stay of
foreclosure proceedings for a period of 180 days,91 upon the
issuance by the court of the Liquidation Order.92
Republic Act No. 10142 was to govern all petitions filed after it
had taken effect, and all further proceedings in pending
insolvency, suspension of payments, and rehabilitation cases,
except when its application "would not be feasible or would
work injustice, in which event the procedures set forth in prior
laws and regulations shall apply."93
The relevant proceedings in this case took place prior to
Republic Act No. 10142; hence, the issue will be resolved
according to the provisions of Act No. 1956.
II
Act No. 1956 impliedly requires a secured creditor to ask the
permission of the insolvent court before said creditor can
foreclose the mortgaged property.
When read together, the following provisions of Act No. 1956
reveal the necessity for leave of the insolvency court:
(A)
Under Section 14, "[a]n insolvent debtor, owing debts
exceeding in amount the sum of one thousand pesos, may
apply to be discharged from his debts and liabilities by petition
to the Court of First Instance of the province or city in which he
has resided for six months next preceding the filing of such
petition. In his petition, he shall set forth his place of residence,
the period of his residence therein immediately prior to filing
said petition, his inability to pay all his debts in full, his
willingness to surrender all his property, estate, and effects not
exempt from execution for the benefit of his creditors, and an
application to be adjudged an insolvent. He shall annex to his
petition a schedule and inventory in the form hereinafter
provided. The filing of such petition shall be an act of
insolvency."
(B)
Under Section 16, "[the] inventory must contain, besides the
creditors, an accurate description of all the real and personal
property, estate, and effects of the [insolvent], including his
homestead, if any, together with a statement of the value of
each item of said property, estate, and effects and its location,
and a statement of the incumbrances thereon. All property
exempt by law from execution shall be set out in said inventory
with a statement of its valuation, location, and the
incumbrances thereon, if any. The inventory shall contain an
outline of the facts giving rises [sic], or which might give rise, to
a right of action in favor of the insolvent debtor."
(C)
Under Section 18, upon receipt of the petition, the court shall
issue an order declaring the petitioner insolvent, and directing
the sheriff to take possession of and safely keep, until the
appointment of a receiver or assignee, all the debtor's real and
personal property, except those exempt by law from execution.
The order also forbids the transfer of any property by the
debtor.
(D)
Under Section 32, once an assignee is elected and qualified,
the clerk of court shall assign and convey to the assignee all
the real and personal property of the debtor, not exempt from
execution, and such assignment shall relate back to the
commencement of the insolvency proceedings, and by
operation n of law, shall vest the tide to all such property in the
assignee.
With the declaration of insolvency of the debtor, insolvency
courts "obtain full and complete jurisdiction over all property of
the insolvent and of all claims by and against [it.]"94 It follows
that the insolvency court has exclusive jurisdiction to deal with
the property of the insolvent.95 Consequently, after the
mortgagor-debtor has been declared insolvent and the
insolvency court has acquired control of his estate, a
mortgagee may not, without the permission of the insolvency
court, institute proceedings to enforce its lien. In so doing, it
would interfere with the insolvency court's possession and
orderly administration of the insolvent's properties.96
It is true that under Section 59 of Act No. 1956, the creditor is
given the option to participate in the insolvency proceedings by
proving the balance of his debt, after deducting the value of the
mortgaged property as agreed upon with the receiver or
determined by the court or by a sale of the property as directed
by the court; or proving his whole debt, after releasing his claim
to the receiver/sheriff before the election of an assignee, or to
the assignee. However, Section 59 of Act No. 1956 proceeds
to state that when "the property is not sold or released, and
delivered up, or its value fixed, the creditor [is] not allowed to
prove any part of his debt," but the assignee shall deliver to the
creditor the mortgaged property. Hence, explicitly under
Section 59 and as a necessary consequence flowing from the
exclusive jurisdiction of the insolvency court over the estate of
the insolvent, the mortgaged property must first be formally
delivered by the court or the assignee (if one has already been
elected) before a mortgagee-creditor can initiate proceedings
for foreclosure.97
Here, the foreclosure and sale of the mortgaged property of the
debtor, without leave of court, contravene the provisions of Act
No. 1956 and violate the Order dated July 12, 2005 of the
insolvency court which declared S.F. Naguiat insolvent and
forbidden from making any transfer of any of its properties to
any person.
Petitioner would insist that "respondent was given the
opportunity to be represented in the public auction sale
conducted on December 9, 2005"98 because it received a
copy of the Notice of the Sheriffs Sale on November 11,
2005;"99 and the Notice of Auction Sale was published in a
newspaper of general circulation.100 However, respondent
allegedly opted not to participate by not attending the public
auction sale.101
Such was to be expected because when the foreclosure
proceeding was initiated, respondent was already declared
insolvent. Indeed, upon the adjudication of insolvency, the
insolvent ceased to exist and was in effect judicially declared
dead as of the filing of the insolvency petition and by the nature
of things had no further interest in the property covered by the
mortgage.102 Under Section 32 of Act No. 1956, title to the
insolvent's estate relates back to the filing of the insolvency
petition upon the election of the assignee who shall thereafter
act on behalf of all the creditors. Under Section 36, the
24
assignee has the power to redeem all valid mortgages or sell
property subject to mortgage. Thus, the extrajudicial
foreclosure of the mortgaged property initiated by petitioner
without leave of insolvency court would effectively exclude the
assignee's right to participate in the public auction sale of the
property and to redeem the foreclosed property103 to the
prejudice of all the other creditors of the insolvent.
Petitioner filed its Manifestation and Motion before the
insolvency court on September 7, 2005,104 praying that it
would no longer file the Comment required as it opted to
exercise its right to extrajudicially foreclose the property
mortgaged and that it "be allowed to temporarily withdraw its
active participation in the . . . proceeding pending the outcome
of the extra-judicial foreclosure proceeding of the mortgaged
property."105
Petitioner should have waited for the insolvency court to act on
its Manifestation and Motion before foreclosing the mortgaged
property and its lien (assuming valid) would not be impaired or
its claim in any way jeopardized by any reasonable delay.
There are mechanisms within Act No. 1956 such as Section 59
that ensure that the interests of the secured creditor are
adequately protected. Parenthetically, mortgage liens are
retained in insolvency proceedings. What is merely suspended
until court approval is obtained is the creditor's enforcement of
such preference.
On the other hand, to give the secured creditor a free hand in
foreclosing its collateral upon the initiation of insolvency
proceedings may frustrate the basic objectives of Act No. 1956
of maximizing the value of the estate of the insolvent or
obtaining the highest return possible from its sale for the
benefit of all the creditors (both secured and unsecured).
III
Executive Judge Gabitan-Erum did not unlawfully neglect to
perform her duty when she refused to approve and sign the
Certificate of Sale, as would warrant the issuance of a writ of
mandamus against her.
An executive judge has the administrative duty in extrajudicial
foreclosure proceedings to ensure that all the conditions of Act
No. 3135 have been complied with before approving the sale at
public auction of any mortgaged property.106
"Certain requisites must be established before a creditor can
proceed to an extrajudicial foreclosure, namely: first, there
must have been the failure to pay the loan obtained from the
mortgagee-creditor; second, the loan obligation must be
secured by a real estate mortgage; and third, the mortgagee-
creditor has the right to foreclose the real estate mortgage
either judicially or extrajudicially."107
Furthermore, Act No. 3135 outlines the notice and publication
requirements and the procedure for the extrajudicial
foreclosure which constitute a condition sine qua non for its
validity. Specifically, Sections 2, 3, and 4 of the law prescribe
the formalities of the extrajudicial foreclosure proceeding:
SEC. 2. Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case the
place within said province in which the sale is to be made is the
subject of stipulation, such sale shall be made in said place or
in the municipal building of the municipality in which the
property or part thereof is situated.
SEC. 3. Notice shall be given by posting notices of the sale for
not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice
shall also be published once a week for at least three
consecutive weeks in a newspaper of general circulation in the
municipality or city.
SEC. 4. The sale shall be made at public auction, between the
hours of nine in the morning and four in the afternoon; and
shall be under the direction of the sheriff of the province, the
justice or auxiliary justice of the peace of the municipality in
which such sale has to be made, or a notary public of said
municipality, who shall be entitled to collect a fee of five pesos
for each day of actual work performed, in addition to his
expenses.
''Mandamus will not issue to enforce a right which is in
substantial dispute or to which a substantial doubt exists."108
There was a valid reason for Executive Judge Gabitan-Erum to
doubt the propriety of the foreclosure sale. Her verification with
the records of the Clerk of Court showed that a Petition for
Insolvency had been filed and had already been acted upon by
the insolvency court prior to the application for extrajudicial
foreclosure of the mortgaged properties. Among the
inventoried unpaid debts and properties attached to the
Petition for Insolvency was the loan secured by the real estate
mortgage subject of the application for extrajudicial foreclosure
sale.109 With the pendency of the insolvency case, substantial
doubt exists to justify the refusal by Executive Judge Gabitan-
Erum to approve the Certificate of Sale as the extrajudicial
foreclosure sale without leave of the insolvency court may
contravene the policy and purpose of Act No. 1956.110
Act No. 3135 is silent with respect to mortgaged properties that
are in custodia legis, such as the property in this case, which
was placed under the control and supervision of the insolvency
court. This court has declared that "[a] court which has control
of such property, exercises exclusive jurisdiction over the
same, retains all incidents relative to the conduct of such
property. No court, except one having supervisory control or
superior jurisdiction in the premises, has a right to interfere with
and change that possession."111 The extrajudicial foreclosure
and sale of the mortgaged property of the debtor would clearly
constitute an interference with the insolvency court's
possession of the property.
Furthermore, Executive Judge Gabitan-Erum noticed that the
President of the highest bidder in the public auction sale may
be related to the owners of S.F. Naguiat Enterprises, Inc. The
President of the highest bidder, Phoenix Global Energy, Inc.,
was a certain Eugene T. Naguiat.112 "Among the
incorporators of S.F. Naguiat Enterprises, Inc. [the insolvent
corporation] [were] Sergio F. Naguiat, Maningning T. Naguiat,
Antolin M. Tiglao, Nero F. Naguiat and Antolin T. Naguiat.
Later[,] its capital was increased and the listed subscribers
[were] Celestina T. Naguiat, Rommel T. Naguiat, Antolin T.
Naguiat, Sergio T. Naguiat, Jr., Alexander T. Naguiat, Coumelo
T. Naguiat, Fely Ann Breggs and Teresita Celine Quemer."113
Under the foregoing circumstances, the refusal of Executive
Judge Gabitan-Erum to approve the Certificate of Sale was in
accord with her duty to act with prudence, caution, and
attention in the performance of her functions.
WHEREFORE, the Petition is DENIED, and the Court of
Appeals' Decision dated November 15, 2006 and Resolution
dated June 14, 2007 are AFFIRMED. SO ORDERED.
25
G.R. No. L-56568 May 20, 1987
REPUBLIC OF THE PHILIPPINES, represented by the Bureau
of Customs and the Bureau of Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE
COURT OF FIRST INSTANCE OF MANILA, BRANCH XVII,
QUALITY TABACCO CORPORATION, FRANCISCO,
FEDERACION OBRERO DE LA INDUSTRIA TABAQUERA Y
OTROS TRABAJADORES DE FILIPINAS (FOITAF) USTC
EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO,
respondents.
Oscar A. Pascua for assignee F. Candelaria.
Teofilo C. Villarico for respondent Federation.
Pedro A. Lopez for respondent USTC.
FELICIANO, J.:
The Republic of the Philippines seeks the review on certiorari
of the Order dated 17 November 1980 of the Court of First
Instance of Manila in its Civil Case No. 108395 entitled "In the
Matter of Voluntary Insolvency of Quality Tobacco Corporation,
Quality Tobacco Corporation, Petitioner," and of the Order
dated 19 January 1981 of the same court denying the motion
for reconsideration of the earlier Order filed by the Bureau of
Internal Revenue and the Bureau of Customs for the Republic.
In the voluntary insolvency proceedings commenced in May
1977 by private respondent Quality Tobacco Corporation (the
"Insolvent"), the following claims of creditors were filed:
(i) P2,806,729.92, by the USTC Association of
Employees and workers Union-PTGWO USTC as separation
pay for their members. This amount plus an additional sum of
P280,672.99 as attorney's fees had been awarded by the
National Labor Relations Commission in NLRC Case No. RB-
IV-9775-77. 1
(ii) P53,805.05 by the Federacion de la Industria
Tabaquera y Otros Trabajadores de Filipinas ("FOITAF), as
separation pay for their members, an amount similarly awarded
by the NLRC in the same NLRC Case.
(iii) P1,085,188.22 by the Bureau of Internal Revenue for
tobacco inspection fees covering the period 1 October 1967 to
28 February 1973;
(iv) P276,161.00 by the Bureau of Customs for customs
duties and taxes payable on various importations by the
Insolvent. These obligations appear to be secured by surety
bonds. 2 Some of these imported items are apparently still in
customs custody so far as the record before this Court goes.
In its questioned Order of 17 November 1980, the trial court
held that the above-enumerated claims of USTC and FOITAF
(hereafter collectively referred to as the "Unions") for
separation pay of their respective members embodied in final
awards of the National Labor Relations Commission were to be
preferred over the claims of the Bureau of Customs and the
Bureau of Internal Revenue. The trial court, in so ruling, relied
primarily upon Article 110 of the Labor Code which reads thus:
Article 110. Worker preference in case of bankruptcy — In the
event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards wages due
them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary
notwithstanding. Union paid wages shall be paid in full before
other creditors may establish any claim to a share in the assets
of the employer.
The Solicitor General, in seeking the reversal of the questioned
Orders, argues that Article 110 of the Labor Code is not
applicable as it speaks of "wages," a term which he asserts
does not include the separation pay claimed by the Unions.
"Separation pay," the Solicitor General contends,
is given to a laborer for a separation from employment
computed on the basis of the number of years the laborer was
employed by the employer; it is a form of penalty or damage
against the employer in favor of the employee for the latter's
dismissal or separation from service. 3
Article 97 (f) of the Labor Code defines "wages" in the following
terms:
Wage' paid to any employee shall mean the remuneration or
earnings, however designated, capable of being expressed in
terms of money, whether fixed or ascertained on a time, task,
piece, or commission basis, or other method of calculating the
same, which is payable by an employer to an employee under
a written or unwritten contract of employment for work done or
to be done, or for services rendered or to be rendered, and
includes the fair and reasonable value, as determined by the
Secretary of Labor, of board, lodging, or other facilities
customarily furnished by the employer to the employee. 'Fair
and reasonable value' shall not include any profit to the
employer or to any person affiliated with the
employer.(emphasis supplied)
We are unable to subscribe to the view urged by the Solicitor
General. We note, in this connection, that in Philippine
Commercial and Industrial Bank (PCIB) us. National Mines and
Allied Workers Union, 4 the Solicitor General took a different
view and there urged that the term "wages" under Article 110
of the Labor Code may be regarded as embracing within its
scope severance pay or termination or separation pay. In
PCIB, this Court agreed with the position advanced by the
Solicitor General.5 We see no reason for overturning this
particular position. We continue to believe that, for the specific
purposes of Article 110 and in the context of insolvency
termination or separation pay is reasonably regarded as
forming part of the remuneration or other money benefits
accruing to employees or workers by reason of their having
previously rendered services to their employer; as such, they
fall within the scope of "remuneration or earnings — for
services rendered or to be rendered — ." Liability for
separation pay might indeed have the effect of a penalty, so far
as the employer is concerned. So far as concerns the
employees, however, separation pay is additional remuneration
to which they become entitled because, having previously
rendered services, they are separated from the employer's
service. The relationship between separation pay and services
rendered is underscored by the fact that separation pay is
measured by the amount (i.e., length) of the services rendered.
This construction is sustained both by the specific terms of
Article 110 and by the major purposes and basic policy
embodied in the Labor Code. 6 It is also the construction that is
suggested by Article 4 of the Labor Code which directs that
doubts — assuming that any substantial rather than merely
frivolous doubts remain-in the interpretation of the provisions of
the labor Code and its implementing rules and regulations shall
be "resolved in favor of labor."
26
The resolution of the issue of priority among the several claims
filed in the insolvency proceedings instituted by the Insolvent
cannot, however, rest on a reading of Article 110 of the labor
Code alone.
Article 110 of the Labor Code, in determining the reach of its
terms, cannot be viewed in isolation. Rather, Article 110 must
be read in relation to the provisions of the Civil Code
concerning the classification, concurrence and preference of
credits, which provisions find particular application in
insolvency proceedings where the claims of all creditors,
preferred or non-preferred, may be adjudicated in a binding
manner. 7 It is thus important to begin by outlining the scheme
constituted by the provisions of the Civil Code on this subject.
Those provisions may be seen to classify credits against a
particular insolvent into three general categories, namely:
(a) special preferred credits listed in Articles 2241 and
2242,
(b) ordinary preferred credits listed in Article 2244; and
(c) common credits under Article 2245.
Turning first to special preferred credits under Articles 2241
and 2242, it should be noted at once that these credits
constitute liens or encumbrances on the specific movable or
immovable property to which they relate. Article 2243 makes
clear that these credits "shall be considered as mortgages or
pledges of real or personal property, or liens within the purview
of legal provisions governing insolvency." It should be
emphasized in this connection that "duties, taxes and fees due
[on specific movable property of the insolvent] to the State or
any subdivision thereof" (Article 2241 [1]) and "taxes due upon
the [insolvent's] land or building (2242 [1])"stand first in
preference in respect of the particular movable or immovable
property to which the tax liens have attached. Article 2243 is
quite explicit: "[T]axes mentioned in number 1, Article 2241 and
number 1, Article 2242 shall first be satisfied. " The claims
listed in numbers 2 to 13 in Article 2241 and in numbers 2 to 10
in Articles 2242, all come after taxes in order of precedence;
such claims enjoy their privileged character as liens and may
be paid only to the extent that taxes have been paid from the
proceeds of the specific property involved (or from any other
sources) and only in respect of the remaining balance of such
proceeds. What is more, these other (non-tax) credits, although
constituting liens attaching to particular property, are not
preferred one over another inter se. Provided tax liens shall
have been satisfied, non-tax liens or special preferred credits
which subsist in respect of specific movable or immovable
property are to be treated on an equal basis and to be satisfied
concurrently and proportionately. 8 Put succintly, Articles 2241
and 2242 jointly with Articles 2246 to 2249 establish a two-tier
order of preference. The first tier includes only taxes, duties
and fees due on specific movable or immovable property. All
other special preferred credits stand on the same second tier to
be satisfied, pari passu and pro rata, out of any residual value
of the specific property to which such other credits relate.
Credits which are specially preferred because they constitute
liens (tax or non-tax) in turn, take precedence over ordinary
preferred credits so far as concerns the property to which the
liens have attached. The specially preferred credits must be
discharged first out of the proceeds of the property to which
they relate, before ordinary preferred creditors may lay claim to
any part of such proceeds. 9
If the value of the specific property involved is greater than the
sum total of the tax liens and other specially preferred credits,
the residual value will form part of the "free property" of the
insolvent — i.e., property not impressed with liens by operation
of Articles 2241 and 2242. If, on the other hand, the value of
the specific movable or immovable is less than the aggregate
of the tax liens and other specially preferred credits, the
unsatisfied balance of the tax liens and other such credits are
to the treated as ordinary credits under Article 2244 and to be
paid in the order of preference there set up. 10
In contrast with Articles 2241 and 2242, Article 2244 creates no
liens on determinate property which follow such property. What
Article 2244 creates are simply rights in favor of certain
creditors to have the cash and other assets of the insolvent
applied in a certain sequence or order of priority. 11
Only in respect of the insolvent's "free property" is an order of
priority established by Article 2244. In this sequence, certain
taxes and assessments also figure but these do not have the
same kind of overriding preference that Articles 2241 No. 1 and
2242 No. I create for taxes which constituted liens on the
taxpayer's property. Under Article 2244,
(a) taxes and assessments due to the national
government, excluding those which result in tax liens under
Articles 2241 No. 1 and 2242 No. 1 but including the balance
thereof not satisfied out of the movable or immovable property
to which such liens attached, are ninth in priority;
(b) taxes and assessments due any province, excluding
those impressed as tax liens under Articles 2241 No. 1 and
2242 No. 1, but including the balance thereof not satisfied out
of the movable or immovable property to which such liens
attached, are tenth in priority; and
(c) taxes and assessments due any city or municipality,
excluding those impressed as tax liens under Articles 2241 No.
I and 2242 No. 2 but including the balance thereof not satisfied
out of the movable or immovable property to which such liens
attached, are eleventh in priority.
It is within the framework of the foregoing rules of the Civil
Code that the question of the relative priority of the claims of
the Bureau of Customs and the Bureau of Internal Revenue, on
the one hand, and of the claims of the Unions for separation
pay of their members, on the other hand, is to be resolved. A
related vital issue is what impact Article 110 of the labor Code
has had on those provisions of the Civil Code.
A. Claim of the Bureau of Customs for Unpaid Customs
Duties and Taxes-
Under Section 1204 of the Tariff and Customs Code, 12 the
liability of an importer
for duties, taxes and fees and other charges attaching on
importation constitute a personal debt due from the importer to
the government which can be discharged only by payment in
full of all duties, taxes, fees and other charges legally accruing
It also constitutes a lien upon the articles imported which may
be enforced while such articles are in the custody or subject to
the control of the government. (emphasis supplied)
Clearly, the claim of the Bureau of Customs for unpaid customs
duties and taxes enjoys the status of a specially preferred
credit under Article 2241, No. 1, of the Civil Code. only in
respect of the articles importation of which by the Insolvent
resulted in the assessment of the unpaid taxes and duties, and
27
which are still in the custody or subject to the control of the
Bureau of Customs. The goods imported on one occasion are
not subject to a lien for customs duties and taxes assessed
upon other importations though also effected by the Insolvent.
Customs duties and taxes which remain unsatisfied after levy
upon the imported articles on which such duties and taxes are
due, would have to be paid out of the Insolvent's "free property"
in accordance with the order of preference embodied in Article
2244 of the Civil Code. Such unsatisfied customs duties and
taxes would fall within Article 2244, No. 9, of the Civil Code and
hence would be ninth in priority.
B. Claims of the Bureau of Internal Revenue for Tabacco
Inspection Fees —
Under Section 315 of the National Internal Revenue Code ("old
Tax Code"), 13 later reenacted in Identical terms as Section
301 of the Tax Code of 1977, 14 an unpaid "internal revenue
tax," together with related interest, penalties and costs,
constitutes a lien in favor of the Government from the time an
assessment therefor is made and until paid, "upon all property
and rights to property belonging to the taxpayer."
Tobacco inspection fees are specifically mentioned as one of
the miscellaneous taxes imposed under the National Internal
Revenue Code, specifically Title VIII, Chapter IX of the old Tax
Code and little VIII, Chapter VII of the Tax Code of 1977. 15
Tobacco inspection fees are collected both for purposes of
regulation and control and for purposes of revenue generation:
half of the said fees accrues to the Tobacco Inspection Fund
created by Section 12 of Act No. 2613, as amended by Act No.
3179, while the other half accrues to the Cultural Center of the
Philippines. Tobacco inspection fees, in other words, are
imposed both as a regulatory measure and as a revenue-
raising measure. In Commissioner of Internal Revenue us.
Guerrero, et al 16 this Court held, through Mr. Chief Justice
Concepcion, that the term "tax" is used in Section 315 of the
old Tax Code:
not in the limited sense [of burdens imposed upon persons
and/or properties, by way of contributions to the support of the
Government, in consideration of general benefits derived from
its operation], but, in a broad sense, encompassing all
government revenues collectible by the Commissioner of
Internal Revenue under said Code, whether involving taxes, in
the strict technical sense thereof, or not. x x x As used in Title
IX of said Code, the term 'tax' includes 'any national internal
revenue tax, fee or charge imposed by the Code. 17
It follows that the claim of the Bureau of Internal Revenue for
unpaid tobacco inspection fees constitutes a claim for unpaid
internal revenue taxes 18 which gives rise to a tax lien upon all
the properties and assets, movable and immovable, of the
Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242
No. 1, and 2246-2249 of the Civil Code, this tax claim must be
given preference over any other claim of any other creditor, in
respect of any and all properties of the Insolvent. 19
C. Claims of the Unions for Separation Pay of Their
Members —
Article 110 of the Labor Code does not purport to create a lien
in favor of workers or employees for unpaid wages either upon
all of the properties or upon any particular property owned by
their employer. Claims for unpaid wages do not therefore fall at
all within the category of specially preferred claims established
under Articles 2241 and 2242 of the Civil Code, except to the
extent that such claims for unpaid wages are already covered
by Article 2241, number 6. "claims for laborers' wages, on the
goods manufactured or the work done;" or by Article 2242,
number 3: "claims of laborers and other workers engaged in
the construction, reconstruction or repair of buildings, canals
and other works, upon said buildings, canals or other works."
To the extent that claims for unpaid wages fall outside the
scope of Article 2241, number 6 and 2242, number 3, they
would come within the ambit of the category of ordinary
preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims
of the Unions for separation pay of their members constitute
liens attaching to the processed leaf tobacco, cigars and
cigarettes and other products produced or manufactured by the
Insolvent, but not to other assets owned by the Insolvent. And
even in respect of such tobacco and tobacco products
produced by the Insolvent, the claims of the Unions may be
given effect only after the Bureau of Internal Revenue's claim
for unpaid tobacco inspection fees shall have been satisfied
out of the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or encumbrance
upon a building or other real property of the Insolvent in favor
of workmen who constructed or repaired such building or other
real property. Article 2242, number 3, does not however
appear relevant in the instant case, since the members of the
Unions to whom separation pay is due rendered services to the
Insolvent not (so far as the record of this case would show) in
the construction or repair of buildings or other real property, but
rather, in the regular course of the manufacturing operations of
the Insolvent. The Unions' claims do not therefore constitute a
lien or encumbrance upon any immovable property owned by
the Insolvent, but rather, as already indicated, upon the
Insolvent's existing inventory (if any of processed tobacco and
tobacco products.
We come to the question of what impact Article 110 of the
Labor Code has had upon the complete scheme of
classification, concurrence and preference of credits in
insolvency set out in the Civil Code. We believe and so hold
that Article 110 of the Labor Code did not sweep away the
overriding preference accorded under the scheme of the Civil
Code to tax claims of the government or any subdivision
thereof which constitute a lien upon properties of the Insolvent.
It is frequently said that taxes are the very lifeblood of
government. The effective collection of taxes is a task of
highest importance for the sovereign. It is critical indeed for its
own survival. It follows that language of a much higher degree
of specificity than that exhibited in Article 110 of the Labor
Code is necessary to set aside the intent and purpose of the
legislator that shines through the precisely crafted provisions of
the Civil Code. It cannot be assumed simpliciter that the
legislative authority, by using in Article 110 the words "first
preference" and "any provision of law to the contrary
notwithstanding" intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume the
sovereign itself within the term "other creditors" in stating that
"unpaid wages shall be paid in full before other creditors may
establish any claim to a share in the assets of employer."
Insistent considerations of public policy prevent us from giving
to "other creditors" a linguistically unlimited scope that would
embrace the universe of creditors save only unpaid employees.
We, however, do not believe that Article 110 has had no impact
at all upon the provisions of the Civil Code. Bearing in mind the
overriding precedence given to taxes, duties and fees by the
Civil Code and the fact that the Labor Code does not impress
any lien on the property of an employer, the use of the phrase
"first preference" in Article 110 indicates that what Article 110
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intended to modify is the order of preference found in Article
2244, which order relates, as we have seen, to property of the SO ORDERED.
Insolvent that is not burdened with the liens or encumbrances
created or recognized by Articles 2241 and 2242. We have
noted that Article 2244, number 2, establishes second priority
for claims for wages for services rendered by employees or
laborers of the Insolvent "for one year preceding the
commencement of the proceedings in insolvency." Article 110
of the Labor Code establishes "first preference" for services
rendered "during the period prior to the bankruptcy or
liquidation, " a period not limited to the year immediately prior
to the bankruptcy or liquidation. Thus, very substantial effect
may be given to the provisions of Article 110 without grievously
distorting the framework established in the Civil Code by
holding, as we so hold, that Article 110 of the Labor Code has
modified Article 2244 of the Civil Code in two respects: (a)
firstly, by removing the one year limitation found in Article
2244, number 2; and (b) secondly, by moving up claims for
unpaid wages of laborers or workers of the Insolvent from
second priority to first priority in the order of preference
established I by Article 2244.

Accordingly, and by way of recapitulating the application of

Civil Code and Labor Code provisions to the facts herein, the
trial court should inventory the properties of the Insolvent so as
to determine specifically: (a) whether the assets of the
Insolvent before the trial court includes stocks of processed or
manufactured tobacco products; and (b) whether the Bureau of
Customs still has in its custody or control articles imported by
the Insolvent and subject to the lien of the government for
unpaid customs duties and taxes.

In respect of (a), if the Insolvent has inventories of processed

or manufactured tobacco products, such inventories must be
subjected firstly to the claim of the Bureau of Internal Revenue
for unpaid tobacco inspection fees. The remaining value of
such inventories after satisfaction of such fees (or should such
inspection fees be satisfied out of other properties of the
Insolvent) will be subject to a lien in favor of the Unions by
virtue of Article 2241, number 6. In case, upon the other hand,
the Insolvent no longer has any inventory of processed or
manufactured product, then the claim of the Unions for
separation pay would have to be satisfied out of the "free
property" of the Insolvent under Article 2244 of the Civil Code.
as modified by Article 110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have

any importations by the Insolvent still within customs custody
or control, or should the importations still held by the Bureau of
Customs be or have become insufficient in value for the
purpose, customs duties and taxes remaining unpaid would
have only ninth priority by virtue of Article 2244, number 9. In
respect therefore of the Insolvent's "free property, " the claims
of the Unions will enjoy first priority under Article 2244 as
modified and will be paid ahead of the claims of the Bureau of
Customs for any customs duties and taxes still remaining
unsatisfied.

It is understood that the claims of the Unions referred to above

do not include the 10% claim for attorney's fees. Attorney's
fees incurred by the Unions do not stand on the same footing
as the Unions' claims for separation pay of their members.

WHEREFORE, the petition for review is granted and the

Orders dated 17 November 1980 and 19 January 1981 of the
trial court are modified accordingly. This case is hereby
remanded to the trial court for further proceedings in insolvency
compatible with the rulings set forth above. No pronouncement
as to costs.

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