1. G.R. No.

L-22538

PHILIPPINE NATIONAL BANK, petitioner-appellee ,

vs.
PRIMITIVA MALLORCA, oppositor-appellant.

Disputed by appellant Primitiva Mallorca is the correctness of the order of the Court of
First Instance of Iloilo, sitting as a Cadastral Court,1 directing her to surrender to the
Register of Deeds her co-owner's copy of Transfer Certificate of Title No. T-24256. This
is necessary to enable Philippine National Bank2 to secure in its name Torrens title to
the property involved which it acquired in a foreclosure sale upon mortgage executed in
its favor.

The background facts may be recited as follows:

Way back in 1950, Ruperta Lavilles mortgaged a 48.965 square meter-parcel of land
situated in Passi, Iloilo (Lot 1504, Passi Cadastral Survey) to the PNB as security for a
loan of P1,800.00. The lot was covered by Transfer Certificate of Title 27070 in the
name of Ruperta Lavilles. The mortgage was duly recorded.

On January 12, 1958, while the mortgage above-described was in full force and effect,
and without PNB's knowledge and consent, Ruperta Lavilles sold the appellant Primitiva
Mallorca 20,000 square meters of the mortgaged land.

On January 17, 1958, Mallorca moved the Iloilo cadastral court to have the sale to her
duly annotated on the title,3and, for the purpose, to require PNB to surrender the
owner's copy of TCT 27070 to the Register of Deeds.

The court order of February 3, 1958 directed PNB to deliver said TCT 27070 to the
Register of Deeds, and warned that "[t]he mortgage in favor of the Philippine National
Bank is duly registered in the Office of the Register of Deeds and to whomsoever the
land is sold the vendee will assume the responsibility of complying with the provisions of
the mortgage."
The Register of Deeds then cancelled TCT 27070, issued a new one, TCT 24256,
making two co-owner's copies of the title — one each for Ruperta Lavilles and for
Primitiva Mallorca. PNB's mortgage lien was annotated on both copies.

Ruperta Lavilles failed to pay her mortgage debt. PNB, on April 16, 1958 foreclosed the
mortgage extrajudicially. On May 12, 1958, a certificate of sale was issued to PNB as
the highest bidder in the foreclosure sale. This certificate of sale was registered with the
Register of Deeds of Iloilo.

In March, 1959 Mallorca sued PNB to enforce her right of redemption with damages. 4

On February 9, 1960, judgment was rendered in the case just stated, dismissing the
claim for damages but declaring Mallorca "entitled to exercise her right of redemption
with respect to the 20,000 square meters sold to her by Ruperta Lavilles within the
period specified by law."

Mallorca's appeal from this judgment was, on June 18, 1960, denied by the lower court
— it was filed out of time. Her move to reconsider was rejected. She then went to the
Court of Appeals on mandamus. On January 14, 1961, the appellate court denied the
same for lack of merit.5

Primitiva Mallorca failed to exercise her right of redemption as decreed by the court.

Thus, the final deed of sale in favor of PNB, dated February 19, 1962, was presented to
the Register of Deeds on April 10, for registration. The latter refused to register without
Mallorca's co-owner's copy of TCT 24256. By letter of May 18, 1962, the Register of
Deeds required Mallorca to surrender said copy. She did not comply.

And so, PNB lodged the present petition for consolidation of title in the cadastral court.
The bank prayed that Mallorca's co-owner's copy of TCT 24256 be declared null and
void, and that the Register of Deeds be directed to cancel the same and to issue a new
title in the name of PNB, upon payment of the legal fees.
By order of August 18, 1962, the court a quo required Mallorca "to deliver the co-
owner's duplicate copy of TCT 24256 to the Register of Deeds within a period of five (5)
days."

Mallorca appealed this order to the Court of Appeals. 6 The latter, however, in its
resolution of February 18, 1964, certified the case to this Court, as the issues present
questions of law.

1. Appellant's stand is that her undivided interest consisting of 20,000 square meters of
the mortgaged lot, remained unaffected by the foreclosure and subsequent sale to PNB.
Because, so she argues, she was not a party to the real estate mortgage in favor of
PNB, and she "neither secured nor contracted a loan" with said bank. What PNB
foreclosed, she maintains, "was that portion belonging to Ruperta Lavilles only," not the
part belonging to her.

Appellant's position clashes with precepts well-entrenched in law. By Article 2126 of the
Civil Code,7 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." Sale or transfer cannot affect or release the mortgage. A
purchaser is necessarily bound to acknowledge and respect the encumbrance to which
is subjected the purchased thing and which is at the disposal of the creditor "in order
that he, under the terms of the contract, may recover the amount of his credit
therefrom."8 For, a recorded real estate is a right in rem, a lien on the property whoever
its owner may be.9 Because the personality of the owner is disregarded; the mortgage
subsists notwithstanding changes of ownership; the last transferee is just as much of a
debtor as the first one; and this, independent of whether the transferee knows or not the
person of the mortgagee.10 So it is, that a mortgage lien is inseparable from the property
mortgaged. All subsequent purchasers thereof, must respect the mortgage, whether the
transfer to them be with or without the consent of the mortgagee. For, the mortgage,
until discharge, follows the property.11
And then, militating against appellant's cause is one other special feature of a real
mortgage — its indivisibility.12This Court has understood mortgage indivisibility in the
sense that each and every parcel under mortgage answers for the totality of the debt. 13

It does not really matter that the mortgagee, as in this case, did not oppose the
subsequent sale. Naturally, because the sale was without PNB's knowledge. Even if
such knowledge is chargeable to PNB, its failure to object to the sale could not have
any impairing effect upon its rights as mortgagee. After all, a real mortgage is merely an
encumbrance; it does not extinguish the title of the debtor, whose right to dispose — a
principal attribute of ownership — is not thereby lost.14 And, on the assumption that
PNB recognized the efficaciousness of the sale by Ruperta Lavilles of a portion of the
mortgaged land to Primitiva Mallorca, which Lavilles "had the right to make" and which
anyway PNB "cannot oppose", PNB cannot be prejudiced thereby, for, at all events,
"such sale could not affect the mortgage, as the latter follows the property whoever the
possessor may be."15

On Primitiva Mallorca's part, she cannot rightfully deny the mortgage lien on the portion
of the land she purchased. First. Registration of the mortgage in the Register of Deeds
is notice to all persons of the existence thereof. 16Second. By express provision of
Section 39 of the Land Registration Act, "every subsequent purchaser of registered land
who takes a certificate of title for value in good faith shall hold the same free of all
encumbrance except those noted on said certificate."17 Clear implication exists that if an
encumbrance is so noted, that purchaser is bound thereby. Third. Mallorca herself
petitioned the court to order PNB to deliver the owner's copy of TCT 27070 to the
Register of Deeds for annotation of Mallorca's interest, as heretofore adverted to. And
the court, in giving its stamp of approval to the petition, expressly directed that "to
whomsoever the land is sold the vendee will assume the responsibility of complying with
the provisions of the mortgage." Fourth. Mallorca's own co-owner's copy of the title
issued to her carried PNB's mortgage lien. Fifth. The fact that Mallorca failed to exercise
her right of redemption, which she sought to enforce in a judicial court, ends her interest
to the land she claims, and, doubtless, estops her from denying PNB's mortgage lien
thereon.
We, accordingly, rule that PNB has the right to consolidate its title on the entire lot
mortgaged by Ruperta Lavilles in its favor, including the 20,000 square meter-undivided
interest of Primitiva Mallorca. And this, by virtue of the foreclosure sale and the expiry of
Mallorca's right of redemption.

2. In a final effort to overturn the order under review, appellant espouses the thesis that
the lower court, acting as a cadastral court, is without jurisdiction in the premises. Her
syllogism is this: she is questioning the right of PNB to declare TCT 24256 as null and
void insofar as the 20,000 square meter-undivided portion is concerned; the issue is
thus raised to the level of "contentious litigation"; and, going by jurisprudence, 18 a
cadastral court is devoid of power to act thereon.

The precedents appellant depends on cannot serve as authority in her case. For, those
cases involved unresolvedissues. Here, the question she presents — whether her
undivided share in the lot is encumbered or unencumbered — has been definitely
passed upon in the redemption case she brought against PNB (Civil Case 5149, Court
of First Instance of Iloilo). Mallorca herself acknowledge the validity of that
encumbrance when she commenced said civil case. Given the facts, PNB's petition to
consolidate title falls under the rule that a cadastral court has jurisdiction to entertain a
petition for the cancellation of an outstanding certificate of title where registered owner
has been lawfully divested of his title thereof.19 For, the truth is that this case presents
no substantial controversy. As held in the case of Castillo vs. Ramos, supra, pp. 814-
815 —

where a petition concerning the cancellation of any encumbrance noted on a

Torrens certificate of title is filed within the record of the land registration case in
which the basic decree was entered and there is no substantial controversy in
regard thereto between the petitioner and any other interested party, such
petition may be considered as a mere incidental matter in such land registration
case and may therein be acted upon the proper court.20
Upon the record as it stands, the lower court order of August 18, 1962 is, as it is hereby,
affirmed.

Costs against oppositor-appellant. So ordered.

2. G.R. No. L-78519 September 26, 1989

VICTORIA YAU CHU, assisted by her husband MICHAEL CHU, petitioners,

vs.
HON. COURT OF APPEALS, FAMILY SAVINGS BANK and/or CAMS TRADING
ENTERPRISES, INC., respondents.

Francisco A. Lara, Jr. for petitioner. D. T. Ramos and Associates for respondent
Family Savings Bank. Romulo T. Santos for respondent CAMS Trading.

GRINO-AQUINO, J.:

This is a petition for review on certiorari to annul and set aside the Court of Appeals'
decision dated October 28, 1986 in CA-G.R. CV No. 03269 which affirmed the decision
of the trial court in favor of the private respondents in an action to recover the
petitioners' time deposits in the respondent Family Savings Bank.

Since 1980, the petitioner, Victoria Yau Chu, had been purchasing cement on credit
from CAMS Trading Enterprises, Inc. (hereafter "CAMS Trading" for brevity). To
guaranty payment for her cement withdrawals, she executed in favor of Cams Trading
deeds of assignment of her time deposits in the total sum of P320,000 in the Family
Savings Bank (hereafter the Bank). Except for the serial numbers and the dates of the
time deposit certificates, the deeds of assignment, which were prepared by her own
lawyer, uniformly provided —
 ... That the assignment serves as a collateral or guarantee for the
payment of my obligation with the said CAMS TRADING ENTERPRISES,
INC. on account of my cement withdrawal from said company, per
separate contract executed between us.

On July 24,1980, Cams Trading notified the Bank that Mrs. Chu had an unpaid account
with it in the sum of P314,639.75. It asked that it be allowed to encash the time deposit
certificates which had been assigned to it by Mrs. Chu. It submitted to the Bank a letter
dated July 18, 1980 of Mrs. Chu admitting that her outstanding account with Cams
Trading was P404,500. After verbally advising Mrs. Chu of the assignee's request to
encash her time deposit certificates and obtaining her verbal conformity thereto, the
Bank agreed to encash the certificates.It delivered to Cams Trading the sum of
P283,737.75 only, as one time deposit certificate (No. 0048120954) lacked the proper
signatures. Upon being informed of the encashment, Mrs. Chu demanded from the
Bank and Cams Trading that her time deposit be restored. When neither complied, she
filed a complaint to recover the sum of P283,737.75 from them. The case was docketed
in the Regional Trial Court of Makati, Metro Manila (then CFI of Rizal, Pasig Branch
XIX), as Civil Case No. 38861.

In a decision dated December 12, 1983, the trial court dismissed the complaint for lack
of merit.

Chu appealed to the Court of Appeals (CA-G.R. CV No. 03269) which affirmed the
dismissal of her complaint.

In this petition for review, she alleges that the Court of Appeals erred:

1. In not annulling the encashment of her time deposit certificates as

a pactum commissorium; and

2. In not finding that the obligations secured by her time deposits had
already been paid.
We find no merit in the petition for review.

The Court of Appeals found that the deeds of assignment were contracts of pledge, but,
as the collateral was also money or an exchange of "peso for peso," the provision in
Article 2112 of the Civil Code for the sale of the thing pledged at public auction to
convert it into money to satisfy the pledgor's obligation, did not have to be followed. All
that had to be done to convert the pledgor's time deposit certificates into cash was to
present them to the bank for encashment after due notice to the debtor.

The encashment of the deposit certificates was not a pacto commissorio which is
prohibited under Art. 2088 of the Civil Code. A pacto commissorio is a provision for
the automatic appropriation of the pledged or mortgaged property by the creditor in
payment of the loan upon its maturity. The prohibition against a pacto commissorio is
intended to protect the obligor, pledgor, or mortgagor against being overreached by his
creditor who holds a pledge or mortgage over property whose value is much more than
the debt. Where, as in this case, the security for the debt is also money deposited in a
bank, the amount of which is even less than the debt, it was not illegal for the creditor to
encash the time deposit certificates to pay the debtors' overdue obligation, with the
latter's consent.

Whether the debt had already been paid as now alleged by the debtor, is a factual
question which the Court of Appeals found not to have been proven for the evidence
which the debtor sought to present on appeal, were receipts for payments made prior to
July 18, 1980. Since the petitioner signed on July 18, 1980 a letter admitting her
indebtedness to be in the sum of P404,500, and there is no proof of payment made by
her thereafter to reduce or extinguish her debt, the application of her time deposits,
which she had assigned to the creditor to secure the payment of her debt, was proper.
The Court of Appeals did not commit a reversible error in holding that it was so.

WHEREFORE, the petition for review is denied. Costs against the appellant.

SO ORDERED.
3. G.R. No. 172592

SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIO-ONG, Petitioners,

- versus -

ROBAN LENDING CORPORATION, Respondent.

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban
Lending Corporation (respondent) in the total amount of P4,000,000.00. These loans
were secured by a real estate mortgage on petitioners parcels of land located in
Binauganan, TarlacCity and covered by TCT No. 297840.[1]

On February 12, 2001, petitioners and respondent executed an Amendment to

Amended Real Estate Mortgage[2] consolidating their loans inclusive of charges thereon
which totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement[3] wherein petitioners assigned the properties covered by TCT No. 297840
to respondent in settlement of their total obligation, and a Memorandum of
Agreement[4] reading:

That the FIRST PARTY [Roban Lending Corporation] and the

SECOND PARTY [the petitioners] agreed to consolidate and
restructure all aforementioned loans, which have been all past due and
 delinquent since April 19, 2000, and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY hereby sign [sic] another
promissory note in the amount of P5,916,117.50 (a copy of which is
hereto attached and forms xxx an integral part of this document), with a
promise to pay the FIRST PARTY in full within one year from the date
of the consolidation and restructuring, otherwise the SECOND PARTY
agree to have their DACION IN PAYMENT agreement, which they have
executed and signed today in favor of the FIRST PARTY be
enforced[.][5]

In April 2002 (the day is illegible), petitioners filed a Complaint, [6] docketed as
Civil Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for
declaration of mortgage contract as abandoned, annulment of deeds, illegal exaction,
unjust enrichment, accounting, and damages, alleging that the Memorandum of
Agreement and the Dacion in Payment executed are void for being pactum
commissorium.[7]

Petitioners alleged that the loans extended to them from July 14, 1999 to March
20, 2000 were founded on several uniform promissory notes, which provided for 3.5%
monthly interest rates, 5% penalty per month on the total amount due and demandable,
and a further sum of 25% attorneys fees thereon,[8] and in addition, respondent exacted
certain sums denominated as EVAT/AR.[9] Petitioners decried these additional charges
as illegal, iniquitous, unconscionable, and revolting to the conscience as they hardly
allow any borrower any chance of survival in case of default.[10]

Petitioners further alleged that they had previously made payments on their loan
accounts, but because of the illegal exactions thereon, the total balance appears not to
have moved at all, hence, accounting was in order.[11]
 Petitioners thus prayed for judgment:

a) Declaring the Real Estate Mortgage Contract and its

amendments x x x as null and void and without legal force and effect for
having been renounced, abandoned, and given up;

b) Declaring the Memorandum of Agreement xxx and

Dacion in Payment x x x as null and void for being pactum
commissorium;

c) Declaring the interests, penalties, Evat [sic] and

attorneys fees assessed and loaded into the loan accounts of the
plaintiffs with defendant as unjust, iniquitous, unconscionable and illegal
and therefore, stricken out or set aside;

d) Ordering an accounting on plaintiffs loan accounts to

determine the true and correct balances on their obligation against legal
charges only; and

e) Ordering defendant to [pay] to the plaintiffs: --

e.1 Moral damages in an amount not less than

P100,000.00 and exemplary damages of P50,000.00;

e.2 Attorneys fees in the amount of P50,000.00 plus

P1,000.00 appearance fee per hearing; and

e.3 The cost of suit.[12] as well as other just and equitable

reliefs.
In its Answer with Counterclaim,[13] respondent maintained the legality of its transactions
with petitioners, alleging that:
 xxxx

If the voluntary execution of the Memorandum of Agreement and

Dacion in Payment Agreement novated the Real Estate Mortgage then
the allegation of Pactum Commissorium has no more legal leg to stand
on;

The Dacion in Payment Agreement is lawful and valid as it is

recognized x x x under Art. 1245 of the Civil Code as a special form of
payment whereby the debtor-Plaintiffs alienates their property to the
creditor-Defendant in satisfaction of their monetary obligation;

The accumulated interest and other charges which were

computed for more than two (2) years would stand reasonable and valid
taking into consideration [that] the principal loan is P4,000,000 and if
indeed it became beyond the Plaintiffs capacity to pay then the fault is
attributed to them and not the Defendant[.][14]

After pre-trial, the initial hearing of the case, originally set on December 11, 2002,
was reset several times due to, among other things, the parties efforts to settle the case
amicably.[15]

During the scheduled initial hearing of May 7, 2003, the RTC issued the following
order:

Considering that the plaintiff Wilfredo Ong is not around on the

ground that he is in Manila and he is attending to a very sick relative,
without objection on the part of the defendants counsel, the initial
 hearing of this case is reset to June 18, 2003 at 10:00 oclock in the
morning.

Just in case [plaintiffs counsel] Atty. Concepcion cannot present

his witness in the person of Mr. Wilfredo Ong in the next scheduled
hearing, the counsel manifested that he will submit the case for
summary judgment.[16] (Underscoring supplied)

It appears that the June 18, 2003 setting was eventually rescheduled to February
11, 2004 at which both counsels were present[17] and the RTC issued the following
order:

The counsel[s] agreed to reset this case on April 14, 2004,

at 10:00 oclock in the morning. However, the counsels are directed
to be ready with their memorand[a] together with all the exhibits or
evidence needed to support their respective positions which should be
the basis for the judgment on the pleadings if the parties fail to settle
the case in the next scheduled setting.

x x x x[18] (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the
counsel of respondent filed a memorandum.[19]

By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the
basis of the pleadings that there was no pactum commissorium, dismissed the
complaint.[20]

On appeal,[21] the Court of Appeals[22] noted that

 x x x [W]hile the trial court in its decision stated that it was
rendering judgment on the pleadings, x x x what it actually rendered
was a summary judgment. A judgment on the pleadings is proper when
the answer fails to tender an issue, or otherwise admits the material
allegations of the adverse partys pleading. However, a judgment on the
pleadings would not have been proper in this case as the answer
tendered an issue, i.e. the validity of the MOA and DPA. On the other
hand, a summary judgment may be rendered by the court if the
pleadings, supporting affidavits, and other documents show that, except
as to the amount of damages, there is no genuine issue as to any
material fact.[23]

Nevertheless, finding the error in nomenclature to be mere semantics with no

bearing on the merits of the case,[24] the Court of Appeals upheld the RTC decision that
there was no pactum commissorium.[25]

Their Motion for Reconsideration[26] having been denied,[27] petitioners filed the
instant Petition for Review on Certiorari,[28] faulting the Court of Appeals for having
committed a clear and reversible error

I. . . . WHEN IT FAILED AND REFUSED TO APPLY

PROCEDURAL REQUISITES WHICH WOULD WARRANT THE
SETTING ASIDE OF THE SUMMARY JUDGMENT IN
VIOLATION OF APPELLANTS RIGHT TO DUE PROCESS;

II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN

THIS CASE IS NECESSARY BECAUSE THE FACTS ARE
VERY MUCH IN DISPUTE;
 III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT
THE MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO AGREEMENT (DPA) WERE DESIGNED TO
CIRCUMVENT THE LAW AGAINST PACTUM
COMMISSORIUM; and

IV. . . . WHEN IT FAILED TO CONSIDER THAT THE

MEMORANDUM OF AGREEMENT (MOA) AND THE DACION
EN PAGO (DPA) ARE NULL AND VOID FOR BEING
CONTRARY TO LAW AND PUBLIC POLICY.[29]

The petition is meritorious.

Both parties admit the execution and contents of the Memorandum of Agreement
and Dacion in Payment. They differ, however, on whether both contracts
constitute pactum commissorium or dacion en pago.

This Court finds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides:

The creditor cannot appropriate the things given by way of

pledge or mortgage, or dispose of them. Any stipulation to the contrary
is null and void.

The elements of pactum commissorium, which enables the mortgagee to acquire

ownership of the mortgaged property without the need of any foreclosure
proceedings,[30]are: (1) there should be a property mortgaged by way of security for the
payment of the principal obligation, and (2) there should be a stipulation for automatic
appropriation by the creditor of the thing mortgaged in case of non-payment of the
principal obligation within the stipulated period.[31]

In the case at bar, the Memorandum of Agreement and the Dacion in Payment
contain no provisions for foreclosure proceedings nor redemption. Under the
Memorandum of Agreement, the failure by the petitioners to pay their debt within the
one-year period gives respondent the right to enforce the Dacion in Payment
transferring to it ownership of the properties covered by TCT No. 297840. Respondent,
in effect, automatically acquires ownership of the properties upon petitioners failure to
pay their debt within the stipulated period.

Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation.[32] This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt.[33] In the case at bar, the
alienation of the properties was by way of security, and not by way of satisfying the
debt.[34] The Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of Agreement executed on the
same day as the Dacion in Payment, petitioners had to execute a promissory note
for P5,916,117.50 which they were to pay within one year.[35]

Respondent cites Solid Homes, Inc. v. Court of Appeals[36] where this Court
upheld a Memorandum of Agreement/Dacion en Pago.[37] That case did not involve the
issue of pactum commissorium.[38]

That the questioned contracts were freely and voluntarily executed by petitioners
and respondent is of no moment, pactum commissorium being void for being prohibited
by law.[39]

Respecting the charges on the loans, courts may reduce interest rates, penalty
charges, and attorneys fees if they are iniquitous or unconscionable. [40]
 This Court, based on existing jurisprudence,[41] finds the monthly interest rate of
3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This
Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total
amount due and demandable principal plus interest, with interest not paid when due
added to and becoming part of the principal and likewise bearing interest at the same
rate, compounded monthly[42] unconscionable and reduces it to a yearly rate of 12% of
the amount due, to be computed from the time of demand.[43] This Court finds the
attorneys fees of 25% of the principal, interests and interests thereon, and the penalty
fees unconscionable, and thus reduces the attorneys fees to 25% of the principal
amount only.[44]

The prayer for accounting in petitioners complaint requires presentation of

evidence, they claiming to have made partial payments on their loans, vis a
vis respondents denial thereof.[45] A remand of the case is thus in order.

Prescinding from the above disquisition, the trial court and the Court of Appeals
erred in holding that a summary judgment is proper. A summary judgment is permitted
only if there is no genuine issue as to any material fact and a moving party is entitled to
a judgment as a matter of law.[46] A summary judgment is proper if, while the pleadings
on their face appear to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not genuine. [47] A genuine
issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the
presentation of evidence.[48] As mentioned above, petitioners prayer for accounting
requires the presentation of evidence on the issue of partial payment.

But neither is a judgment on the pleadings proper. A judgment on the pleadings

may be rendered only when an answer fails to tender an issue or otherwise admits the
material allegations of the adverse partys pleadings.[49] In the case at bar, respondents
Answer with Counterclaim disputed petitioners claims that the Memorandum of
Agreement and Dation in Payment are illegal and that the extra charges on the loans
are unconscionable.[50] Respondent disputed too petitioners allegation of bad faith.[51]

WHEREFORE, the challenged Court of Appeals Decision

is REVERSED and SET ASIDE. The Memorandum of Agreement and the Dacion in
Payment executed by petitioner- spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong
and respondent Roban Lending Corporation on February 12, 2001 are declared NULL
AND VOID for beingpactum commissorium.

In line with the foregoing findings, the following terms of the loan contracts
between the parties are MODIFIED as follows:

1. The monthly interest rate of 3.5%, or 42% per annum, is reduced to

12% per annum;

2. The monthly penalty fee of 5% of the total amount due and

demandable is reduced to 12% per annum, to be computed from the time
of demand; and

3. The attorneys fees are reduced to 25% of the principal amount only.

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of
receiving evidence on petitioners prayer for accounting.

SO ORDERED.
4. GR NO 118342

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS

and LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT BANK OF

THE PHILIPPINES and AGRIPINA P. CAPERAL, respondents.

These two consolidated cases stemmed from a complaint[1] filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs
appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located in
Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the
annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of her
rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys
fees, and expenses of litigation.

After the joinder of issues following the filing by the parties of their respective pleadings,
the trial court conducted a pre-trial where CUBA and DBP agreed on the following facts,
which were embodied in the pre-trial order:[2]

1) Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)
dated May 13, 1974 from the Government;

2) Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines
in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms
stated in the Promissory Notes dated September 6, 1974; August 11, 1975; and
April 4, 1977;

3) As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights;

4) Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the
terms of the Promissory Notes;

5) Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP

appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;
6) After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;

7) In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the
Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979.
DBP thereafter accepted the offer to repurchase in a letter addressed to plaintiff
dated February 1, 1982;

8) After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a
new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by
the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding
her husband;

9) Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;

10) After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in temporary
Arrangement dated February 23, 1982;

11) Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March
13, 1984, and which was received by plaintiff Lydia Cuba;
12) After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;

13) That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding
dated June 24, 1984, to dispose of the property;

14) That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;

15) Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A
on December 28, 1984 by the Ministry of Agriculture and Food.

16) Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. [3]

Trial was thereafter had on other matters.

The principal issue presented was whether the act of DBP in appropriating to
itself CUBAs leasehold rights over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA
insisted on an affirmative resolution. DBP stressed that it merely exercised its
contractual right under the Assignments of Leasehold Rights, which was not a contract
of mortgage. Defendant Caperal sided with DBP.

The trial court resolved the issue in favor of CUBA by declaring that DBPs taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBPs stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans, (2) although
the fishpond land in question is still a public land, CUBAs leasehold rights and interest
thereon are alienable rights which can be the proper subject of a mortgage; and (3) the
intention of the contracting parties to treat the Assignment of Leasehold Rights as a
mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only right
was to foreclose the Assignment in accordance with law.

The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly prohibited
and declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership
and possession by the said bank were void. Accordingly, the Deed of Conditional Sale
in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale
in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed
by Caperal in favor of DBP, were also void and ineffective.

As to damages, the trial court found ample evidence on record that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the fishpond
area but also from the adjoining big house; and that when CUBAs son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBAs personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and her
men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond
with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP
representatives prevented CUBAs men from feeding the fish. At the conservative price
of P3.00 per fish, the gross value would have been P690,000, and after deducting 25%
of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of
P517,500. It then set the aggregate of the actual damages sustained by CUBA at
P1,067,500.

The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBAs
leasehold rights. Such representation induced the said Bureau to terminate CUBAs
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral
shock, degradation, social humiliation, and serious anxieties for which she became sick
and had to be hospitalized the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in
view of the considerable expenses she incurred for lawyers fees and in view of the
finding that she was entitled to exemplary damages.

In its decision of 31 January 1990, [4] the trial court disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. DECLARING null and void and without any legal effect the act of defendant
Development Bank of the Philippines in appropriating for its own interest, without
any judicial or extra-judicial foreclosure, plaintiffs leasehold rights and interest
over the fishpond land in question under her Fishpond Lease Agreement No.
2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and
between the defendant Development Bank of the Philippines and plaintiff (Exh. E
and Exh. 1) and the acts of notarial rescission of the Development Bank of the
Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective;

3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and
between the Development Bank of the Philippines and defendant Agripina
Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated
December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment
of Leasehold Rights dated February 12, 1985 executed by defendant Agripina
Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24)
as void ab initio;

4. ORDERING defendant Development Bank of the Philippines and defendant

Agripina Caperal, jointly and severally, to restore to plaintiff the latters leasehold
rights and interests and right of possession over the fishpond land in question,
without prejudice to the right of defendant Development Bank of the Philippines
to foreclose the securities given by plaintiff;

5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the

following amounts:

a. The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED

PESOS (P1,067,500.00), as and for actual damages;
 b. The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as
moral damages;

c. The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for

exemplary damages;

d. And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as

and for attorneys fees;

6. And ORDERING defendant Development Bank of the Philippines to reimburse and

pay to defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-
TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS
(P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to
defendant Development Bank of the Philippines under their Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.

In its decision [5] of 25 May 1994, the Court of Appeals ruled that (1) the trial
court erred in declaring that the deed of assignment was null and void and that
defendant Caperal could not validly acquire the leasehold rights from DBP; (2) contrary
to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil
Code because DBP appeared to be the sole creditor to CUBA - cession presupposes
plurality of debts and creditors; (3) the deeds of assignment represented the voluntary
act of CUBA in assigning her property rights in payment of her debts, which amounted
to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA
was estopped from questioning the assignment of the leasehold rights, since she
agreed to repurchase the said rights under a deed of conditional sale; and (5) condition
no. 12 of the deed of assignment was an express authority from CUBA for DBP to sell
whatever right she had over the fishpond. It also ruled that CUBA was not entitled to
loss of profits for lack of evidence, but agreed with the trial court as to the actual
damages of P1,067,500. It, however, deleted the amount of exemplary damages and
reduced the award of moral damages from P100,000 to P50,000 and attorneys fees,
from P100,000 to P50,000.

The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cubas leasehold rights and interest under Fishpond Lease Agreement
No. 2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed
of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the leasehold
rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages;
P50,000 as moral damages; and P50,000 as attorneys fees.

Since their motions for reconsideration were denied,[6] DBP and CUBA filed
separate petitions for review.

In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorneys fees in favor of CUBA.

Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was a
pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorneys fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.

We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.

It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes, there
was a provision that: In the event of foreclosure of the mortgage securing this notes,
I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any. [7]

Simultaneous with the execution of the notes was the execution of Assignments
of Leasehold Rights [8] where CUBA assigned her leasehold rights and interest on a
44-hectare fishpond, together with the improvements thereon. As pointed out by CUBA,
the deeds of assignment constantly referred to the assignor (CUBA) as borrower; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed. And, condition no.
33 provided that if foreclosure is actually accomplished, the usual 10% attorneys fees
and 10% liquidated damages of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.

Besides, in their stipulation of facts the parties admitted that the assignment was by way
of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,[9] this Court had the occasion to rule that
an assignment to guarantee an obligation is in effect a mortgage.

We find no merit in DBPs contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. The former was
only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a
sum of money remained, and the assignment merely served as security for the loans
covered by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted. Also, the
last paragraph of the assignment stated: The assignor further reiterates and states all
terms, covenants, and conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof.

Neither did the assignment amount to payment by cession under Article 1255 of
the Civil Code for the plain and simple reason that there was only one creditor, the DBP.
Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtors property.

Nor did the assignment constitute dation in payment under Article 1245 of the
civil Code, which reads: Dation in payment, whereby property is alienated to the creditor
in satisfaction of a debt in money, shall be governed by the law on sales. It bears
stressing that the assignment, being in its essence a mortgage, was but a security and
not a satisfaction of indebtedness.[10]

We do not, however, buy CUBAs argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:

12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and authority
to take actual possession of the property above-described, together with all
improvements thereon, subject to the approval of the Secretary of Agriculture and
Natural Resources, to lease the same or any portion thereof and collect rentals, to make
repairs or improvements thereon and pay the same, to sell or otherwise dispose of
whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient to
protect its interest. All expenses advanced by the Assignee in connection with purpose
above indicated which shall bear the same rate of interest aforementioned are also
guaranteed by this Assignment. Any amount received from rents, administration, sale or
disposal of said property may be supplied by the Assignee to the payment of repairs,
improvements, taxes, assessments and other incidental expenses and obligations and
the balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and upon
application of total amounts received there shall remain a deficiency, said Assignor
hereby binds himself to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not be revoked as long
as the Assignor is indebted to the Assignee and all acts that may be executed by the
Assignee by virtue of said power are hereby ratified.
 The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation, and
(2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period.[11]

Condition no. 12 did not provide that the ownership over the leasehold rights
would automatically pass to DBP upon CUBAs failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had [w]ithout foreclosure
proceedings, whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of
plaintiff Lydia Cuba over the fishpond in question. Its contention that it limited itself to
mere administration by posting caretakers is further belied by the deed of conditional
sale it executed in favor of CUBA. The deed stated:

WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by
the herein vendees [Cuba spouses] the former acquired all the rights and interest of the
latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall
remain in the name of the Vendor until after the purchase price, advances and interest
shall have been fully paid. (Emphasis supplied).
 It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBAs leasehold rights merely on the strength of the deed of
assignment.

DBP cannot take refuge in condition no. 12 of the deed of assignment to justify
its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBAs default would operate to vest in DBP ownership of the said rights.
Besides, an assignment to guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers ownership on the
assignee.[12]

At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing
of, the thing given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBPs act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases,[13] estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code
and to public policy, cannot be deemed validated by estoppel.

Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet,
in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations.[14] This only goes to show that DBP was
aware of the necessity of foreclosure proceedings.

In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBAs original lease permit, approved the
deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which
were predicated on such false representation, as well as the subsequent acts
emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088
of the Civil Code.

Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended.[15] With more
reason that the sale of property given as security for the payment of a debt be set aside
if there was no prior foreclosure proceeding.

Hence, DBP should render an accounting of the income derived from the
operation of the fishpond in question and apply the said income in accordance with
condition no. 12 of the deed of assignment which provided: Any amount received from
rents, administration, may be applied to the payment of repairs, improvements, taxes,
assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness.

We shall now take up the issue of damages.

Article 2199 provides:

 Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved. Such
compensation is referred to as actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with

reasonable degree of certainty.[16] A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof.[17] It must point out specific facts which could
afford a basis for measuring whatever compensatory or actual damages are borne.[18]

In the present case, the trial court awarded in favor of CUBA P1,067,500 as
actual damages consisting of P550,000 which represented the value of the alleged lost
articles of CUBA and P517,500 which represented the value of the 230,000 pieces of
bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and
the adjoining house. This award was affirmed by the Court of Appeals.

We find that the alleged loss of personal belongings and equipment was not
proved by clear evidence. Other than the testimony of CUBA and her caretaker, there
was no proof as to the existence of those items before DBP took over the fishpond in
question. As pointed out by DBP, there was not inventory of the alleged lost items
before the loss which is normal in a project which sometimes, if not most often, is left to
the care of other persons. Neither was a single receipt or record of acquisition
presented.

Curiously, in her complaint dated 17 May 1985, CUBA included losses of

property as among the damages resulting from DBPs take-over of the fishpond. Yet, it
was only in September 1985 when her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged loss of several articles. Such
claim for losses of property, having been made before knowledge of the alleged actual
loss, was therefore speculative. The alleged loss could have been a mere afterthought
or subterfuge to justify her claim for actual damages.

With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the fishpond in
March 1979, the same was not called for. Such loss was not duly proved; besides, the
claim therefor was delayed unreasonably. From 1979 until after the filing of her
complaint in court in May 1985, CUBA did not bring to the attention of DBP the alleged
loss. In fact, in her letter dated 24 October 1979,[19] she declared:

1. That from February to May 1978, I was then seriously ill in Manila and within
the same period I neglected the management and supervision of the cultivation and
harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable loss
in the produce of the same in the amount of about P500,000.00 to my great damage
and prejudice due to fraudulent acts of some of my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBPs take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBPs
representatives prevented her men from feeding the fish.

The award of actual damages should, therefore, be struck down for lack of
sufficient basis.

In view, however, of DBPs act of appropriating CUBAs leasehold rights which

was contrary to law and public policy, as well as its false representation to the then
Ministry of Agriculture and Natural Resources that it had foreclosed the mortgage, an
award of moral damages in the amount of P50,000 is in order conformably with Article
2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective damages in
the amount of P25,000 should likewise be awarded by way of example or correction for
the public good.[20] There being an award of exemplary damages, attorneys fees are
also recoverable.[21]

WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV

No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral
damages, which is hereby sustained. The 31 January 1990 Decision of the Regional
Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting
aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral
damages from P100,000 to P50,000; the exemplary damages, from P50,000 to
P25,000; and the attorneys fees, from P100,000 to P20,000. The Development Bank of
the Philippines is hereby ordered to render an accounting of the income derived from
the operation of the fishpond in question.

Let this case be REMANDED to the trial court for the reception of the income statement
of DBP, as well as the statement of the account of Lydia P. Cuba, and for the
determination of each partys financial obligation to one another.

SO ORDERED.
5. G.R. No. 120528

ATTY. DIONISIO CALIBO, JR., petitioner, vs. COURT OF APPEALS and DR.
PABLO U. ABELLA, respondents January 29, 2001

Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr.,
assailing the decision of the Court of Appeals in CA-G.R. CV No. 39705, which affirmed
the decision of the Regional Trial Court of Cebu, Branch 11, declaring private
respondent as the lawful possessor of a tractor subject of a replevin suit and ordering
petitioner to pay private respondent actual damages and attorneys fees.

The facts of the case, as summarized by respondent court, are undisputed.

 On January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella
purchased an MF 210 agricultural tractor with Serial No. 00105 and Engine No.
P126M00199 (Exhibit A; Record, p.5) which he used in his farm in Dagohoy, Bohol.

Sometime in October or November 1985, Pablo Abellas son, Mike Abella rented
for residential purposes the house of defendant-appellant Dionisio R. Calibo, Jr., in
Tagbilaran City.

In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm
in Dagohoy, Bohol, and left it in the safekeeping of his son, Mike Abella, in Tagbilaran
City. Mike kept the tractor in the garage of the house he was leasing from Calibo.

Since he started renting Calibos house, Mike had been religiously paying the
monthly rentals therefor, but beginning November of 1986, he stopped doing so. The
following month, Calibo learned that Mike had never paid the charges for electric and
water consumption in the leased premises which the latter was duty-bound to
shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric
and water bills. During this confrontation, Mike informed Calibo that he (Mike) would be
staying in the leased property only until the end of December 1986. Mike also assured
Calibo that he would be settling his account with the latter, offering the tractor as
security. Mike even asked Calibo to help him find a buyer for the tractor so he could
sooner pay his outstanding obligation.

In January 1987 when a new tenant moved into the house formerly leased to
Mike, Calibo had the tractor moved to the garage of his fathers house, also in
Tagbilaran City.

Apprehensive over Mikes unsettled account, Calibo visited him in his Cebu City
address in January, February and March, 1987 and tried to collect payment. On all
three occasions, Calibo was unable to talk to Mike as the latter was reportedly out of
town. On his third trip to Cebu City, Calibo left word with the occupants of the Abella
residence thereat that there was a prospective buyer for the tractor. The following week,
Mike saw Calibo in Tagbilaran City to inquire about the possible tractor buyer. The sale,
however, did not push through as the buyer did not come back anymore. When again
confronted with his outstanding obligation, Mike reassured Calibo that the tractor would
stand as a guarantee for its payment. That was the last time Calibo saw or heard from
Mike.

After a long while, or on November 22, 1988, Mikes father, Pablo Abella, came to
Tagbilaran City to claim and take possession of the tractor. Calibo, however, informed
Pablo that Mike left the tractor with him as security for the payment of Mikes obligation
to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mikes unpaid
lease rentals, in addition to issuing postdated checks to cover the unpaid electric and
water bills the correctness of which Pablo said he still had to verify with Mike. Calibo
told Pablo that he would accept the P2,000.00-check only if the latter would execute a
promissory note in his favor to cover the amount of the unpaid electric and water
bills. Pablo was not amenable to this proposal. The two of them having failed to come to
an agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to
take possession of the tractor.[1]

On November 25, 1988, private respondent instituted an action for replevin,

claiming ownership of the tractor and seeking to recover possession thereof from
petitioner. As adverted to above, the trial court ruled in favor of private respondent; so
did the Court of Appeals when petitioner appealed.

The Court of Appeals sustained the ruling of the trial court that Mike Abella could
not have validly pledged the subject tractor to petitioner since he was not the owner
thereof, nor was he authorized by its owner to pledge the tractor. Respondent court also
rejected petitioners contention that, if not a pledge, then a deposit was created. The
Court of Appeals said that under the Civil Code, the primary purpose of a deposit is only
safekeeping and not, as in this case, securing payment of a debt.

The Court of Appeals reduced the amount of actual damages payable to private
respondent, deducting therefrom the cost of transporting the tractor from Tagbilaran,
Bohol, to Cebu City.

Hence, this petition.

 Essentially, petitioner claims that the tractor in question was validly pledged to him
by private respondents son Mike Abella to answer for the latters monetary obligations to
petitioner. In the alternative, petitioner asserts that the tractor was left with him, in the
concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike
Abella pays his obligations.

Petitioner maintains that even if Mike Abella were not the owner of the tractor, a
principal-agent relationship may be implied between Mike Abella and private
respondent. He contends that the latter failed to repudiate the alleged agency, knowing
that his son is acting on his behalf without authority when he pledged the tractor to
petitioner. Petitioner argues that, under Article 1911 of the Civil Code, private
respondent is bound by the pledge, even if it were beyond the authority of his son to
pledge the tractor, since he allowed his son to act as though he had full powers.

On the other hand, private respondent asserts that respondent court had correctly
ruled on the matter.

In a contract of pledge, the creditor is given the right to retain his debtors movable
property in his possession, or in that of a third person to whom it has been delivered,
until the debt is paid. For the contract to be valid, it is necessary that: (1) the pledge is
constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the
absolute owner of the thing pledged; and (3) the person constituting the pledge has the
free disposal of his property, and in the absence thereof, that he be legally authorized
for the purpose.[2]

As found by the trial court and affirmed by respondent court, the pledgor in this
case, Mike Abella, was not the absolute owner of the tractor that was allegedly pledged
to petitioner. The tractor was owned by his father, private respondent, who left the
equipment with him for safekeeping. Clearly, the second requisite for a valid pledge,
that the pledgor be the absolute owner of the property, is absent in this case. Hence,
there is no valid pledge.

He who is not the owner or proprietor of the property pledged or mortgaged to

guarantee the fulfillment of a principal obligation, cannot legally constitute such a
guaranty as may validly bind the property in favor of his creditor, and the pledgee or
mortgagee in such a case acquires no right whatsoever in the property pledged or
mortgaged.[3]

There also does not appear to be any agency in this case. We agree with the Court
of Appeals that:

As indicated in Article 1869, for an agency relationship to be deemed as implied, the

principal must know that another person is acting on his behalf without authority. Here,
appellee categorically stated that the only purpose for his leaving the subject tractor in
the care and custody of Mike Abella was for safekeeping, and definitely not for him to
pledge or alienate the same. If it were true that Mike pledged appellees tractor to
appellant, then Mike was acting not only without appellees authority but without the
latters knowledge as well.

Article 1911, on the other hand, mandates that the principal is solidarily liable with
the agent if the former allowed the latter to act as though he had full powers. Again, in
view of appellees lack of knowledge of Mikes pledging the tractor without any authority
from him, it stands to reason that the former could not have allowed the latter to pledge
the tractor as if he had full powers to do so.[4]

There is likewise no valid deposit in this case. In a contract of deposit, a person

receives an object belonging to another with the obligation of safely keeping it and of
returning the same.[5] Petitioner himself states that he received the tractor not to safely
keep it but as a form of security for the payment of Mike Abellas obligations. There is no
deposit where the principal purpose for receiving the object is not safekeeping. [6]

Consequently, petitioner had no right to refuse delivery of the tractor to its lawful
owner. On the other hand, private respondent, as owner, had every right to seek to
repossess the tractor, including the institution of the instant action for replevin.

We do not here pass upon the other assignment of errors made by petitioner
concerning alleged irregularities in the raffle and disposition of the case at the trial
court. A petition for review on certiorari is not the proper vehicle for such allegations.
 WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of
the Court of Appeals in CA-G.R. CV No. 39705 is AFFIRMED. Costs against petitioner.

SO ORDERED.

6. G.R. No. 3088

ELBANCOESPAÑOL-FILIPINO, plaintiff-appellant,
vs.
JAMES PETERSON, sheriff of the city of Manila, ET AL., defendants-appellees.

Del-Pan,Ortigas&Fisherforappellant.
Hartigan, Marple, Rohde, & Gutierrez for appellees.

TORRES, J.:

On the 24th of October, 1905, the Spanish-Filipino Bank, a corporation, through

its attorneys, Del-Pan, Ortigas and Fisher, filed a complaint against the sheriff of the city
of Manila and the other defendant, Juan Garcia, praying that judgment be rendered
against the said sheriff, declaring that the execution levied upon the property referred to
in the complaint, to wit, wines, liquors, canned goods, and other similar merchandise,
was illegal, and directing the defendants to return the said goods to the plaintiff
corporation, and in case that he had disposed of the same, to pay the value thereof,
amounting to P30,000, Philippine currency, and further that it be declared that the said
plaintiff corporation, under the contract of pledge referred to in the complaint had the
right to apply the proceeds of the sale of the said goods to the payment of the debt of
P40,000, Philippine currency, for the security of which the said merchandise was
pledged, with preference over the claim of the other defendant, Juan Garcia and that
both defendants be held jointly liable to the plaintiff for the sum of P500, Philippine
currency, as damages, and the said defendants to pay the costs of the proceedings,
and for such other and further relief as the plaintiff might be entitled to under the law.
Plaintiff alleges in its complaint that under the contract entered into on the 4th of March,
1905, by and between the Spanish-Filipino Bank and Francisco Reyes, the former,
loaned to the latter the sum of P141,702, Philippine currency; that on the same date
Francisco Reyes was already indebted to the bank in the sum of P84,415.38, Philippine
currency, which, added to the amount of the loan, made a total of P226,117.38,
Philippine currency, received by the said Reyes as a loan from the plaintiff bank, the
entire sum at an annual interest of 8 per cent; that to secure the payment of these two
sums and the interest thereon, the debtor, Francisco Reyes, by a public instrument
executed before a notary on the aforesaid date mortgaged in favor of the plaintiff bank
several pieces of property belonging to him, and pledged to the said bank part of his
personal property, specifying the proportion on which the said real and personal
property thus mortgaged and pledged in favor of the plaintiff corporation would be
respectively liable for the payment of the debt; that the property pledged by the debtor
to the bank included a stock or merchandise, consisting of wines, liquors, canned
goods, and other similar articles valued at P90,591.75, Philippine currency, then stored
in the warehouses of the debtor, Reyes, No. 12 Plaza Moraga, in the city of Manila,
which said goods and merchandise were liable for the payment of the said sum of
P90,591.75, Philippine currency; that in the aforesaid deed of pledge it was agreed by
and between the bank and the debtor, Reyes, that the goods should be delivered to
Ramon Garcia y Planas for safe-keeping, the debtor having actually turned over to the
said Garcia y Planas the goods in question by delivering to him the keys of the
warehouse in which they were kept; that in a subsequent contract entered into by and
between the debtor, Reyes, and the plaintiff bank on the 29th of September, 1905, the
said contract executed on the 4th of March was modified so as to provide that the goods
then (September 29) in possession the depositary should only be liable for the sum of
P40,000, Philippine currency, the said contract of the 4th of March remaining in all other
respects in full force and effect, Luis M.a Sierra having been subsequently appointed by
agreement between the bank and the debtor as depositary of the goods thus pledged in
substitution for the said Ramon Garcia y Planas.

On the 19th of October, 1905, in an action brought in the Court of First Instance
of the city of Manila by Juan Garcia y Planas against Francisco Reyes and Ramon
Agtarat, judgment was rendered against the last-mentioned two for the sum of P15,000,
Philippine currency, to be paid by them severally or jointly, upon which judgment
execution was issued against the property of the defendants, Reyes and Agtarap. On
the aforesaid 19th day of October, for the purpose of levying upon the property of the
defendants, the sheriff at the request of Garcia, the plaintiff in that case, entered the
warehouse where the goods pledged to the plaintiff bank were stored under the custody
of the depositary, Sierra, and levied upon them as per list attached to the complaint
marked "Exhibit A." The sheriff seized the goods which had been pledged to the bank,
depriving the latter of the possession of the same, to which said contract executed on
the 4th of March, 1905. Without the authority of the bank, Reyes could not dispose of
the said goods. The value of the goods seized by the sheriff was P30,000, Philippine
currency, the said sheriff, having refused, and still refusing, to return to the same to the
bank, notwithstanding repeated demands made upon him to this effect, and it being
alleged in the complaint that unless prohibited by the court the sheriff would proceed to
sell the said goods at public auction and apply the proceeds to the satisfaction of the
judgment rendered in favor of the Juan Garcia y Planas, while the other debtor Reyes
had not paid to the bank the P40,000, Philippine currency, to secure the payment of
which the goods mentioned in Exhibit A had been pledged to the bank, that is, to secure
the payment of a sum in excess of the actual value of the goods in the hands of the
sheriff.

The defendant sheriff, James J. Peterson, and Juan Garcia, his codefendant,
through their attorneys, Hartigan, Marple, Rohde and Gutierrez, answering the
complaint, stated that they admitted the allegations contained in paragraphs 1, 2, 3, 4,
5, 12, and 17 of the complaint, but denied the allegations contained in paragraphs 6, 7,
8, 9, 10, 11, 14, 16, and 18. They further denied the allegations contained in paragraph
12, with the exception that the defendant sheriff levied upon the goods mentioned in
Exhibit A attached to the complaint for the purpose of satisfying the judgment referred to
therein; and also the allegations contained in paragraph 13 of the complaint, with the
exception that the sheriff seized the property mentioned in Exhibit A under the execution
referred to therein; and finally defendants denied the allegation contained in paragraph
15 of the complaint, with the exception of the allegation that the value of the property
seized is P30,000. They accordingly asked that the action be dismissed and that it be
adjudged that the plaintiff had no interest whatever in the property described in the
complaint, and that the plaintiff be taxed with the costs of these proceedings.

The testimony introduced by the parties having been received, and the exhibits
having been attached to the record, the court below entered judgment on the 4th of
January, 1906, dismissing plaintiff's action and directing that the defendant recover from
the Spanish-Filipino Bank the costs of this action, for which execution was duly issued.
To this judgment counsel for plaintiff excepted and announced his intention of
prosecuting a bill of exceptions, and further made a motion for a new trial on the ground
that the judgment of the court below was contrary to law and that the findings of fact
were plainly and manifestly contrary to the weight of the evidence.

The decision of this case depends mainly upon the question as to whether the
contract of pledge entered into by and between the Spanish-Filipino Bank and
Francisco Reyes to secure a loan made by the former to the latter was valid, all the
requisites prescribed by the Civil Code having been complied with.
 If so, the bank's claim had preference over the claim of a third person not
secured, as was the bank's, by a pledge, with reference to the property pledged to the
extent of its value, and therefore such property could not have been legally levied upon
by the sheriff at the request of the defendant, Juan Garcia. (Arts. 1921, 1922, Civil
Code.)

The contract in question complies with all the requisites provided in article 1857
of the Civil Code, such as that the property was pledged to secure a debt, the date of
the execution, the terms of the pledge, and the property pledged, all of which appears in
a public document, and the property pledged was placed in the hands of a third person
by common consent of the debtor and creditor, under the supervision of an agent of the
bank. (Arts. 1863, 1865, 1866, 1869, 1871, Civil Code.) The defect alleged to exist in
the said contract is that the debtor, Reyes, continued in possession of the property
pledged; that he never parted with the said property, and that neither the creditor nor
the depositary appointed by common consent of the parties were ever in possession of
the property pledged, and for this reason, and upon the further ground that the contract
was fraudulent, the court below dismissed the complaint with the costs against the
plaintiff.

In the motion for a new trial it was alleged by the plaintiff that the judgment of the
court below was contrary to law, and that the findings of fact contained therein were
plainly and manifestly against the weight of the evidence. If plaintiffs contention is
correct, then the judgment of the court below should be reversed.

From the evidence introduced at the trial, both oral and documentary, it appears
that a third person, appointed by the common consent of the debtor and creditor, was in
possession of the goods pledged in favor of the bank under the direct supervision of an
agent of the bank expressly appointed for this purpose, and it has not been shown that
the said Reyes continued in the possession of the goods after they had been pledged to
the plaintiff bank.
 Exhibit C and the testimony of Francisco Reyes, Luis M.a Sierra, and Mariano
Rodriguez corroborate the existence and authenticity of the contract of pledge recorded
in a public instrument and conclusively and satisfactorily show that the debtor, after the
pledge of the property, parted with the possession of the same, and that it was delivered
to a third person designated by common consent of the parties. For the purpose of
giving this possession greater effect, the pledgee appointed a person to examine daily
the property in the warehouse where the same was kept.

The witness Matias Garcia also testified as to the status of these goods, and
informed Juan Garcia of such status before the same were levied upon.

The sheriff's testimony supports the allegation that the depositary, Sierra, was
present at the place where the goods were kept, as well as the representative of the
bank, Rodriguez, when he, the sheriff, went there for the purpose of levying upon the
said property. He further testified that Rodriguez, the representative of the bank, then
protested and notified him that the property in question was pledged to the Spanish-
Filipino Bank.

The contract in question was, therefore, a perfect contract of pledge under

articles 1857 and 1863 of the Civil Code, it having been conclusively shown that the
pledgee took charge and possession of the goods pledged through a depository and a
special agent appointed by it, each of whom had a duplicate key to the warehouse
wherein the said goods were stored, and that the pledgee, itself, received and collected
the proceeds of the goods as they were sold.

The fact that the said goods continued in the warehouse which was formerly
rented by the pledgor, Reyes, does not affect the validity and legality of the pledge, it
having been demonstrated that after the pledge had been agreed upon, and after the
depository appointed with the common consent of the parties had taken possession of
the said property, the owner, the pledgor, could no longer dispose of the same, the
pledgee being the only one authorized to do so through the depositary and special
agent who represented it, the symbolical transfer of the goods by means of the delivery
of the keys to the warehouse where the goods were stored being sufficient to show that
the depositary appointed by the common consent of the parties was legally placed in
possession of the goods. (Articles 438, 1463, Civil Code.)

The fact that the debtor, Reyes, procured purchasers and made arrangements
for the sale of the goods pledged and that the bills for the goods thus sold were signed
by him does not affect the validity of the contract, for the pledgor, Reyes, continued to
be the owner of the goods, (art. 1869, Civil Code), he being the one principally
interested in the sale of the property on the best possible terms.

As to the reservation stipulated in paragraph 13 of the contract executed on the

4th of March, 1905, it could not affect the contract in question for the reason that
reservation referred to the rent from the property mortgaged, to the bank and the
dividends from the shares of stock also pledged to the bank, and not the merchandise
so pledged, and such reservation could not have rendered the contract of pledge null.

If the case is to be decided in accordance with the facts alleged and established,
the defendant not having introduced any evidence to show that the said contract of
pledge was fraudulent as to other creditors, there was no legal ground upon which the
court below could have held that the contract evidenced by the instrument in question
was entered into to defraud other creditors of the pledgor.

For the reason hereinbefore set out, and the judgment of the court below being
contrary to the evidence, the said judgment is hereby reversed, and it is hereby
adjudged that the plaintiff corporation, under and by virtue of the contract of pledge in
question, had a preferential right over that of the defendant, Juan Garcia, to the goods
pledged or the value thereof, the value to be applied to the payment of the debt of
P40,000, Philippine currency, for the security of which the said property was pledged,
and the defendants are accordingly hereby ordered to return to the plaintiff corporation
the property improperly levied upon, or to pay its value, amounting to P30,000,
Philippine currency, without special provision as to costs. After the expiration of twenty
days let judgment be entered in accordance herewith, and ten days thereafter the case
be remanded to the court below for execution. So ordered.

Arellano, C.J., Mapa, Carson and Willard, JJ,. concur.

7. G.R. No. L-24137 March 29, 1926

EULOGIO,BETITA,plaintiff-appellee
vs.
SIMEON GANZON, ALEJO DE LA FLOR, and CLEMENTE PEDRENA, defendants-
appellants.
Padilla, Trenas and Magalona for appellants.
Varela and Ybiernas for appellee.

OSTRAND, J.:

This action is brought to recover the possession of four carabaos with damages
in the sum of P200. Briefly stated, the facts are as follows: On May 15, 1924, the
defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the sum
of P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied
execution on the carabaos in question which were found in the possession of one
Simon Jacinto but registered in the name of Tiburcia Buhayan. The plaintiff herein,
Eulogio Betita, presented a third party claim (terceria) alleging that the carabaos had
been mortgaged to him and as evidence thereof presented a document dated May 6,
1924, but the sheriff proceeded with the sale of the animals at public auction where they
were purchased by the defendant Clemente Perdena for the sum of P200, and this
action was thereupon brought.

The document upon which the plaintiff bases his cause of action is in the Visayan
dialect and in translation reads as follows:

I, Tiburcia Buhatan, of age, widow and resident of the sitio of Jimamanay, municipality
of Balasan, Province of Iloilo, Philippine Islands, do hereby execute this document
extrajudicially and state that I am indebted to Mr. Eulogio Betita, resident of the
municipality of Estancia, Province of Iloilo, Philippine Islands, in the sum of P470,
Philippine currency, and was so indebted since the year 1922, and as a security to my
creditor I hereby offer four head of carabaos belonging to me exclusively (three females
and one male), the certificates of registration of said animals being Nos. 2832851,
4670520, 4670521 and 4670522, which I delivered to said Mr. Eulogio Betita.

I hereby promise to pay said debt in the coming month of February, 1925, in case I will
not be able to pay, Mr. Eulogio Betita may dispose of the carabaos given as security for
said debt.
This document is a new one or a renewal of our former document because the first
carabaos mortgaged died and were substituted for by the newly branded ones."

In testimony whereof and not knowing how to sign my name, I caused my name to be
written and marked same with my right thumb.

Estancia, May 6, 1924.

(Marked). TIBURCIA BUHAYAN

Signed in the presence of:

MIGUEL MERCURIO

TIRZO ZEPEDA

The court below held that inasmuch as this document was prior in date to the
judgment under which the execution was levied, it was a preferred credit and judgment
was rendered in favor of the plaintiff for the possession of the carabaos, without
damages and without costs. From this judgment the defendants appeal.

The judgment must be reversed unless the document above quoted can be
considered either a chattel mortgage or else a pledge. That it is not a sufficient chattel
mortgage is evident; it does not meet the requirements of section 5 of the Chattel
Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel
mortgage, is consequently of no effect as against third parties (Williams vs. McMicking,
17 Phil., 408; Giberson vs. A. N. Jureidini Bros., 44 Phi., 216; Benedicto de
Tarrosa vs. F. M. Yap Tico & Co. and Provincial Sheriff of Occidental Negros, 46 Phil.,
753).

Neither did the document constitute a sufficient pledge of the property valid
against third parties. Article 1865 of the Civil Code provides that "no pledge shall be
effective as against third parties unless evidence of its date appears in a public
instrument." The document in question is not public, but it is suggested that its filing with
the sheriff in connection with the terceria gave in the effect of a public instrument and
served to fix the date of the pledge, and that it therefore fulfills the requirements of
article 1865. Assuming, without conceding, that the filing of the document with the
sheriff had that effect, it seems nevertheless obvious that the pledge only became
effective as against the plaintiff in execution from the date of the filing and did not rise
superior to the execution attachment previously levied (see Civil Code, article 1227).

Manresa, in commenting on article 1865, says:

ART. 1865. A pledge will not be valid against a third party if the certainty of the
date is not expressed in a public instrument.

This article, the precept of which did not exist in our old law, answers the
necessity for not disturbing the relationship or the status of the ownership of
things with hidden or simulated contracts of pledge, in the same way and for the
identical reasons that were taken into account by the mortgage law in order to
suppress the implied and legal mortgages which produce so much instability in
real property.

Considering the effects of a contract of pledge, it is easily understood that,

without this warranty demanded by law, the case may happen wherein a debtor
in bad faith from the moment that he sees his movable property in danger of
execution may attempt to withdraw the same from the action of justice and the
reach of his creditors by simulating, through criminal confabulations, anterior and
fraudulent alterations in his possession by means of feigned contracts of this
nature; and, with the object of avoiding or preventing such abuses, almost all the
foreign writers advise that, for the effectiveness of the pledge, it be demanded as
a precise condition that in every case the contract be executed in a public writing,
for, otherwise, the determination of its date will be rendered difficult and its proof
more so, even in cases in which it is executed before witnesses, due to the
difficulty to be encountered in seeking those before whom it was executed.
 Our code has not gone so far, for it does not demand in express terms that in all
cases the pledge be constituted or formalized in a public writing, nor even in
private document, but only that the certainty of the date be expressed in the first
of the said class of instruments in order that it may be valid against a third
party;and, in default of any express provision of law, in the cases where no
agreement requiring the execution in a public writing exists, it should be
subjected to the general rule, and especially to that established in the last
paragraph of article 1280, according to which all contracts not included in the
foregoing cases of the said article should be made in writing even though it be
private, whenever the amount of the presentation of one or of the two contracting
parties exceeds 1,500 pesetas. (Vol. 12, ed., p. 421.)

If the mere filing of a private document with the sheriff after the levy of execution
can create a lien of pledge superior to the attachment, the purpose of the provisions of
article 1865 as explained by Manresa clearly be defeated. Such could not have been
the intention of the authors of the Code. (See also Ocejo, Perez & Co. vs. International
Banking Corporation, 37 Phil., 631 and Tec Bi & Co. Chartered Bank of India, Australia
& China, 41 Phil., 596.)

The alleged pledge is also ineffective for another reason, namely, that the plaintiff
pledgee never had actual possession of the property within the meaning of article 1863
of the Civil Code. But it is argued that at the time of the levy the animals in question
were in the possession of one Simon Jacinto; that Jacinto was the plaintiff's tenant; and
that the tenant's possession was the possession of his landlord.

It appears, however, from the evidence that though not legally married, Simon
Jacinto and Tiburcia Buhayan were living together as husband and wife and had been
so living for many years. Testifying as a witness for the plaintiff, Jacinto on cross-
examination made the following statements:

Q. But the caraballas in question had never been in possession of Eulogio

Betita? — A. The three young ones did not get into his hands.
 Q. And the others? — A. Sometimes they were in the hands of Betita and at
other times in the hands of Buhayan.

Q. Those are the caraballas which formerly were mortgaged by Buhayan to

Betita, isn't that so? — A. Yes, sir.

Q. And the four carabaos now in question had never been in possession of
Betita, but were in your possession? — A. When I worked they were in my
hands.

Q. And before you worked, these caraballas were in possession of your mistress,
Tiburcia Buhayan? — A. Yes, sir.

Q. Do you mean to say that from the possession of Tiburcia Buhayan the animals
passed immediately into your possession? — A. Yes sir.

This testimony is substantially in accord with that of the defendant sheriff to the
effect that he found the animals at the place where Tiburcia Buhayan was living. Article
1863 of the Civil Code reads as follows:

In addition to the requisites mentioned in article 1857, it shall be necessary, in

order to constitute the contract of pledge, that the pledge be placed in the
possession of the creditor or of a third person appointed by common consent.

In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a pledge without which the
contract cannot be regarded as entered into or completed, because, precisely, in
this delivery lies the security of the pledge. Therefore, in order that the contract of
pledge may be complete, it is indispensable that the aforesaid delivery take place
. . . . (P. 411, supra.)

It is, of course, evident that the delivery of possession referred to in article 1863
implies a change in the actual possession of the property pledged and that a mere
symbolic delivery is not sufficient. In the present case the animals in question were in
the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was
entered into and apparently remained with them until the execution was levied, and
there was no actual delivery of possession to the plaintiff himself. There was therefore
in reality no change in possession.

It may further be noted that the alleged relation of landlord and tenant between
the plaintiff and Simon Jacinto is somewhat obscure and it is, perhaps, doubtful if any
tenancy, properly speaking, existed. The land cultivated by Jacinto was not the property
of the plaintiff, but it appears that a part of the products was to be applied towards the
payment of Tiburcia Buhayan's debt to the plaintiff. Jacinto states that he was not a
tenant until after the pledge was made.

From what has been said it follows that the judgment appealed from must be
reversed and it is ordered and adjudged that the plaintiff take nothing by his action.
Without costs. So ordered.

8. G.R. No. 158997

FORT BONIFACIO DEVELOPMENT CORPORATION,Petitioner,

- versus -
YLLAS LENDING CORPORATION and JOSE S. LAURAYA, in his

official capacity as President,Respondents.

The Case

This is a petition for review on certiorari[1] of the Orders issued on 7 March 2003[2] and 3
July 2003[3] by Branch 59 of the Regional Trial Court of Makati City (trial court) in Civil
Case No. 01-1452. The trial courts orders dismissed Fort Bonifacio Development
Corporations (FBDC) third party claim and denied FBDCs Motion to Intervene and
Admit Complaint in Intervention.

The Facts

On 24 April 1998, FBDC executed a lease contract in favor of Tirreno, Inc. (Tirreno)
over a unit at the Entertainment Center Phase 1 of the Bonifacio Global City in Taguig,
Metro Manila. The parties had the lease contract notarized on the day of its
execution. Tirreno used the leased premises for Savoia Ristorante and La Strega Bar.

Two provisions in the lease contract are pertinent to the present case: Section 20, which
is about the consequences in case of default of the lessee, and Section 22, which is
about the lien on the properties of the lease. The pertinent portion of Section 20 reads:

Section 20. Default of the Lessee

20.1 The LESSEE shall be deemed to be in default within the meaning of

this Contract in case:
 (i) The LESSEE fails to fully pay on time any rental, utility and
service charge or other financial obligation of the LESSEE under
this Contract;

xxx

20.2 Without prejudice to any of the rights of the LESSOR under this
Contract, in case of default of the LESSEE, the lessor shall have the right
to:

(i) Terminate this Contract immediately upon written notice to the

LESSEE, without need of any judicial action or declaration;

xxx

Section 22, on the other hand, reads:

Section 22. Lien on the Properties of the Lessee

Upon the termination of this Contract or the expiration of the Lease Period
without the rentals, charges and/or damages, if any, being fully paid or
settled, the LESSOR shall have the right to retain possession of the
properties of the LESSEE used or situated in the Leased Premises and
the LESSEE hereby authorizes the LESSOR to offset the prevailing value
thereof as appraised by the LESSOR against any unpaid rentals, charges
and/or damages. If the LESSOR does not want to use said properties, it
may instead sell the same to third parties and apply the proceeds thereof
against any unpaid rentals, charges and/or damages.

Tirreno began to default in its lease payments in 1999. By July 2000, Tirreno was
already in arrears by P5,027,337.91. FBDC and Tirreno entered into a settlement
agreement on 8 August 2000. Despite the execution of the settlement agreement,
FBDC found need to send Tirreno a written notice of termination dated 19 September
2000 due to Tirrenosalleged failure to settle its outstanding obligations. On 29
September 2000, FBDC entered and occupied the leased premises. FBDC also
appropriated the equipment and properties left by Tirreno pursuant to Section 22 of their
Contract of Lease as partial payment for Tirrenos outstanding obligations. Tirreno filed
an action for forcible entry against FBDC before the Municipal Trial Court
of Taguig. Tirreno also filed a complaint for specific performance with a prayer for the
issuance of a temporary restraining order and/or a writ of preliminary injunction against
FBDC before the Regional Trial Court (RTC) of Pasig City. The RTC of Pasig City
dismissed Tirrenos complaint for forum-shopping.

On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya, in his official
capacity as President, (respondents) caused the sheriff of Branch 59 of the trial court to
serve an alias writ of seizure against FBDC. On the same day, FBDC served on the
sheriff an affidavit of title and third party claim. FBDC found out that on 27 September
2001, respondents filed a complaint for Foreclosure of Chattel Mortgage with Replevin,
docketed as Civil Case No. 01-1452, against Tirreno, Eloisa Poblete Todaro (Eloisa),
and Antonio D. Todaro (Antonio), in their personal and individual capacities, and in
Eloisas official capacity as President. In their complaint, respondents alleged that they
lent a total of P1.5 million to Tirreno, Eloisa, and Antonio. On 9 November
2000, Tirreno, Eloisa and Antonio executed a Deed of Chattel Mortgage in favor
of respondents as security for the loan. The following properties are covered by the
Chattel Mortgage:

a. Furniture, Fixtures and Equipment of Savoia Ristorante and

La Strega Bar, a restaurant owned and managed by [Tirreno], inclusive of
the leasehold right of [Tirreno] over its rented building where [the] same is
presently located.
 b. Goodwill over the aforesaid restaurant, including its business name,
business sign, logo, and any and all interest therein.

c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili,

which are fixtures in the above-named restaurant.

The details and descriptions of the above items are specified in Annex A
which is hereto attached and forms as an integral part of this Chattel
Mortgage instrument.[4]

In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio made the following
warranties to respondents:

1. WARRANTIES: The MORTGAGOR hereby declares and warrants that:

a. The MORTGAGOR is the absolute owner of the above named

properties subject of this mortgage, free from all liens and encumbrances.

b. There exist no transaction or documents affecting the same previously

presented for, and/or pending transaction.[5]

Despite FBDCs service upon him of an affidavit of title and third party claim, the sheriff
proceeded with the seizure of certain items from FBDCs premises. The sheriffs partial
return indicated the seizure of the following items from FBDC:

A. FIXTURES
(2) Smaller Murano Chandeliers
 (1) Main Murano Chandelier
B. EQUIPMENT
(13) Uni-Air Split Type 2HP Air Cond.
(2) Uni-Air Split Type 1HP Air Cond.
(3) Uni-Air Window Type 2HP Air Cond.
(56) Chairs
(1) Table
(2) boxes Kitchen equipments [sic][6]

The sheriff delivered the seized properties to respondents. FBDC questioned the
propriety of the seizure and delivery of the properties to respondents without an
indemnity bond before the trial court. FBDC argued that when respondents
and Tirreno entered into the chattel mortgage agreement on 9 November
2000, Tirreno no longer owned the mortgaged properties as FBDC already enforced its
lien on 29 September 2000.

In ruling on FBDCs motion for leave to intervene and to admit complaint in intervention,
the trial court stated the facts as follows:

Before this Court are two pending incidents, to wit: 1) [FBDCs] Third-Party
Claim over the properties of [Tirreno] which were seized and delivered by
the sheriff of this Court to [respondents]; and 2) FBDCs Motion to
Intervene and to Admit Complaint in Intervention.

Third party claimant, FBDC, anchors its claim over the subject properties
on Sections 20.2(i) and 22 of the Contract of Lease executed by [FBDC]
with Tirreno. Pursuant to said Contract of Lease, FBDC took possession
of the leased premises and proceeded to sell to third parties the properties
found therein and appropriated the proceeds thereof to pay the unpaid
lease rentals of [Tirreno].
 FBDC, likewise filed a Motion to Admit its Complaint-in-Intervention.

In Opposition to the third-party claim and the motion to intervene,

[respondents] posit that the basis of [FBDCs] third party claim being
anchored on the aforesaid Contract [of] Lease is baseless. [Respondents]
contend that the stipulation of the contract of lease partakes of a pledge
which is void under Article 2088 of the Civil Code for
being pactum commissorium.

xxx

By reason of the failure of [Tirreno] to pay its lease rental and fees due in
the amount of P5,027,337.91, after having notified [Tirreno] of the
termination of the lease, x x x FBDC took possession of [Tirreno.s]
properties found in the premises and sold those which were not of use to
it. Meanwhile, [respondents], as mortgagee of said properties, filed an
action for foreclosure of the chattel mortgage with replevin and caused the
seizure of the same properties which [FBDC] took and appropriated in
payment of [Tirrenos] unpaid lease rentals.[7]

The Ruling of the Trial Court

In its order dated 7 March 2003, the trial court stated that the present case raises the
questions of who has a better right over the properties of Tirreno and whether FBDC
has a right to intervene in respondents complaint for foreclosure of chattel mortgage.
In deciding against FBDC, the trial court declared that Section 22 of the lease contract
between FBDC and Tirreno is void under Article 2088 of the Civil Code.[8] The trial court
stated that Section 22 of the lease contract pledges the properties found in the leased
premises as security for the payment of the unpaid rentals. Moreover, Section 22
provides for the automatic appropriation of the properties owned by Tirreno in the event
of its default in the payment of monthly rentals to FBDC. Since Section 22 is void, it
cannot vest title of ownership over the seized properties. Therefore, FBDC cannot
assert that its right is superior to respondents, who are the mortgagees of the disputed
properties.
The trial court quoted from Bayer Phils. v. Agana[9] to justify its ruling that FBDC should
have filed a separate complaint against respondents instead of filing a motion to
intervene. The trial court quoted from Bayer as follows:

In other words, construing Section 17 of Rule 39 of the Revised Rules of

Court (now Section 16 of the 1997 Rules on Civil Procedure), the rights of
third-party claimants over certain properties levied upon by the sheriff to
satisfy the judgment may not be taken up in the case where such claims
are presented but in a separate and independent action instituted by the
claimants.[10]

The dispositive portion of the trial courts decision reads:

WHEREFORE, premises considered, [FBDCs] Third Party Claim is hereby

DISMISSED. Likewise, the Motion to Intervene and Admit Complaint in
Intervention is DENIED.[11]

FBDC filed a motion for reconsideration on 9 May 2003. The trial court
denied FBDCs motion for reconsideration in an order dated 3 July 2003. FBDC filed the
present petition before this Court to review pure questions of law.

The Issues
FBDC alleges that the trial court erred in the following:

1. Dismissing FBDCs third party claim upon the trial courts

erroneous interpretation that FBDC has no right of ownership over
the subject properties because Section 22 of the contract of lease
is void for being a pledge and a pactum commissorium;

2. Denying FBDC intervention on the ground that its proper remedy

as third party claimant over the subject properties is to file a
separate action; and

3. Depriving FBDC of its properties without due process of law when

the trial court erroneously dismissed FBDCs third party claim,
denied FBDCs intervention, and did not require the posting of an
indemnity bond for FBDCs protection.[12]

The Ruling of the Court

The petition has merit.

Taking of Lessees Properties

without Judicial Intervention

We reproduce Section 22 of the Lease Contract below for easy reference:

Section 22. Lien on the Properties of the Lessee

Upon the termination of this Contract or the expiration of the Lease Period
without the rentals, charges and/or damages, if any, being fully paid or
settled, the LESSOR shall have the right to retain possession of the
properties of the LESSEE used or situated in the Leased Premises and
the LESSEE hereby authorizes the LESSOR to offset the prevailing value
thereof as appraised by the LESSOR against any unpaid rentals, charges
 and/or damages. If the LESSOR does not want to use said properties, it
may instead sell the same to third parties and apply the proceeds thereof
against any unpaid rentals, charges and/or damages.

Respondents, as well as the trial court, contend that Section 22 constitutes

a pactum commissorium, a void stipulation in a pledge contract. FBDC, on the other
hand, states that Section 22 is merely a dacion en pago.

Articles 2085 and 2093 of the Civil Code enumerate the requisites essential to a
contract of pledge: (1) the pledge is constituted to secure the fulfillment of a principal
obligation; (2) the pledgor is the absolute owner of the thing pledged; (3) the persons
constituting the pledge have the free disposal of their property or have legal
authorization for the purpose; and (4) the thing pledged is placed in the possession of
the creditor, or of a third person by common agreement. Article 2088 of the Civil Code
prohibits the creditor from appropriating or disposing the things pledged, and any
contrary stipulation is void.

On the other hand, Article 1245 of the Civil Code defines dacion en pago, or dation in
payment, as the alienation of property to the creditor in satisfaction of a debt in
money.Dacion en pago is governed by the law on sales. Philippine National Bank v.
Pineda[13] held that dation in payment requires delivery and transmission of ownership
of a thing owned by the debtor to the creditor as an accepted equivalent of the
performance of the obligation. There is no dation in payment when there is no transfer
of ownership in the creditors favor, as when the possession of the thing is merely given
to the creditor by way of security.

Section 22, as worded, gives FBDC a means to collect payment from Tirreno in case of
termination of the lease contract or the expiration of the lease period and there are
unpaid rentals, charges, or damages. The existence of a contract of pledge, however,
does not arise just because FBDC has means of collecting past due rent
from Tirreno other than direct payment. The trial court concluded that Section 22
constitutes a pledge because of the presence of the first three requisites of a
pledge: Tirrenos properties in the leased premises secure Tirrenos lease
payments; Tirreno is the absolute owner of the said properties; and the persons
representing Tirreno have legal authority to constitute the pledge.However, the fourth
requisite, that the thing pledged is placed in the possession of the creditor, is
absent. There is non-compliance with the fourth requisite even if Tirrenospersonal
properties are found in FBDCs real property. Tirrenos personal properties are
in FBDCs real property because of the Contract of Lease, which
gives Tirreno possession of the personal properties. Since Section 22 is not a contract
of pledge, there is no pactum commissorium.

FBDC admits that it took Tirrenos properties from the leased premises without judicial
intervention after terminating the Contract of Lease in accordance with Section
20.2.FBDC further justifies its action by stating that Section 22 is a forfeiture clause in
the Contract of Lease and that Section 22 gives FBDC a remedy against Tirrenos failure
to comply with its obligations. FBDC claims that Section 22 authorizes FBDC to take
whatever properties that Tirreno left to pay off Tirrenos obligations.

We agree with FBDC.

A lease contract may be terminated without judicial

intervention. Consing v. Jamandre upheld the validity of a contractually-stipulated
termination clause:

This stipulation is in the nature of a resolutory condition, for upon the

exercise by the [lessor] of his right to take possession of the leased
property, the contract is deemed terminated. This kind of contractual
stipulation is not illegal, there being nothing in the law proscribing such
kind of agreement.
 xxx

Judicial permission to cancel the agreement was not, therefore necessary

because of the express stipulation in the contract of [lease] that the
[lessor], in case of failure of the [lessee] to comply with the terms and
conditions thereof, can take-over the possession of the leased premises,
thereby cancelling the contract of sub-lease. Resort to judicial action is
necessary only in the absence of a special provision granting the power of
cancellation.[14]

A lease contract may contain a forfeiture clause. Country Bankers Insurance Corp. v.
Court of Appeals upheld the validity of a forfeiture clause as follows:

A provision which calls for the forfeiture of the remaining deposit still in the
possession of the lessor, without prejudice to any other obligation still
owing, in the event of the termination or cancellation of the agreement by
reason of the lessees violation of any of the terms and conditions of the
agreement is a penal clause that may be validly entered into. A penal
clause is an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing
on the debtor a special prestation (generally consisting in the payment of a
sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.[15]

In Country Bankers, we allowed the forfeiture of the lessees advance deposit of lease
payment. Such a deposit may also be construed as a guarantee of payment, and thus
answerable for any unpaid rent or charges still outstanding at any termination of the
lease.
In the same manner, we allow FBDCs forfeiture of Tirrenos properties in the leased
premises. By agreement between FBDC and Tirreno, the properties are answerable for
any unpaid rent or charges at any termination of the lease. Such agreement is not
contrary to law, morals, good customs, or public policy. Forfeiture of the properties is
the only security that FBDC may apply in case of Tirrenos default in its obligations.

Intervention versus Separate Action

Respondents posit that the right to intervene, although permissible, is not an absolute
right. Respondents agree with the trial courts ruling that FBDCs proper remedy is not
intervention but the filing of a separate action. Moreover, respondents allege that FBDC
was accorded by the trial court of the opportunity to defend its claim of ownership in
court through pleadings and hearings set for the purpose. FBDC, on the other hand,
insists that a third party claimant may vindicate his rights over properties taken in an
action for replevin by intervening in the replevin action itself.
We agree with FBDC.
Both the trial court and respondents relied on our ruling in Bayer Phils. v. Agana[16] to
justify their opposition to FBDCs intervention and to insist on FBDCs filing of a separate
action. In Bayer, we declared that the rights of third party claimants over certain
properties levied upon by the sheriff to satisfy the judgment may not be taken up in the
case where such claims are presented, but in a separate and independent action
instituted by the claimants. However, both respondents and the trial court overlooked
the circumstances behind the ruling in Bayer, which makes the Bayer ruling inapplicable
to the present case. The third party in Bayer filed his claim during execution; in the
present case, FBDC filed for intervention during the trial.

The timing of the filing of the third party claim is important because the timing
determines the remedies that a third party is allowed to file. A third party claimant under
Section 16 of Rule 39 (Execution, Satisfaction and Effect of Judgments) [17] of the 1997
Rules of Civil Procedure may vindicate his claim to the property in a separate action,
because intervention is no longer allowed as judgment has already been rendered. A
third party claimant under Section 14 of Rule 57 (Preliminary Attachment) [18] of the 1997
Rules of Civil Procedure, on the other hand, may vindicate his claim to the property by
intervention because he has a legal interest in the matter in litigation. [19]
We allow FBDCs intervention in the present case because FBDC satisfied the
requirements of Section 1, Rule 19 (Intervention) of the 1997 Rules of Civil Procedure,
which reads as follows:

Section 1. Who may intervene. A person who has a legal interest in the
matter in litigation, or in the success of either of the parties, or an interest
against both, or is so situated as to be adversely affected by a distribution
or other disposition of property in the custody of the court or of an officer
thereof may, with leave of court, be allowed to intervene in the action. The
court shall consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties, and whether
or not the intervenors rights may be fully protected in a separate
proceeding.

Although intervention is not mandatory, nothing in the Rules proscribes

intervention. The trial courts objection against FBDCs intervention has been set aside
by our ruling that Section 22 of the lease contract is not pactum commissorium.

Indeed, contrary to respondents contentions, we ruled in BA Finance Corporation v.

Court of Appeals that where the mortgagees right to the possession of the specific
property is evident, the action need only be maintained against the possessor of the
property. However, where the mortgagees right to possession is put to great doubt, as
when a contending party might contest the legal bases for mortgagees cause of action
or an adverse and independent claim of ownership or right of possession is raised by
the contending party, it could become essential to have other persons involved and
accordingly impleaded for a complete determination and resolution of the
controversy. Thus:

A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the
possession of the property, unless and until the mortgagor defaults and
the mortgagee thereupon seeks to foreclose thereon. Since the
mortgagees right of possession is conditioned upon the actual default
which itself may be controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in order to allow a full
and conclusive determination of the case. When the mortgagee seeks
a replevin in order to effect the eventual foreclosure of the mortgage, it is
not only the existence of, but also the mortgagors default on, the chattel
mortgage that, among other things, can properly uphold the right
to replevy the property. The burden to establish a valid justification for that
action lies with the plaintiff [-mortgagee]. An adverse possessor, who is
not the mortgagor, cannot just be deprived of his possession, let alone be
bound by the terms of the chattel mortgage contract, simply because the
mortgagee brings up an action for replevin.[20] (Emphasis added)

FBDC exercised its lien to Tirrenos properties even before respondents

and Tirreno executed their Deed of Chattel Mortgage. FBDC is adversely affected by
the disposition of the properties seized by the sheriff. Moreover, FBDCs intervention in
the present case will result in a complete adjudication of the issues brought about
by Tirrenos creation of multiple liens on the same properties and subsequent default in
its obligations.

Sheriffs Indemnity Bond

FBDC laments the failure of the trial court to require respondents to file an
indemnity bond for FBDCs protection. The trial court, on the other hand, did not mention
the indemnity bond in its Orders dated 7 March 2003 and 3 July 2003.

Pursuant to Section 14 of Rule 57, the sheriff is not obligated to turn over to
respondents the properties subject of this case in view of respondents failure to file a
bond. The bond in Section 14 of Rule 57 (proceedings where property is claimed by
third person) is different from the bond in Section 3 of the same rule (affidavit and
bond). Under Section 14 of Rule 57, the purpose of the bond is to indemnify the sheriff
against any claim by the intervenor to the property seized or for damages arising from
such seizure, which the sheriff was making and for which the sheriff was directly
responsible to the third party. Section 3, Rule 57, on the other hand, refers to the
attachment bond to assure the return of defendants personal property or the payment of
damages to the defendant if the plaintiffs action to recover possession of the same
property fails, in order to protect the plaintiffs right of possession of said property, or
prevent the defendant from destroying the same during the pendency of the suit.

Because of the absence of the indemnity bond in the present case, FBDC may also
hold the sheriff for damages for the taking or keeping of the properties seized from
FBDC.

WHEREFORE, we GRANT the petition. We SET ASIDE the Orders dated 7 March
2003 and 3 July 2003 of Branch 59 of the Regional Trial Court of Makati City in Civil
Case No. 01-1452 dismissing Fort Bonifacio Development Corporations Third Party
Claim and denying Fort Bonifacio Development Corporations Motion to Intervene and
Admit Complaint in Intervention. We REINSTATE Fort Bonifacio Development
Corporations Third Party Claim and GRANT its Motion to Intervene and Admit
Complaint in Intervention. Fort Bonifacio Development Corporation may hold the Sheriff
liable for the seizure and delivery of the properties subject of this case because of the
lack of an indemnity bond.
SO ORDERED.
9. G.R. No. L-17500 May 16, 1967

PEOPLE'S BANK AND TRUST CO. and ATLANTIC GULF AND PACIFIC CO. OF
MANILA, plaintiffs-appellants,
vs.
DAHICAN LUMBER COMPANY, DAHICAN AMERICAN LUMBER CORPORATION
and CONNELL BROS. CO. (PHIL.), defendants-appellants.

Angel S. Gamboa for defendants-appellants.

Laurel Law Offices for plaintiffs-appellants.

DIZON, J.:

On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia
corporation licensed to do business in the Philippines — hereinafter referred to as
ATLANTIC — sold and assigned all its rights in the Dahican Lumber concession to
Dahican Lumber Company — hereinafter referred to as DALCO — for the total sum of
$500,000.00, of which only the amount of $50,000.00 was paid. Thereafter, to develop
the concession, DALCO obtained various loans from the People's Bank & Trust
Company — hereinafter referred to as the BANK — amounting, as of July 13, 1950, to
P200,000.00. In addition, DALCO obtained, through the BANK, a loan of $250,000.00
from the Export-Import Bank of Washington D.C., evidenced by five promissory notes of
$50,000.00 each, maturing on different dates, executed by both DALCO and the
Dahican America Lumber Corporation, a foreign corporation and a stockholder of
DALCO, — hereinafter referred to as DAMCO, all payable to the BANK or its order.

As security for the payment of the abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK — the latter acting for itself and as trustee for the Export-
Import Bank of Washington D.C. — a deed of mortgage covering five parcels of land
situated in the province of Camarines Norte together with all the buildings and other
improvements existing thereon and all the personal properties of the mortgagor located
in its place of business in the municipalities of Mambulao and Capalonga, Camarines
Norte (Exhibit D). On the same date, DALCO executed a second mortgage on the same
properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale
price of the lumber concession amounting to the sum of $450,000.00 (Exhibit G). Both
deeds contained the following provision extending the mortgage lien to properties to be
subsequently acquired — referred to hereafter as "after acquired properties" — by the
mortgagor:

All property of every nature and description taken in exchange or replacement,

and all buildings, machinery, fixtures, tools equipment and other property which
the Mortgagor may hereafter acquire, construct, install, attach, or use in, to,
upon, or in connection with the premises, shall immediately be and become
subject to the lien of this mortgage in the same manner and to the same extent
as if now included therein, and the Mortgagor shall from time to time during the
existence of this mortgage furnish the Mortgagee with an accurate inventory of
such substituted and subsequently acquired property.

Both mortgages were registered in the Office of the Register of Deeds of Camarines
Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of
stock of DALCO and 9,286 shares of DAMCO to secure the same obligations.

Upon DALCO's and DAMCO's failure to pay the fifth promissory note upon its maturity,
the BANK paid the same to the Export-Import Bank of Washington D.C., and the latter
assigned to the former its credit and the first mortgage securing it. Subsequently, the
BANK gave DALCO and DAMCO up to April 1, 1953 to pay the overdue promissory
note.

After July 13, 1950 — the date of execution of the mortgages mentioned above —
DALCO purchased various machineries, equipment, spare parts and supplies in
addition to, or in replacement of some of those already owned and used by it on the
date aforesaid. Pursuant to the provision of the mortgage deeds quoted theretofore
regarding "after acquired properties," the BANK requested DALCO to submit complete
lists of said properties but the latter failed to do so. In connection with these purchases,
there appeared in the books of DALCO as due to Connell Bros. Company (Philippines)
— a domestic corporation who was acting as the general purchasing agent of DALCO
— thereinafter called CONNELL — the sum of P452,860.55 and to DAMCO, the sum of
P2,151,678.34.

On December 16, 1952, the Board of Directors of DALCO, in a special meeting called
for the purpose, passed a resolution agreeing to rescind the alleged sales of equipment,
spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the corresponding
agreements of rescission of sale were executed between DALCO and DAMCO, on the
one hand and between DALCO and CONNELL, on the other.

On January 13, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded
that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953; ATLANTIC and the BANK, commenced foreclosure
proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte application for the appointment of a
Receiver and/or for the issuance of a writ of preliminary injunction to restrain DALCO
from removing its properties. The court granted both remedies and appointed George H.
Evans as Receiver. Upon defendants' motion, however, the court, in its order of
February 21, 1953, discharged the Receiver.

On March 2, 1953, defendants filed their answer denying the material allegations of the
complaint and alleging several affirmative defenses and a counterclaim.

On March 4 of the same year, CONNELL, filed a motion for intervention alleging that it
was the owner and possessor of some of the equipments, spare parts and supplies
which DALCO had acquired subsequent to the execution of the mortgages sought to be
foreclosed and which plaintiffs claimed were covered by the lien. In its order of March
18,1953 the Court granted the motion, as well as plaintiffs' motion to set aside the order
discharging the Receiver. Consequently, Evans was reinstated.

On April 1, 1953, CONNELL filed its answer denying the material averment of the
complaint, and asserting affirmative defenses and a counterclaim.
Upon motion of the parties the Court, on September 30, 1953, issued an order
transferring the venue of the action to the Court of First Instance of Manila where it was
docketed as Civil Case No. 20987.

On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all the
machineries, equipment and supplies of DALCO, and the same were subsequently sold
for a total consideration of P175,000.00 which was deposited in court pending final
determination of the action. By a similar agreement one-half (P87,500.00) of this
amount was considered as representing the proceeds obtained from the sale of the
"undebated properties" (those not claimed by DAMCO and CONNELL), and the other
half as representing those obtained from the sale of the "after acquired properties".

After due trial, the Court, on July 15, 1960, rendered judgment as follows:

IN VIEW WHEREFORE, the Court:

1. Condemns Dahican Lumber Co. to pay unto People's Bank the sum of
P200,000,00 with 7% interest per annum from July 13, 1950, Plus another sum
of P100,000.00 with 5% interest per annum from July 13, 1950; plus 10% on both
principal sums as attorney's fees;

2. Condemns Dahican Lumber Co. to pay unto Atlantic Gulf the sum of
P900,000.00 with 4% interest per annum from July 3, 1950, plus 10% on both
principal as attorney's fees;

3. Condemns Dahican Lumber Co. to pay unto Connell Bros, the sum of
P425,860.55, and to pay unto Dahican American Lumber Co. the sum of
P2,151,678.24 both with legal interest from the date of the filing of the respective
answers of those parties, 10% of the principals as attorney's fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00,
after deducting the recognized expenses, one-half thereof be adjudicated unto
plaintiffs, the court no longer specifying the share of each because of that
 announced intention under the stipulation of facts to "pool their resources"; as to
the other one-half, the same should be adjudicated unto both plaintiffs, and
defendant Dahican American and Connell Bros. in the proportion already set
forth on page 9, lines 21, 22 and 23 of the body of this decision; but with the
understanding that whatever plaintiffs and Dahican American and Connell Bros.
should receive from the P175,000.00 deposited in the Court shall be applied to
the judgments particularly rendered in favor of each;

5. No other pronouncement as to costs; but the costs of the receivership as to

the debated properties shall be borne by People's Bank, Atlantic Gulf, Connell
Bros., and Dahican American Lumber Co., pro-rata.

On the following day, the Court issued the following supplementary decision:

IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in

order to add the following paragraph 6:

6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90)
days, the Court orders the sale at public auction of the lands object of the
mortgages to satisfy the said mortgages and costs of foreclosure.

From the above-quoted decision, all the parties appealed.

Main contentions of plaintiffs as appellants are the following: that the "after acquired
properties" were subject to the deeds of mortgage mentioned heretofore; that said
properties were acquired from suppliers other than DAMCO and CONNELL; that even
granting that DAMCO and CONNELL were the real suppliers, the rescission of the sales
to DALCO could not prejudice the mortgage lien in favor of plaintiffs; that considering
the foregoing, the proceeds obtained from the sale of the "after acquired properties" as
well as those obtained from the sale of the "undebated properties" in the total sum of
P175,000.00 should have been awarded exclusively to plaintiffs by reason of the
mortgage lien they had thereon; that damages should have been awarded to plaintiffs
against defendants, all of them being guilty of an attempt to defraud the former when
they sought to rescind the sales already mentioned for the purpose of defeating their
mortgage lien, and finally, that defendants should have been made to bear all the
expenses of the receivership, costs and attorney's fees.

On the other hand, defendants-appellants contend that the trial court erred: firstly, in not
holding that plaintiffs had no cause of action against them because the promissory note
sued upon was not yet due when the action to foreclose the mortgages was
commenced; secondly, in not holding that the mortgages aforesaid were null and void
as regards the "after acquired properties" of DALCO because they were not registered
in accordance with the Chattel Mortgage Law, the court erring, as a consequence, in
holding that said properties were subject to the mortgage lien in favor of plaintiffs;
thirdly, in not holding that the provision of the fourth paragraph of each of said
mortgages did not automatically make subject to such mortgages the "after acquired
properties", the only meaning thereof being that the mortgagor was willing to constitute
a lien over such properties; fourthly, in not ruling that said stipulation was void as
against DAMCO and CONNELL and in not awarding the proceeds obtained from the
sale of the "after acquired properties" to the latter exclusively; fifthly, in appointing a
Receiver and in holding that the damages suffered by DAMCO and CONNELL by
reason of the depreciation or loss in value of the "after acquired properties" placed
under receivership was damnum absque injuria and, consequently, in not awarding, to
said parties the corresponding damages claimed in their counterclaim; lastly, in
sentencing DALCO and DAMCO to pay attorney's fees and in requiring DAMCO and
CONNELL to pay the costs of the Receivership, instead of sentencing plaintiffs to pay
attorney's fees.

Plaintiffs' brief as appellants submit six assignments of error, while that of defendants
also as appellants submit a total of seventeen. However, the multifarious issues thus
before Us may be resolved, directly or indirectly, by deciding the following issues:

Firstly, are the so-called "after acquired properties" covered by and subject to the deeds
of mortgage subject of foreclosure?; secondly, assuming that they are subject thereto,
are the mortgages valid and binding on the properties aforesaid inspite of the fact that
they were not registered in accordance with the provisions of the Chattel Mortgage
Law?; thirdly, assuming again that the mortgages are valid and binding upon the "after
acquired properties", what is the effect thereon, if any, of the rescission of sales entered
into, on the one hand, between DAMCO and DALCO, and between DALCO and
CONNELL, on the other?; and lastly, was the action to foreclose the mortgages
premature?

A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all
property of every nature and description taken in exchange or replacement, as well as
all buildings, machineries, fixtures, tools, equipments, and other property that the
mortgagor may acquire, construct, install, attach; or use in, to upon, or in connection
with the premises — that is, its lumber concession — "shall immediately be and become
subject to the lien" of both mortgages in the same manner and to the same extent as if
already included therein at the time of their execution. As the language thus used
leaves no room for doubt as to the intention of the parties, We see no useful purpose in
discussing the matter extensively. Suffice it to say that the stipulation referred to is
common, and We might say logical, in all cases where the properties given as collateral
are perishable or subject to inevitable wear and tear or were intended to be sold, or to
be used — thus becoming subject to the inevitable wear and tear — but with the
understanding — express or implied — that they shall be replaced with others to be
thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral,
its obvious purpose being to maintain, to the extent allowed by circumstances, the
original value of the properties given as security. Indeed, if such properties were of the
nature already referred to, it would be poor judgment on the part of the creditor who
does not see to it that a similar provision is included in the contract.

B. But defendants contend that, granting without admitting, that the deeds of mortgage
in question cover the "after acquired properties" of DALCO, the same are void and
ineffectual because they were not registered in accordance with the Chattel Mortgage
Law. In support of this and of the proposition that, even if said mortgages were valid,
they should not prejudice them, the defendants argue (1) that the deeds do not describe
the mortgaged chattels specifically, nor were they registered in accordance with the
Chattel Mortgage Law; (2) that the stipulation contained in the fourth paragraph thereof
constitutes "mere executory agreements to give a lien" over the "after acquired
properties" upon their acquisition; and (3) that any mortgage stipulation concerning
"after acquired properties" should not prejudice creditors and other third persons such
as DAMCO and CONNELL.

The stipulation under consideration strongly belies defendants contention. As adverted

to hereinbefore, it states that all property of every nature, building, machinery etc. taken
in exchange or replacement by the mortgagor "shall immediately be and become
subject to the lien of this mortgage in the same manner and to the same extent as if
now included therein". No clearer language could have been chosen.

Conceding, on the other hand, that it is the law in this jurisdiction that, to affect third
persons, a chattel mortgage must be registered and must describe the mortgaged
chattels or personal properties sufficiently to enable the parties and any other person to
identify them, We say that such law does not apply to this case.

As the mortgages in question were executed on July 13, 1950 with the old Civil Code
still in force, there can be no doubt that the provisions of said code must govern their
interpretation and the question of their validity. It happens however, that Articles 334
and 1877 of the old Civil Code are substantially reproduced in Articles 415 and 2127,
respectively, of the new Civil Code. It is, therefore, immaterial in this case whether we
take the former or the latter as guide in deciding the point under consideration.

Article 415 does not define real property but enumerates what are considered as such,
among them being machinery, receptacles, instruments or replacements intended by
owner of the tenement for an industry or works which may be carried on in a building or
on a piece of land, and shall tend directly to meet the needs of the said industry or
works.

On the strength of the above-quoted legal provisions, the lower court held that
inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs, they
came within the operation of Art. 415, paragraph 5 and Art. 2127 of the New Civil
Code".

We find the above ruling in agreement with our decisions on the subject:

(1) In Berkenkotter vs. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph 5
of the Civil Code (old) gives the character of real property to machinery, liquid
containers, instruments or replacements intended by the owner of any building or land
for use in connection with any industry or trade being carried on therein and which are
expressly adapted to meet the requirements of such trade or industry.

(2) In Cu Unjieng e Hijos vs. Mabalacat Sugar Co., 58 Phil. 439, We held that a
mortgage constituted on a sugar central includes not only the land on which it is built but
also the buildings, machinery and accessories installed at the time the mortgage was
constituted as well as the buildings, machinery and accessories belonging to the
mortgagor, installed after the constitution thereof .

It is not disputed in the case at bar that the "after acquired properties" were purchased
by DALCO in connection with, and for use in the development of its lumber concession
and that they were purchased in addition to, or in replacement of those already existing
in the premises on July 13, 1950. In Law, therefore, they must be deemed to have
been immobilized, with the result that the real estate mortgages involved herein —
which were registered as such — did not have to be registered a second time as chattel
mortgages in order to bind the "after acquired properties" and affect third parties.

But defendants, invoking the case of Davao Sawmill Company vs. Castillo, 61 Phil. 709,
claim that the "after acquired properties" did not become immobilized because DALCO
did not own the whole area of its lumber concession all over which said properties were
scattered.

The facts in the Davao Sawmill case, however, are not on all fours with the ones
obtaining in the present. In the former, the Davao Sawmill Company, Inc., had
repeatedly treated the machinery therein involved as personal property by executing
chattel mortgages thereon in favor of third parties, while in the present case the parties
had treated the "after acquired properties" as real properties by expressly and
unequivocally agreeing that they shall automatically become subject to the lien of the
real estate mortgages executed by them. In the Davao Sawmill decision it was, in fact,
stated that "the characterization of the property as chattels by the appellant is indicative
of intention and impresses upon the property the character determined by the parties"
(61 Phil. 112, emphasis supplied). In the present case, the characterization of the "after
acquired properties" as real property was made not only by one but by both interested
parties. There is, therefore, more reason to hold that such consensus impresses upon
the properties the character determined by the parties who must now be held in
estoppel to question it.

Moreover, quoted in the Davao Sawmill case was that of Valdez vs. Central Altagracia,
Inc. (225 U.S. 58) where it was held that while under the general law of Puerto Rico,
machinery placed on property by a tenant does not become immobilized, yet, when the
tenant places it there pursuant to contract that it shall belong to the owner, it then
becomes immobilized as to that tenant and even as against his assignees and creditors
who had sufficient notice of such stipulation. In the case at bar it is not disputed that
DALCO purchased the "after acquired properties" to be placed on, and be used in the
development of its lumber concession, and agreed further that the same shall become
immediately subject to the lien constituted by the questioned mortgages. There is also
abundant evidence in the record that DAMCO and CONNELL had full notice of such
stipulation and had never thought of disputed validity until the present case was filed.
Consequently all of them must be deemed barred from denying that the properties in
question had become immobilized.

What We have said heretofore sufficiently disposes all the arguments adduced by
defendants in support their contention that the mortgages under foreclosure are void,
and, that, even if valid, are ineffectual as against DAMCO and CONNELL.

Now to the question of whether or not DAMCO CONNELL have rights over the "after
acquired properties" superior to the mortgage lien constituted thereon in favor of
plaintiffs. It is defendants' contention that in relation to said properties they are "unpaid
sellers"; that as such they had not only a superior lien on the "after acquired properties"
but also the right to rescind the sales thereof to DALCO.

This contention — it is obvious — would have validity only if it were true that DAMCO
and CONNELL were the suppliers or vendors of the "after acquired properties".
According to the record, plaintiffs did not know their exact identity and description prior
to the filing of the case bar because DALCO, in violation of its obligation under the
mortgages, had failed and refused theretofore to submit a complete list thereof. In the
course of the proceedings, however, when defendants moved to dissolve the order of
receivership and the writ of preliminary injunction issued by the lower court, they
attached to their motion the lists marked as Exhibits 1, 2 and 3 describing the properties
aforesaid. Later on, the parties agreed to consider said lists as identifying and
describing the "after acquire properties," and engaged the services of auditors to
examine the books of DALCO so as to bring out the details thereof. The report of the
auditors and its annexes (Exhibits V, V-1 — V4) show that neither DAMCO nor
CONNELL had supplied any of the goods of which they respective claimed to be the
unpaid seller; that all items were supplied by different parties, neither of whom appeared
to be DAMCO or CONNELL that, in fact, CONNELL collected a 5% service charge on
the net value of all items it claims to have sold to DALCO and which, in truth, it had
purchased for DALCO as the latter's general agent; that CONNELL had to issue its own
invoices in addition to those o f the real suppliers in order to collect and justify such
service charge.

Taking into account the above circumstances together with the fact that DAMCO was a
stockholder and CONNELL was not only a stockholder but the general agent of DALCO,
their claim to be the suppliers of the "after acquired required properties" would seem to
be preposterous. The most that can be claimed on the basis of the evidence is that
DAMCO and CONNELL probably financed some of the purchases. But if DALCO still
owes them any amount in this connection, it is clear that, as financiers, they can not
claim any right over the "after acquired properties" superior to the lien constituted
thereon by virtue of the deeds of mortgage under foreclosure. Indeed, the execution of
the rescission of sales mentioned heretofore appears to be but a desperate attempt to
better or improve DAMCO and CONNELL's position by enabling them to assume the
role of "unpaid suppliers" and thus claim a vendor's lien over the "after acquired
properties". The attempt, of course, is utterly ineffectual, not only because they are not
the "unpaid sellers" they claim to be but also because there is abundant evidence in the
record showing that both DAMCO and CONNELL had known and admitted from the
beginning that the "after acquired properties" of DALCO were meant to be included in
the first and second mortgages under foreclosure.

The claim that Belden, of ATLANTIC, had given his consent to the rescission, expressly
or otherwise, is of no consequence and does not make the rescission valid and legally
effective. It must be stated clearly, however, in justice to Belden, that, as a member of
the Board of Directors of DALCO, he opposed the resolution of December 15, 1952
passed by said Board and the subsequent rescission of the sales.

Finally, defendants claim that the action to foreclose the mortgages filed on February
12, 1953 was premature because the promissory note sued upon did not fall due until
April 1 of the same year, concluding from this that, when the action was commenced,
the plaintiffs had no cause of action. Upon this question the lower court says the
following in the appealed judgment;

The other is the defense of prematurity of the causes of action in that plaintiffs,
as a matter of grace, conceded an extension of time to pay up to 1 April, 1953
while the action was filed on 12 February, 1953, but, as to this, the Court taking it
that there is absolutely no debate that Dahican Lumber Co., was insolvent as of
the date of the filing of the complaint, it should follow that the debtor thereby lost
the benefit to the period.

x x x unless he gives a guaranty or security for the debt . . . (Art. 1198, New Civil
Code);

and as the guaranty was plainly inadequate since the claim of plaintiffs reached
in the aggregate, P1,200,000 excluding interest while the aggregate price of the
 "after-acquired" chattels claimed by Connell under the rescission contracts was
P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost
all the properties were sold afterwards for only P175,000.00, page 47, Vol. IV,
and the Court understanding that when the law permits the debtor to enjoy the
benefits of the period notwithstanding that he is insolvent by his giving a guaranty
for the debt, that must mean a new and efficient guaranty, must concede that the
causes of action for collection of the notes were not premature.

Very little need be added to the above. Defendants, however, contend that the lower
court had no basis for finding that, when the action was commenced, DALCO was
insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code. We find,
however, that the finding of the trial court is sufficiently supported by the evidence
particularly the resolution marked as Exhibit K, which shows that on December 16, 1952
— in the words of the Chairman of the Board — DALCO was "without funds, neither
does it expect to have any funds in the foreseeable future." (p. 64, record on appeal).

The remaining issues, namely, whether or not the proceeds obtained from the sale of
the "after acquired properties" should have been awarded exclusively to the plaintiffs or
to DAMCO and CONNELL, and if in law they should be distributed among said parties,
whether or not the distribution should be pro-rata or otherwise; whether or not plaintiffs
are entitled to damages; and, lastly, whether or not the expenses incidental to the
Receivership should be borne by all the parties on a pro-rata basis or exclusively by one
or some of them are of a secondary nature as they are already impliedly resolved by
what has been said heretofore.

As regard the proceeds obtained from the sale of the of after acquired properties" and
the "undebated properties", it is clear, in view of our opinion sustaining the validity of the
mortgages in relation thereto, that said proceeds should be awarded exclusively to the
plaintiffs in payment of the money obligations secured by the mortgages under
foreclosure.
On the question of plaintiffs' right to recover damages from the defendants, the law
(Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected in
cases of contracts intended to defraud them; and that any third person who induces
another to violate his contract shall be liable for damages to the other contracting party.
Similar liability is demandable under Arts. 20 and 21 — which may be given retroactive
effect (Arts. 225253) — or under Arts. 1902 and 2176 of the Old Civil Code.

The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO,
after failing to pay the fifth promissory note upon its maturity, conspired jointly with
CONNELL to violate the provisions of the fourth paragraph of the mortgages under
foreclosure by attempting to defeat plaintiffs' mortgage lien on the "after acquired
properties". As a result, the plaintiffs had to go to court to protect their rights thus
jeopardized. Defendants' liability for damages is therefore clear.

However, the measure of the damages suffered by the plaintiffs is not what the latter
claim, namely, the difference between the alleged total obligation secured by the
mortgages amounting to around P1,200,000.00, plus the stipulated interest and
attorney's fees, on the one hand, and the proceeds obtained from the sale of "after
acquired properties", and of those that were not claimed neither by DAMCO nor
CONNELL, on the other. Considering that the sale of the real properties subject to the
mortgages under foreclosure has not been effected, and considering further the lack of
evidence showing that the true value of all the properties already sold was not realized
because their sale was under stress, We feel that We do not have before Us the true
elements or factors that should determine the amount of damages that plaintiffs are
entitled recover from defendants. It is, however, our considered opinion that, upon the
facts established, all the expenses of the Receivership, which was deemed necessary
to safeguard the rights of the plaintiffs, should be borne by the defendants, jointly and
severally, in the same manner that all of them should pay to the plaintiffs, jointly a
severally, attorney's fees awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the
plaintiffs are entitled to recover from the defendants, the record of this case shall be
remanded below for the corresponding proceedings.

Modified as above indicated, the appealed judgment is affirmed in all other respects.
With costs.

10. G.R. No. 150197

PRUDENTIAL BANK Petitioner,

- versus -

CALLEJO, SR.,
TINGA, and DON A. ALVIAR and GEORGIA
B. ALVIAR, Respondents.

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision[1]of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the
Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.

Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners
of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title
(TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a
deed of real estate mortgage in favor of petitioner Prudential Bank to secure the
payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of
TCT No. 438157. On 4 August 1975, respondents executed the corresponding
promissory note, PN BD#75/C-252, covering the said loan, which provides that the loan
matured on 4 August 1976 at an interest rate of 12% per annum with a 2% service
charge, and that the note is secured by a real estate mortgage as
aforementioned.[3] Significantly, the real estate mortgage contained the following clause:
 That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary as
appears in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are
described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute owner free from all
liens and incumbrances. . . .[4]

On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345

for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured by
a hold-out on the mortgagors foreign currency savings account with the bank under
Account No. 129, and that the mortgagors passbook is to be surrendered to the bank
until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of
which the husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in the
note, the loan is secured by Clean-Phase out TOD CA 3923, which means that the
temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted
into an ordinary loan in compliance with a Central Bank circular directing the
discontinuance of overdrafts.[7]

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its
approval of a straight loan of P545,000.00, the proceeds of which shall be used to
liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned that
the securities for the loan were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co. and the chattel mortgage on various heavy and transportation
equipment.[8]

On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the

obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real
estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam
Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment
was acknowledged by petitioner who accordingly released the mortgage over the two
properties.[9]

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage
on the property covered by TCT No. 438157. Per petitioners computation, respondents
had the total obligation of P1,608,256.68, covering the three (3) promissory notes, to
wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345 for P382,680.83, and PN
BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty charges.
The public auction sale of the mortgaged property was set on 15 January 1980.[10]

Respondents filed a complaint for damages with a prayer for the issuance of a writ of
preliminary injunction with the RTC of Pasig,[11] claiming that they have paid their
principal loan secured by the mortgaged property, and thus the mortgage should not be
foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 made on 6
March 1979 was not a payment made by respondents, but by G.B. Alviar Realty and
Development Inc., which has a separate loan with the bank secured by a separate
mortgage.[12]

On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to
proceed with the extra-judicial foreclosure.[13]Respondents sought reconsideration of the
decision.[14] On 24 August 1994, the trial court issued an Order setting aside its earlier
decision and awarded attorneys fees to respondents. [15] It found that only
the P250,000.00 loan is secured by the mortgage on the land covered by TCT No.
438157. On the other hand, the P382,680.83 loan is secured by the foreign currency
deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured
loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in
compliance with a Central Bank circular. According to the trial court, the blanket
mortgage clause relied upon by petitioner applies only to future loans obtained by the
mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of errors:

I. The trial court erred in holding that the real estate

mortgage covers only the promissory note BD#75/C-252 for the
sum of P250,000.00.

II. The trial court erred in holding that the promissory note
BD#76/C-345 for P2,640,000.00 (P382,680.83 outstanding
principal balance) is not covered by the real estate mortgage by
expressed agreement.

III. The trial court erred in holding that Promissory Note

BD#76/C-430 for P545,000.00 is not covered by the real estate
mortgage.

IV. The trial court erred in holding that the real estate
mortgage is a contract of adhesion.
 V. The trial court erred in holding defendant-appellant
liable to pay plaintiffs-appellees attorneys fees for P20,000.00.[16]

The Court of Appeals affirmed the Order of the trial court but deleted the award
of attorneys fees.[17] It ruled that while a continuing loan or credit accommodation based
on only one security or mortgage is a common practice in financial and commercial
institutions, such agreement must be clear and unequivocal. In the instant case, the
parties executed different promissory notes agreeing to a particular security for each
loan. Thus, the appellate court ruled that the extrajudicial foreclosure sale of the
property for the three loans is improper.[18]

The Court of Appeals, however, found that respondents have not yet paid
the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty and
Development, Inc.[19]

Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors
raised in the Court of Appeals as grounds herein.

Petitioner maintains that the blanket mortgage clause or the dragnet clause in the
real estate mortgage expressly covers not only the P250,000.00 under PN BD#75/C-
252, but also the two other promissory notes included in the application for extrajudicial
foreclosure of real estate mortgage.[20] Thus, it claims that it acted within the terms of
the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate
mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,[21] Tad-Y v. Philippine
National Bank,[22] Quimson v. Philippine National Bank,[23] C & C Commercial v.
Philippine National Bank,[24] Mojica v. Court of Appeals,[25] and China Banking
Corporation v. Court of Appeals,[26]all of which upheld the validity of mortgage contracts
securing future advancements.

Anent the Court of Appeals conclusion that the parties did not intend to include
PN BD#76/C-345 in the real estate mortgage because the same was specifically
secured by a foreign currency deposit account, petitioner states that there is no law or
rule which prohibits an obligation from being covered by more than one
security.[27] Besides, respondents even continued to withdraw from the same foreign
currency account even while the promissory note was still outstanding, strengthening
the belief that it was the real estate mortgage that principally secured all of respondents
promissory notes.[28] As for PN BD#76/C-345, which the Court of Appeals found to be
exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such
security is not exclusive, as the dragnet clause of the real estate mortgage covers all
the obligations of the respondents.[29]

Moreover, petitioner insists that respondents attempt to evade foreclosure by the

expediency of stating that the promissory notes were executed by them not in their
personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact
for home construction and personal consumption of respondents. Thus, it states that
there is a need to pierce the veil of corporate fiction.[30]

Finally, petitioner alleges that the mortgage contract was executed by respondents with
knowledge and understanding of the dragnet clause, being highly educated individuals,
seasoned businesspersons, and political personalities.[31] There was no oppressive use
of superior bargaining power in the execution of the promissory notes and the real
estate mortgage.[32]

For their part, respondents claim that the dragnet clause cannot be applied to the
subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans
are covered by separate promissory notes that expressly provide for a different form of
security.[33] They reiterate the holding of the trial court that the blanket mortgage clause
would apply only to loans obtained jointly by respondents, and not to loans obtained by
other parties.[34] Respondents also place a premium on the finding of the lower courts
that the real estate mortgage clause is a contract of adhesion and must be strictly
construed against petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity of the
blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket
mortgage clause; and consequently, (iii) the propriety of seeking foreclosure of the
mortgaged property for the non-payment of the three loans.

At this point, it is important to note that one of the loans sought to be included in the
blanket mortgage clause was obtained by respondents for Donalco Trading, Inc.
Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading,
Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of
corporate fiction and hold respondents liable even for obligations they incurred for the
corporation. The mortgage contract states that the mortgage covers as well as those
that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct or indirect,
principal or secondary. Well-settled is the rule that a corporation has a personality
separate and distinct from that of its officers and stockholders. Officers of a corporation
are not personally liable for their acts as such officers unless it is shown that they have
exceeded their authority.[36] However, the legal fiction that a corporation has a
personality separate and distinct from stockholders and members may be disregarded if
it is used as a means to perpetuate fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, or to confuse legitimate
issues.[37] PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the
respondents, is not within the contemplation of the blanket mortgage clause. Moreover,
petitioner is unable to show that respondents are hiding behind the corporate structure
to evade payment of their obligations. Save for the notation in the promissory note that
the loan was for house construction and personal consumption, there is no proof
showing that the loan was indeed for respondents personal consumption. Besides,
petitioner agreed to the terms of the promissory note. If respondents were indeed the
real parties to the loan, petitioner, a big, well-established institution of long standing that
it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their
personal capacity and not as officers of the corporation.
Now on the main issues.

A blanket mortgage clause, also known as a dragnet clause in American jurisprudence,

is one which is specifically phrased to subsume all debts of past or future origins. Such
clauses are carefully scrutinized and strictly construed.[38] Mortgages of this character
enable the parties to provide continuous dealings, the nature or extent of which may not
be known or anticipated at the time, and they avoid the expense and inconvenience of
executing a new security on each new transaction.[39] A dragnet clause operates as a
convenience and accommodation to the borrowers as it makes available additional
funds without their having to execute additional security documents, thereby saving
time, travel, loan closing costs, costs of extra legal services, recording fees, et
cetera.[40] Indeed, it has been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts, [41] and the amounts named
as consideration in said contracts do not limit the amount for which the mortgage may
stand as security if from the four corners of the instrument the intent to secure future
and other indebtedness can be gathered.[42]

The blanket mortgage clause in the instant case states:

That for and in consideration of certain loans, overdraft and other
credit accommodations obtained from the Mortgagee by the Mortgagor
and/or ________________ hereinafter referred to, irrespective of number,
as DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two
Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the Mortgagor and/or
DEBTOR, including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or secondary as
appears in the accounts, books and records of the Mortgagee, the
Mortgagor does hereby transfer and convey by way of mortgage unto the
Mortgagee, its successors or assigns, the parcels of land which are
described in the list inserted on the back of this document, and/or
 appended hereto, together with all the buildings and improvements now
existing or which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute owner free from all
liens and incumbrances. . . .[43] (Emphasis supplied.)

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only the P250,000.00 loan from the
petitioner, but also future credit facilities and advancements that may be obtained by the
respondents. The terms of the above provision being clear and unambiguous, there is
neither need nor excuse to construe it otherwise.

The cases cited by petitioner, while affirming the validity of dragnet clauses or
blanket mortgage clauses, are of a different factual milieu from the instant case. There,
the subsequent loans were not covered by any security other than that for the mortgage
deeds which uniformly contained the dragnet clause.

In the case at bar, the subsequent loans obtained by respondents were secured
by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a
hold-out on his foreign currency savings account, while PN BD#76/C-430, executed by
respondents for Donalco Trading, Inc., was secured by Clean-Phase out TOD CA 3923
and eventually by a deed of assignment on two promissory notes executed by Bancom
Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a
chattel mortgage on various heavy and transportation equipment. The matter of PN
BD#76/C-430 has already been discussed. Thus, the critical issue is whether the
blanket mortgage clause applies even to subsequent advancements for which other
securities were intended, or particularly, to PN BD#76/C-345.

Under American jurisprudence, two schools of thought have emerged on this

question. One school advocates that a dragnet clause so worded as to be broad
enough to cover all other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is secured by another
mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will not
secure a note that expresses on its face that it is otherwise secured as to its entirety, at
least to anything other than a deficiency after exhausting the security specified
therein,[45] such deficiency being an indebtedness within the meaning of the mortgage,
in the absence of a special contract excluding it from the arrangement.[46]

The latter school represents the better position. The parties having conformed to the
blanket mortgage clause or dragnet clause, it is reasonable to conclude that they also
agreed to an implied understanding that subsequent loans need not be secured by
other securities, as the subsequent loans will be secured by the first mortgage. In other
words, the sufficiency of the first security is a corollary component of the dragnet clause.
But of course, there is no prohibition, as in the mortgage contract in issue, against
contractually requiring other securities for the subsequent loans. Thus, when the
mortgagor takes another loan for which another security was given it could not be
inferred that such loan was made in reliance solely on the original security with the
dragnet clause, but rather, on the new security given. This is the reliance on the security
test.

Hence, based on the reliance on the security test, the California court in the cited case
made an inquiry whether the second loan was made in reliance on the original security
containing a dragnet clause. Accordingly, finding a different security was taken for the
second loan no intent that the parties relied on the security of the first loan could be
inferred, so it was held. The rationale involved, the court said, was that the dragnet
clause in the first security instrument constituted a continuing offer by the borrower to
secure further loans under the security of the first security instrument, and that when the
lender accepted a different security he did not accept the offer.[47]
In another case, it was held that a mortgage with a dragnet clause is an offer by
the mortgagor to the bank to provide the security of the mortgage for advances of and
when they were made. Thus, it was concluded that the offer was not accepted by the
bank when a subsequent advance was made because (1) the second note was secured
by a chattel mortgage on certain vehicles, and the clause therein stated that the note
was secured by such chattel mortgage; (2) there was no reference in the second note or
chattel mortgage indicating a connection between the real estate mortgage and the
advance; (3) the mortgagor signed the real estate mortgage by her name alone,
whereas the second note and chattel mortgage were signed by the mortgagor doing
business under an assumed name; and (4) there was no allegation by the bank, and
apparently no proof, that it relied on the security of the real estate mortgage in making
the advance.[48]

Indeed, in some instances, it has been held that in the absence of clear, supportive
evidence of a contrary intention, a mortgage containing a dragnet clause will not be
extended to cover future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor.[49]

It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory notes. While
the existence and validity of the dragnet clause cannot be denied, there is a need to
respect the existence of the other security given for PN BD#76/C-345. The foreclosure
of the mortgaged property should only be for the P250,000.00 loan covered by PN
BD#75/C-252, and for any amount not covered by the security for the second
promissory note. As held in one case, where deeds absolute in form were executed to
secure any and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the payment of
such note, was in the absence of a special agreement to the contrary, within the
protection of the mortgage, notwithstanding the giving of the special security. [50] This is
recognition that while the dragnet clause subsists, the security specifically executed for
subsequent loans must first be exhausted before the mortgaged property can be
resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes subject
of this case, is a contract of adhesion, to which respondents only participation was the
affixing of their signatures or adhesion thereto.[51] A contract of adhesion is one in which
a party imposes a ready-made form of contract which the other party may accept or
reject, but which the latter cannot modify.[52]

The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be strictly
construed against the party responsible for its preparation.[53] If the parties intended that
the blanket mortgage clause shall cover subsequent advancement secured by separate
securities, then the same should have been indicated in the mortgage contract.
Consequently, any ambiguity is to be taken contra proferentum, that is, construed
against the party who caused the ambiguity which could have avoided it by the exercise
of a little more care.[54] To be more emphatic, any ambiguity in a contract whose terms
are susceptible of different interpretations must be read against the party who drafted
it,[55] which is the petitioner in this case.

Even the promissory notes in issue were made on standard forms prepared by
petitioner, and as such are likewise contracts of adhesion. Being of such nature, the
same should be interpreted strictly against petitioner and with even more reason since
having been accomplished by respondents in the presence of petitioners personnel and
approved by its manager, they could not have been unaware of the import and extent of
such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial
court found that respondents have not yet paid the P250,000.00, and gave no credence
to their claim that they paid the said amount when they paid petitioner P2,000,000.00.
Thus, the mortgaged property could still be properly subjected to foreclosure
proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted,
subject of course to defenses which are available to respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-
G.R. CV No. 59543 is AFFIRMED.
Costs against petitioner.
SO ORDERED.

11. G.R. No. 189316 June 1, 2013

PHILIPPINE NATIONAL BANK , Petitioner,

vs.
SPOUSES BERNARD and CRESENCIA MARANON, Respondents.

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, assailing
the Decision2 dated June 18, 2008 and Resolution3 dated August 10, 2009 of the Court
of Appeals (CA) in CA-G.R. SP No. 02513, which affirmed in toto the Orders dated
September 8, 20064 and December 6, 20065 of the Regional Trial Court (RTC) of
Bacolod City, Branch 54, directing petitioner Philippine National Bank (PNB) to release
in favor of Spouses Bernard and Cresencia Marafion (Spouses Marafion) the rental fees
it received amounting to Thirty Thousand Pesos (₱30,000.00).

The Facts

The controversy at bar involves a 152-square meter parcel of land located at Cuadra-
Smith Streets, Downtown, Bacolod (subject lot) erected with a building leased by
various tenants. The subject lot was among the properties mortgaged by Spouses
Rodolfo and Emilie Montealegre (Spouses Montealegre) to PNB as a security for a loan.
In their transactions with PNB, Spouses Montealegre used Transfer Certificate of Title
(TCT) No. T-156512 over the subject lot purportedly registered in the name of Emilie
Montealegre (Emilie).6

When Spouses Montealegre failed to pay the loan, PNB initiated foreclosure
proceedings on the mortgaged properties, including the subject lot. In the auction sale
held on August 16, 1991, PNB emerged as the highest bidder. It was issued the
corresponding Certificate of Sale dated December 17, 1991 7 which was subsequently
registered on February 4, 1992.8

Before the expiration of the redemption period or on July 29, 1992, Spouses Marañon
filed before the RTC a complaint for Annulment of Title, Reconveyance and
Damages9 against Spouses Montealegre, PNB, the Register of Deeds of Bacolod City
and the Ex-Officio Provincial Sheriff of Negros Occidental. The complaint, docketed as
Civil Case No. 7213, alleged that Spouses Marañon are the true registered owners of
the subject lot by virtue of TCT No. T-129577 which was illegally cancelled by TCT No.
T-156512 under the name of Emilie who used a falsified Deed of Sale bearing the
forged signatures of Spouse Marañon10 to effect the transfer of title to the property in
her name.

In its Answer,11 PNB averred that it is a mortgagee in good faith and for value and that
its mortgage lien on the property was registered thus valid and binding against the
whole world.

As reflected in the Pre-trial Order12 dated March 12, 1996, the parties stipulated, among
others, that the period for legal redemption of the subject lot has already expired.

While the trial proceedings were ongoing, Paterio Tolete (Tolete), one of the tenants of
the building erected on the subject lot deposited his rental payments with the Clerk of
Court of Bacolod City which, as of October 24, 2002, amounted to ₱144,000.00.

On June 2, 2006, the RTC rendered its Decision13 in favor of the respondents after
finding, based on the expert testimony of Colonel Rodolfo Castillo, Head of the Forensic
Technology Section of Bacolod City Philippine National Police, that the signatures of
Spouses Marañon in the Deed of Sale presented by Spouses Montealegre before the
Register of Deeds to cause the cancellation of TCT No. T-129577 were forged. Hence,
the RTC concluded the sale to be null and void and as such it did not transfer any right
or title in law. PNB was adjudged to be a mortgagee in good faith whose lien on the
subject lot must be respected. Accordingly, the Decision disposed as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs herein

respondents:

1. The cancellation of TCT No. 129577 over Lot 177-A-1 Bacolod Cadastre in the
name of Bernard Marañon and the issuance of new TCT No. 156512 in the name
of defendant Emilie Montealegre are hereby declared null and void;

2. The defendant Emilie Montealegre is ordered to reconvey the title over Lot No.
177-A-1, Bacolod Cadastre back to the plaintiffs Marañon herein respondents;

3. The Real Estate Mortgage lien of the Philippine National Bank registered on
the title of Lot No. 177-A-1 Bacolod Cadastre shall stay and be respected; and

4. The defendants - Emilie Montealegre and spouse are ordered to pay

attorney’s fees in the sum of Php50,000.00, and to pay the costs of the suit.

SO ORDERED.14

Neither of the parties sought a reconsideration of the above decision or any portion
thereof nor did they elevate the same for appellate review.

What precipitated the controversy at hand were the subsequent motions filed by
Spouses Marañon for release of the rental payments deposited with the Clerk of Court
and paid to PNB by Tolete.

On June 13, 2006, Spouses Marañon filed an Urgent Motion for the Withdrawal of
Deposited Rentals15 praying that the ₱144,000.00 rental fees deposited by Tolete with
the Clerk of Court be released in their favor for having been adjudged as the real owner
of the subject lot. The RTC granted the motion in its Order16 dated June 28, 2006.

On September 5, 2006, Spouses Marañon again filed with the RTC an Urgent Ex-Parte
Motion for Withdrawal of Deposited Rentals17 praying that the ₱30,000.00 rental fees
paid to PNB by Tolete on December 12, 1999 be released in their favor. The said lease
payments were for the five (5)-month period from August 1999 to December 1999 at the
monthly lease rate of ₱6,000.00.

The RTC granted the motion in its Order18 dated September 8, 2006 reasoning that
pursuant to its Decision dated June 2, 2006 declaring Spouses Marañon to be the true
registered owners of the subject lot, they are entitled to its fruits.

The PNB differed with the RTC’s ruling and moved for reconsideration averring that as
declared by the RTC in its Decision dated June 2, 2006, its mortgage lien should be
carried over to the new title reconveying the lot to Spouses Marañon. PNB further
argued that with the expiration of the redemption period on February 4, 1993, or one (1)
year from the registration of the certificate of sale, PNB is now the owner of the subject
lot hence, entitled to its fruits. PNB prayed that (1) the Order dated September 8, 2006
be set aside, and (2) an order be issued directing Spouses Marañon to turn over to PNB
the amount of ₱144,000.00 released in their favor by the Clerk of Court.19

On November 20, 2006, the RTC issued an Order again directing PNB to release to
Spouses Marañon the ₱30,000.00 rental payments considering that they were adjudged
to have retained ownership over the property.20

On December 6, 2006, the RTC issued another Order denying PNB’s motion for
reconsideration and reiterating the directives in its Order dated September 8, 2006. 21

Aggrieved, PNB sought recourse with the CA via a petition for certiorari and
mandamus22 claiming that as the lawful owner of the subject lot per the RTC’s judgment
dated June 2, 2006, it is entitled to the fruits of the same such as rentals paid by tenants
hence, the ruling that "the real estate mortgage lien of the PNB registered on the title of
Lot No. 177-A-1 Bacolod Cadastre shall stay and be respected." PNB also contended
that it is an innocent mortgagee.

In its Decision23 dated June 18, 2008, the CA denied the petition and affirmed the RTC’s
judgment ratiocinating that not being parties to the mortgage transaction between PNB
and Spouses Montealegre, Spouses Marañon cannot be deprived of the fruits of the
subject lot as the same will amount to deprivation of property without due process of
law. The RTC further held that PNB is not a mortgagee in good faith because as a
financial institution imbued with public interest, it should have looked beyond the
certificate of title presented by Spouses Montealegre and conducted an inspection on
the circumstances surrounding the transfer to Spouses Montealegre. The decretal
portion of the Decision thus read:

WHEREFORE, in view of the foregoing, the petition is hereby DISMISSED. The Orders
dated September 8, 2006 and December 6, 2006, rendered by the respondent
Presiding Judge of the Regional Trial Court, Branch 54, Bacolod City, in Civil Case NO.
7213 directing the release of the deposited rental in the amount of THIRTY THOUSAND
PESOS ([P]30,000.00) to private respondents are hereby AFFIRMED.

SO ORDERED.24

PNB moved for reconsideration25 but the motion was denied in the CA Resolution dated
August 10, 2009.26 Hence, the present recourse whereby PNB argues that the RTC
Decision dated June 2, 2006 lapsed into finality when it was not appealed or submitted
for reconsideration. As such, all conclusions therein are immutable and can no longer
be modified by any court even by the RTC that rendered the same. The CA however
erroneously altered the RTC Decision by reversing the pronouncement that PNB is a
mortgagee-in-good-faith.

PNB further asseverates that its mortgage lien was carried over to the new title issued
to Spouses Marañon and thus it retained the right to foreclose the subject lot upon non-
payment of the secured debt. PNB asserts that it is entitled to the rent because it
became the subject lot’s new owner when the redemption period expired without the
property being redeemed.

Ruling of the Court

We deny the petition.

It is readily apparent from the facts at hand that the status of PNB’s lien on the subject
lot has already been settled by the RTC in its Decision dated June 2, 2006 where it was
adjudged as a mortgagee in good faith whose lien shall subsist and be respected. The
decision lapsed into finality when neither of the parties moved for its reconsideration or
appealed.

Being a final judgment, the dispositions and conclusions therein have become
immutable and unalterable not only as against the parties but even the courts. This is
known as the doctrine of immutability of judgments which espouses that a judgment that
has acquired finality becomes immutable and unalterable, and may no longer be
modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or by
the highest court of the land.27 The significance of this rule was emphasized in Apo
Fruits Corporation v. Court of Appeals,28 to wit:

The reason for the rule is that if, on the application of one party, the court could change
its judgment to the prejudice of the other, it could thereafter, on application of the latter,
again change the judgment and continue this practice indefinitely. The equity of a
particular case must yield to the overmastering need of certainty and unalterability of
judicial pronouncements.

The doctrine of immutability and inalterability of a final judgment has a two-fold purpose:
(1) to avoid delay in the administration of justice and thus, procedurally, to make orderly
the discharge of judicial business and (2) to put an end to judicial controversies, at the
risk of occasional errors, which is precisely why courts exist. Controversies cannot drag
on indefinitely. The rights and obligations of every litigant must not hang in suspense for
an indefinite period of time. The doctrine is not a mere technicality to be easily brushed
aside, but a matter of public policy as well as a time-honored principle of procedural
law.29 (Citations omitted)

Hence, as correctly argued by PNB, the issue on its status as a mortgagee in good faith
have been adjudged with finality and it was error for the CA to still delve into and,
worse, overturn, the same. The CA had no other recourse but to uphold the status of
PNB as a mortgagee in good faith regardless of its defects for the sake of maintaining
stability of judicial pronouncements. "The main role of the courts of justice is to assist in
the enforcement of the law and in the maintenance of peace and order by putting an
end to judiciable controversies with finality. Nothing better serves this role than the long
established doctrine of immutability of judgments."30

Further, it must be remembered that what reached the CA on certiorari were RTC
resolutions issued long after the finality of the Decision dated June 2, 2006. The RTC
Orders dated September 8, 2006 and December 6, 2006 were implements of the
pronouncement that Spouses Marañon are still the rightful owners of the subject lot, a
matter that has been settled with finality as well. This notwithstanding, the Court agrees
with the ultimate outcome of the CA’s assailed resolutions.

Rent is a civil fruit31 that belongs to the owner of the property32 producing it by right of
accession33.34 The rightful recipient of the disputed rent in this case should thus be the
owner of the subject lot at the time the rent accrued. It is beyond question that Spouses
Marañon never lost ownership over the subject lot. This is the precise consequence of
the final and executory judgment in Civil Case No. 7213 rendered by the RTC on June
3, 2006 whereby the title to the subject lot was reconveyed to them and the cloud
thereon consisting of Emilie’s fraudulently obtained title was removed. Ideally, the
present dispute can be simply resolved on the basis of such pronouncement. However,
the application of related legal principles ought to be clarified in order to settle the
intervening right of PNB as a mortgagee in good faith.
The protection afforded to PNB as a mortgagee in good faith refers to the right to have
its mortgage lien carried over and annotated on the new certificate of title issued to
Spouses Marañon35 as so adjudged by the RTC. Thereafter, to enforce such lien thru
foreclosure proceedings in case of non-payment of the secured debt,36 as PNB did so
pursue. The principle, however, is not the singular rule that governs real estate
mortgages and foreclosures attended by fraudulent transfers to the mortgagor.

Rent, as an accessory follow the principal.37 In fact, when the principal property is
mortgaged, the mortgage shall include all natural or civil fruits and improvements found
thereon when the secured obligation becomes due as provided in Article 2127 of the
Civil Code, viz:

Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation becomes
due, and to the amount of the indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether the estate
remains in the possession of the mortgagor, or it passes into the hands of a third
person.

Consequently, in case of non-payment of the secured debt, foreclosure proceedings

shall cover not only the hypothecated property but all its accessions and accessories as
well. This was illustrated in the early case of Cu Unjieng e Hijos v. Mabalacat Sugar
Co.38 where the Court held:

That a mortgage constituted on a sugar central includes not only the land on which it is
built but also the buildings, machinery, and accessories installed at the time the
mortgage was constituted as well as the buildings, machinery and accessories
belonging to the mortgagor, installed after the constitution thereof x x x .39

Applying such pronouncement in the subsequent case of Spouses Paderes v. Court of

Appeals,40 the Court declared that the improvements constructed by the mortgagor on
the subject lot are covered by the real estate mortgage contract with the mortgagee
bank and thus included in the foreclosure proceedings instituted by the latter.41

However, the rule is not without qualifications. In Castro, Jr. v. CA 42 the Court explained
that Article 2127 is predicated on the presumption that the ownership of accessions and
accessories also belongs to the mortgagor as the owner of the principal. After all, it is an
indispensable requisite of a valid real estate mortgage that the mortgagor be the
absolute owner of the encumbered property, thus:

All improvements subsequently introduced or owned by the mortgagor on the

encumbered property are deemed to form part of the mortgage. That the improvements
are to be considered so incorporated only if so owned by the mortgagor is a rule that
can hardly be debated since a contract of security, whether, real or personal, needs as
an indispensable element thereof the ownership by the pledgor or mortgagor of the
property pledged or mortgaged. x x x.43 (Citation omitted)

Otherwise stated, absent an adverse claimant or any evidence to the contrary, all
accessories and accessions accruing or attached to the mortgaged property are
included in the mortgage contract and may thus also be foreclosed together with the
principal property in case of non-payment of the debt secured.

Corollary, any evidence sufficiently overthrowing the presumption that the mortgagor
owns the mortgaged property precludes the application of Article 2127. Otherwise
stated, the provision is irrelevant and inapplicable to mortgages and their resultant
foreclosures if the mortgagor is later on found or declared to be not the true owner of
the property, as in the instant case.1âwphi1

It is beyond question that PNB’s mortgagors, Spouses Montealegre, are not the true
owners of the subject lot much less of the building which produced the disputed rent.
The foreclosure proceedings on August 16, 1991 caused by PNB could not have, thus,
included the building found on the subject lot and the rent it yields. PNB’s lien as a
mortgagee in good faith pertains to the subject lot alone because the rule that
improvements shall follow the principal in a mortgage under Article 2127 of the Civil
Code does not apply under the premises. Accordingly, since the building was not
foreclosed, it remains a property of Spouses Marañon; it is not affected by non-
redemption and is excluded from any consolidation of title made by PNB over the
subject lot. Thus, PNB’s claim for the rent paid by Tolete has no basis.

It must be remembered that there is technically no juridical tie created by a valid

mortgage contract that binds PNB to the subject lot because its mortgagor was not the
true owner. But by virtue of the mortgagee in good faith principle, the law allows PNB to
enforce its lien. We cannot, however, extend such principle so as to create a juridical tie
between PNB and the improvements attached to the subject lot despite clear and
undeniable evidence showing that no such juridical tie exists.

Lastly, it is worthy to note that the effects of the foreclosure of the subject lot is in fact
still contentious considering that as a purchaser in the public sale, PNB was only
substituted to and acquired the right, title, interest and claim of the mortgagor to the
property as of the time of the levy.44 There being already a final judgment reconveying
the subject lot to Spouses Marañon and declaring as null and void Emilie's purported
claim of ownership, the legal consequences of the foreclosure sale, expiration of the
redemption period and even the consolidation of the subject lot's title in PNB's name
shall be subjected to such final judgment. This is the clear import of the ruling in
Unionbank of the Philippines v. Court of Appeals:45

This is because as purchaser at a public auction, UNIONBANK is only substituted to

and acquires the right, title, interest and claim of the judgment debtors or mortgagors to
the property at the time of levy. Perforce, the judgment in the main action for
reconveyance will not be rendered ineffectual by the consolidation of ownership and the
issuance of title in the name of UNIONBANK.46 (Citation omitted)

Nonetheless, since the present recourse stemmed from a mere motion claiming
ownership of rent and not from a main action for annulment of the foreclosure sale or of
its succeeding incidents, the Court cannot proceed to make a ruling on the bearing of
the CA's Decision dated June 18, 2008 to PNB's standing as a purchaser in the public
auction. Such matter will have to be threshed out in the proper forum.

All told, albeit the dispositive portions of the assailed CA decision and resolution are
differently premised, they ought to be upheld as they convey the similar conclusion that
Spouses Marañon are the rightful owners of the rent earned by the building on the
subject lot.

WHEREFORE, foregoing considered, the petition is hereby DENIED. The Decision

dated June 18, 2008 and Resolution dated August 10, 2009 of the Court of Appeals in
CA-G.R. SP No. 02513 are AFFIRMED.

SO ORDERED.

12. G.R. No. L-30173

GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,

vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.

Castillo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.

REYES, J.B.L., J.:

Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the
reason that only questions of law are involved.
This case was originally commenced by defendants-appellants in the municipal court of
Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendants-
appellants appealed to the court a quo (Civil Case No. 30993) which also rendered a
decision against them, the dispositive portion of which follows:

WHEREFORE, the court hereby renders judgment in favor of the plaintiffs

and against the defendants, ordering the latter to pay jointly and severally
the former a monthly rent of P200.00 on the house, subject-matter of this
action, from March 27, 1956, to January 14, 1967, with interest at the legal
rate from April 18, 1956, the filing of the complaint, until fully paid, plus
attorney's fees in the sum of P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants executed a

chattel mortgage in favor of plaintiffs-appellees over their house of strong materials
located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot Nos. 6-B and 7-
B, Block No. 2554, which were being rented from Madrigal & Company, Inc. The
mortgage was registered in the Registry of Deeds of Manila on 2 September 1955. The
herein mortgage was executed to guarantee a loan of P4,800.00 received from
plaintiffs-appellees, payable within one year at 12% per annum. The mode of payment
was P150.00 monthly, starting September, 1955, up to July 1956, and the lump sum of
P3,150 was payable on or before August, 1956. It was also agreed that default in the
payment of any of the amortizations, would cause the remaining unpaid balance to
becomeimmediately due and Payable and —

the Chattel Mortgage will be enforceable in accordance with the provisions

of Special Act No. 3135, and for this purpose, the Sheriff of the City of
Manila or any of his deputies is hereby empowered and authorized to sell
all the Mortgagor's property after the necessary publication in order to
settle the financial debts of P4,800.00, plus 12% yearly interest, and
attorney's fees... 2
When defendants-appellants defaulted in paying, the mortgage was extrajudicially
foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to the
said contract. As highest bidder, plaintiffs-appellees were issued the corresponding
certificate of sale.3 Thereafter, on 18 April 1956, plaintiffs-appellant commenced Civil
Case No. 43073 in the municipal court of Manila, praying, among other things, that the
house be vacated and its possession surrendered to them, and for defendants-
appellants to pay rent of P200.00 monthly from 27 March 1956 up to the time the
possession is surrendered.4 On 21 September 1956, the municipal court rendered its
decision —

... ordering the defendants to vacate the premises described in the

complaint; ordering further to pay monthly the amount of P200.00 from
March 27, 1956, until such (time that) the premises is (sic) completely
vacated; plus attorney's fees of P100.00 and the costs of the suit. 5

Defendants-appellants, in their answers in both the municipal court and court a

quo impugned the legality of the chattel mortgage, claiming that they are still the owners
of the house; but they waived the right to introduce evidence, oral or documentary.
Instead, they relied on their memoranda in support of their motion to dismiss, predicated
mainly on the grounds that: (a) the municipal court did not have jurisdiction to try and
decide the case because (1) the issue involved, is ownership, and (2) there was no
allegation of prior possession; and (b) failure to prove prior demand pursuant to Section
2, Rule 72, of the Rules of Court.6

During the pendency of the appeal to the Court of First Instance, defendants-appellants
failed to deposit the rent for November, 1956 within the first 10 days of December, 1956
as ordered in the decision of the municipal court. As a result, the court granted plaintiffs-
appellees' motion for execution, and it was actually issued on 24 January 1957.
However, the judgment regarding the surrender of possession to plaintiffs-appellees
could not be executed because the subject house had been already demolished on 14
January 1957 pursuant to the order of the court in a separate civil case (No. 25816) for
ejectment against the present defendants for non-payment of rentals on the land on
which the house was constructed.

The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond
and withdrawal of deposited rentals was denied for the reason that the liability therefor
was disclaimed and was still being litigated, and under Section 8, Rule 72, rentals
deposited had to be held until final disposition of the appeal.7

On 7 October 1957, the appellate court of First Instance rendered its decision, the
dispositive portion of which is quoted earlier. The said decision was appealed by
defendants to the Court of Appeals which, in turn, certified the appeal to this Court.
Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision
without it.

Defendants-appellants submitted numerous assignments of error which can be

condensed into two questions, namely: .

(a) Whether the municipal court from which the case originated had
jurisdiction to adjudicate the same;

(b) Whether the defendants are, under the law, legally bound to pay
rentals to the plaintiffs during the period of one (1) year provided by law for
the redemption of the extrajudicially foreclosed house.

We will consider these questions seriatim.

(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court

from which the case originated, and consequently, the appellate jurisdiction of the Court
of First Instance a quo, on the theory that the chattel mortgage is void ab initio; whence
it would follow that the extrajudicial foreclosure, and necessarily the consequent auction
sale, are also void. Thus, the ownership of the house still remained with defendants-
appellants who are entitled to possession and not plaintiffs-appellees. Therefore, it is
argued by defendants-appellants, the issue of ownership will have to be adjudicated first
in order to determine possession. lt is contended further that ownership being in issue, it
is the Court of First Instance which has jurisdiction and not the municipal court.

Defendants-appellants predicate their theory of nullity of the chattel mortgage on two

grounds, which are: (a) that, their signatures on the chattel mortgage were obtained
through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a
house of strong materials, and, being an immovable, it can only be the subject of a real
estate mortgage and not a chattel mortgage.

On the charge of fraud, deceit or trickery, the Court of First Instance found defendants-
appellants' contentions as not supported by evidence and accordingly dismissed the
charge,8 confirming the earlier finding of the municipal court that "the defense of
ownership as well as the allegations of fraud and deceit ... are mere allegations." 9

It has been held in Supia and Batiaco vs. Quintero and Ayala10 that "the answer is a
mere statement of the facts which the party filing it expects to prove, but it is not
evidence;11 and further, that when the question to be determined is one of title, the
Court is given the authority to proceed with the hearing of the cause until this fact is
clearly established. In the case of Sy vs. Dalman,12 wherein the defendant was also a
successful bidder in an auction sale, it was likewise held by this Court that in detainer
cases the aim of ownership "is a matter of defense and raises an issue of fact which
should be determined from the evidence at the trial." What determines jurisdiction are
the allegations or averments in the complaint and the relief asked for. 13

Moreover, even granting that the charge is true, fraud or deceit does not render a
contract void ab initio, and can only be a ground for rendering the contract voidable or
annullable pursuant to Article 1390 of the New Civil Code, by a proper action in
court. 14 There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. Hence, defendants-
appellants' claim of ownership on the basis of a voidable contract which has not been
voided fails.
It is claimed in the alternative by defendants-appellants that even if there was no fraud,
deceit or trickery, the chattel mortgage was still null and void ab initio because only
personal properties can be subject of a chattel mortgage. The rule about the status of
buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza Theatre
Inc.,15cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the effect that —

... it is obvious that the inclusion of the building, separate and distinct from
the land, in the enumeration of what may constitute real properties (art.
415, New Civil Code) could only mean one thing — that a building is by
itself an immovable property irrespective of whether or not said structure
and the land on which it is adhered to belong to the same owner.

Certain deviations, however, have been allowed for various reasons. In the case
of Manarang and Manarang vs. Ofilada,17 this Court stated that "it is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature
would be real property", citing Standard Oil Company of New York vs. Jaramillo. 18 In
the latter case, the mortgagor conveyed and transferred to the mortgagee by way of
mortgage "the following described personal property." 19 The "personal property"
consisted of leasehold rights and a building. Again, in the case of Luna vs.
Encarnacion,20 the subject of the contract designated as Chattel Mortgage was a house
of mixed materials, and this Court hold therein that it was a valid Chattel mortgage
because it was so expressly designated and specifically that the property given as
security "is a house of mixed materials, which by its very nature is considered personal
property." In the later case of Navarro vs. Pineda,21 this Court stated that —

The view that parties to a deed of chattel mortgage may agree to consider
a house as personal property for the purposes of said contract, "is good
only insofar as the contracting parties are concerned. It is based, partly,
upon the principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139,
23 April 1958). In a case, a mortgaged house built on a rented land was
held to be a personal property, not only because the deed of mortgage
considered it as such, but also because it did not form part of the land
 (Evangelists vs. Abad, [CA]; 36 O.G. 2913), for it is now settled that an
object placed on land by one who had only a temporary right to the same,
such as the lessee or usufructuary, does not become immobilized by
attachment (Valdez vs. Central Altagracia, 222 U.S. 58, cited in Davao
Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a house
belonging to a person stands on a rented land belonging to another
person, it may be mortgaged as a personal property as so stipulated in the
document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted,
however that the principle is predicated on statements by the owner
declaring his house to be a chattel, a conduct that may conceivably estop
him from subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA]
48 O.G. 5374): 22

In the contract now before Us, the house on rented land is not only expressly
designated as Chattel Mortgage; it specifically provides that "the mortgagor ...
voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage23 the property
together with its leasehold rights over the lot on which it is constructed and participation
..." 24 Although there is no specific statement referring to the subject house as personal
property, yet by ceding, selling or transferring a property by way of chattel
mortgage defendants-appellants could only have meant to convey the house as chattel,
or at least, intended to treat the same as such, so that they should not now be allowed
to make an inconsistent stand by claiming otherwise. Moreover, the subject house stood
on a rented lot to which defendats-appellants merely had a temporary right as lessee,
and although this can not in itself alone determine the status of the property, it does so
when combined with other factors to sustain the interpretation that the parties,
particularly the mortgagors, intended to treat the house as personalty. Finally unlike in
the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung Yee vs. F. L.
Strong Machinery and Williamson, 26 wherein third persons assailed the validity of the
chattel mortgage,27 it is the defendants-appellants themselves, as debtors-mortgagors,
who are attacking the validity of the chattel mortgage in this case. The doctrine of
estoppel therefore applies to the herein defendants-appellants, having treated the
subject house as personalty.

(b) Turning to the question of possession and rentals of the premises in question. The
Court of First Instance noted in its decision that nearly a year after the foreclosure sale
the mortgaged house had been demolished on 14 and 15 January 1957 by virtue of a
decision obtained by the lessor of the land on which the house stood. For this reason,
the said court limited itself to sentencing the erstwhile mortgagors to pay plaintiffs a
monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage was
foreclosed and the house sold) until 14 January 1957 (when it was torn down by the
Sheriff), plus P300.00 attorney's fees.

Appellants mortgagors question this award, claiming that they were entitled to remain in
possession without any obligation to pay rent during the one year redemption period
after the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule for the
appellants.

Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No.
1508.28 Section 14 of this Act allows the mortgagee to have the property mortgaged
sold at public auction through a public officer in almost the same manner as that
allowed by Act No. 3135, as amended by Act No. 4118, provided that the requirements
of the law relative to notice and registration are complied with. 29 In the instant case, the
parties specifically stipulated that "the chattel mortgage will be enforceable in
accordance with the provisions of Special Act No. 3135 ... ." 30(Emphasis supplied).

Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendants-

appellants herein) may, at any time within one year from and after the date of the
auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of
the same Act 32 allows the purchaser of the property to obtain from the court the
possession during the period of redemption: but the same provision expressly requires
the filing of a petition with the proper Court of First Instance and the furnishing of a
bond. It is only upon filing of the proper motion and the approval of the corresponding
bond that the order for a writ of possession issues as a matter of course. No discretion
is left to the court. 33 In the absence of such a compliance, as in the instant case, the
purchaser can not claim possession during the period of redemption as a matter of right.
In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of
Court 34 which also applies to properties purchased in extrajudicial foreclosure
proceedings.35 Construing the said section, this Court stated in the aforestated case
of Reyes vs. Hamada.

In other words, before the expiration of the 1-year period within which the
judgment-debtor or mortgagor may redeem the property, the purchaser
thereof is not entitled, as a matter of right, to possession of the same.
Thus, while it is true that the Rules of Court allow the purchaser to receive
the rentals if the purchased property is occupied by tenants, he is,
nevertheless, accountable to the judgment-debtor or mortgagor as the
case may be, for the amount so received and the same will be duly
credited against the redemption price when the said debtor or mortgagor
effects the redemption. Differently stated, the rentals receivable from
tenants, although they may be collected by the purchaser during the
redemption period, do not belong to the latter but still pertain to the debtor
of mortgagor. The rationale for the Rule, it seems, is to secure for the
benefit of the debtor or mortgagor, the payment of the redemption amount
and the consequent return to him of his properties sold at public auction.
(Emphasis supplied)

The Hamada case reiterates the previous ruling in Chan vs. Espe.36

Since the defendants-appellants were occupying the house at the time of the auction
sale, they are entitled to remain in possession during the period of redemption or within
one year from and after 27 March 1956, the date of the auction sale, and to collect the
rents or profits during the said period.
It will be noted further that in the case at bar the period of redemption had not yet
expired when action was instituted in the court of origin, and that plaintiffs-appellees did
not choose to take possession under Section 7, Act No. 3135, as amended, which is the
law selected by the parties to govern the extrajudicial foreclosure of the chattel
mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right
to possess was not yet born at the filing of the complaint, there could be no violation or
breach thereof. Wherefore, the original complaint stated no cause of action and was
prematurely filed. For this reason, the same should be ordered dismissed, even if there
was no assignment of error to that effect. The Supreme Court is clothed with ample
authority to review palpable errors not assigned as such if it finds that their
consideration is necessary in arriving at a just decision of the cases. 37

It follows that the court below erred in requiring the mortgagors to pay rents for the year
following the foreclosure sale, as well as attorney's fees.

FOR THE FOREGOING REASONS, the decision appealed from is reversed and
another one entered, dismissing the complaint. With costs against plaintiffs-appellees.

13. G.R. No. L-15128 August 25, 1960

CECILIO DIEGO, plaintiff-appellee ,

vs.
SEGUNDO FERNANDO, defendant-appellant.

Espinosa Law Offices for appellant.

N.L. Dasig and C.L. Francisco for appellee.
REYES, J.B.L., J.:

Appeal by defendant Segundo Fernando from the judgment of the Court of First
Instance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of mortgage. The
appeal was originally brought to the Court of Appeals, but was certified to us by that
tribunal because it raises only questions of law.

The facts are not disputed. On May 26, 1950, the defendant Segundo Fernando
executed a deed of mortgage in favor of plaintiff Cecilio Diego over two parcels of land
registered in his name, to secure a loan P2,000, without interest, payable within four
years from the date of the mortgage (Exhibit "A"). After the execution of the deed,
possession of the mortgaged properties were turned over to the mortagagee.

The debtor having failed to pay the loan after four years, the mortagagee Diego made
several demands upon him for payment; and as the demands were unheeded, Diego
filed this action for foreclosure of mortgage.

Defendant Fernando's defense was that the true transaction between him and plaintiff
was one of antichresis and not of mortgage; and that as plaintiff had allegedly received
a total of 120 cavans of palay from the properties given as security, which, at the rate of
P10 a cavan, represented a value of P5,200, his debt had already been paid, with
plaintiff still owing him a refund of some P2,720.00.

The Court below, however, found that there was nothing in the deed of mortgage Exhibit
"A" to show that it was not a true contract of mortgage, and that the fact that possession
of the mortgaged properties were turned over to the mortgagee did not alter the
transaction; that the parties must have intended that the mortgagee would collect the
fruits of the mortgaged properties as interest on his loan, which agreement is not
uncommon; and that the evidence showed that plaintiff had already received 55 cavans
of palay from the properties during the period of his possession. Whereupon, judgment
was rendered for plaintiff in the amount of P2,000, the loan he gave the defendant, with
legal interest from the filing of the action until full payment, plus P500 as attorney's fees
and the costs; and in case of default in payment, for the foreclosure of the mortgage.
From this judgment, defendant took the present appeal.

The main issue raised is whether the contract between the parties is one of mortgage or
of antichresis. Appellant, while admitting that the contract Exhibit "A" shows a deed of
mortgage, contends that the admitted fact that the loan was without interest, coupled
with the transfer of the possession of the properties mortgaged to the mortgagee,
reveals that the true transaction between him and appellee was one of antichresis. As
correctly pointed out by appellee and the lower court, however, it is not an essential
requisite of a mortgage that possession of the mortgaged premises be retained by the
mortagagor (Legaspi and Salcedo vs. Celestial, 66 Phil., 372). To be antichresis, it must
be expressly agreed between creditor and debtor that the former, having been given
possession of the properties given as security, is to apply their fruits to the payment of
the interest, if owing, and thereafter to the principal of his credit (Art. 2132, Civil Code,
Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De Mendezona, 48 Phil., 666); so that if a
contract of loan with security does not stipulate the payment of interest but provides for
the delivery to the creditor by the debtor of the property given as security, in order that
the latter may gather its fruits, without stating that said fruits are to be applied to the
payment of interest, if any, and afterwards that of the principal, the contract is a
mortgage and not antichresis (Legaspi vs. Celestial, supra). The court below, therefore,
did not err in holding that the contract Exhibit "A" is a true mortgage and not an
antichresis.

The above conclusion does not mean, however, that appellee, having received the fruis
of the properties mortgaged, will be allowed to approprite them for himself and not be
required to account for them to the appellant. For the contract of mortgage Exhibit "A"
clearly provides that the loan of P2,000 was "without interest within four (4) years from
date of this instrument"; and there being no evidence to show that the parties had
intended to supersede such stipulation when the possession of the mortgaged
properties were turned over to the appellee by another allowing the latter to collect, the
fruits thereof as interest on the loan, the trial court is not authorized to infer from this
transfer of possession alone that the loan was to be without interest for four years, and
substituted another giving appellee the right to receive the fruits of the mortgaged
properties as interests.

The true position of appellee herein under his contract with appellant is a "mortgage in
possession" as that term is understood in American equity jurisprudence; that is "one
who has lawfully acquired actual or constructive possession of the premises mortgaged
to him, standing upon his rights as mortgagee and not claiming under another title, for
the purpose of enforcing his security upon such property or making its income help to
pay his debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666). As such
mortgagee in possession, his rights and obligations are, as pointed out by this Court
in Macapinlac vs. Gutierrez Repide (43 Phil., 770), similar to those of an antichretic
creditor:

The respective rights and obligations of the parties to a contract of antichresis,

under the Civil Code, appear to be similar and in many respects identical with
those recognized in the equity jurisprudence of England and America as incident
to the position of a mortgagee in possession, in reference to which the following
propositions may be taken to be established, namely, that if the mortgagee
acquires possession in any lawful manner, he is entitled to retain such
possession until the indebtedness is satisfied and the property redeemed; that
the non-payment of the debt within the term agreed does not vest the ownership
of the property in the creditor; that the general duty of the mortgagee in
possession towards the premises is that of the ordinary prudent owner; that the
mortgagee must account for the rents and profits of the land, or its value for
purposes of use and occupation, any amount thus realized going towards the
discharge on the mortgage debt; that if the mortgage remains in possession after
the mortgage debt has been satisfied, he becomes a trustee for the mortgagor as
to the excess of the rents and profits over such debt; and lastly, that the
mortgagor can only enforce his rights to the land by an equitable action for an
account and to redeem. (3 Pom. Eq. Jur. secs. 1215-1218)
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a lien
on real property who took possession thereof with the consent of the debtor, held it as
an "antichretic creditor with the right to collect the credit with interest from the fruits,
returning to the antichretic creditor the balance, if any, after deducting the expenses,"
because the fact that the debtor consented and asked the creditor to take charge of
managing his property "does not entitle the latter to appropriate to itself the fruits thereof
unless the former has expressly waived his right thereto."

In the present case, the parties having agreed that the loan was to be without interest,
and the appellant not having expressly waived his right to the fruits of the properties
mortgaged during the time they were in appellee's possession, the latter, like an
antichretic creditor, must account for the value of the fruits received by him, and deduct
it from the loan obtained by appellant. According to the findings of the trial court,
appellee had received a net share of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present action; at the rate of P9.00 per cavan (a
rate admitted by the parties), the total value of the fruits received by appellee is
P495.00. Deducting this amount from the loan of P2,000.00 received by appellant from
appellee, the former has only P1,505.00 left to pay the latter.

Appellant also claims that the lower court erred in ordering him to pay legal interest on
his indebtedness to plaintiff from the filing of the action, since the latter is, up to the
present, still in the possession of the properties mortgaged and still enjoying the fruits.
The court did not err in so holding, since at the time the action was filed and up to the
present, appellant has not discharged his indebtedness to appellee, and the law allows
the latter, in the absence of stipulation as to payment of interest, legal interest from the
time of the debtor's default (Art. 2209, New Civil Code, Art. 1108, old). However,
appellee should be made to account for the fruits he received from the properties
mortgaged from the time of the filing of this action until full payment by appellant, which
fruits should be deducted from the total amount due him from appellant under this
judgment.
Wherefore, the judgment of the court below is modified in the sense that the amount of
appellee's principal recovery is reduced to P1,505.00, with an obligation on the part of
appellee to render an accounting of all the fruits received by him from the properties in
question from the time of the filing of this action until full payment, or in case of
appellant's failure to pay, until foreclosure of the mortgage thereon, the value of which
fruits shall be deducted from the total amount of his recovery. No costs in this instance

14. G.R. Nos. L-43673 and 43674 October 24, 1938

LICERIO LEGASPI and JULIAN SALCEDO, plaintiffs-appellants ,

vs.
DAMASO CELESTIAL, defendant-appellee.
Ambrosio Santos and Calixto M. Legaspi for appellants.
Juan S. Rustia for appellee.

VILLA-REAL, J.:

The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the judgment
rendered by the Court of First Instance of Cavite in civil cases Nos. 3025 and 3037 of
said court, the dispositive part of which reads as follows:

Wherefore, judgment is rendered by this court holding that both the so-called
instrument of mortgage Exhibit A and the instrument Exhibit C-1 are really
contracts of antichresis and, consequently, the plaintiffs should render to the
defendant an account of the 65 salt beds, which are the subject matter of the two
cases, as soon this decision becomes final, taking into consideration the sums
already paid by the defendant to the plaintiffs.

The writ of preliminary attachment issued in civil case No. 3037 is set aside,
without costs in both cases. It is so ordered.

In support of their appeal, the appellants assign the following alleged errors as
committed by the court a quo in its judgment in question, to wit:

1. The court erred in holding that both the instrument of mortgage Exhibit A and
the instrument Exhibit C-1 are really contracts of antichresis.

2. The court likewise erred in ordering the plaintiffs to render to the defendant an
account of the fruits produced by the 65 salt beds, which are the subject matter
of both cases.

3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and
cross-complaint filed by the defendant, with the costs to the latter.
On January 17, 1935, the plaintiffs brought an action against the defendant Damaso
Celestial in the justice of the peace court of Kawit, Cavite, praying that judgment be
rendered, ordering said defendant to pay to the abovenamed plaintiffs the sum of
P556.160, plus the corresponding legal interest thereon from the date of the filing of the
complaint, until fully paid, and the costs.

The defendant, answering the complaint, admitted the essential facts alleged therein,
stating that he was disposed to pay what he should appear still to be indebted and, by
way of counterclaim and cross-complaint, claimed that, the contract entered into
between him and the plaintiffs being an antichresis, the latter were bound to render an
account of the products of the five salt beds, the total production of which was from 300
to 350 cavans of salt at P1 a cavan.

After due trial of the case, the justice of the peace court of Kawit, Cavite, on February 5,
1935, rendered judgment in said case, the dispositive part of which reads as follows:

Premises considered, judgment hereby rendered ordering the defendant to pay

the herein plaintiffs the sum of P556.60 with interest at the legal rate from
January 17, 1935, and to pay the costs of suit. It is so ordered.

From the foregoing judgment, the defendant appealed to the Court of First Instance of
Cavite.

On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025 of said
Court of First Instance, praying that the same defendant Damaso Celestial be ordered
to pay them the sum of P7,637, with the legal interest thereon from the date of the filing
of the complaint, until fully paid, and the costs of the suit, and that, upon his failure to do
so, the mortgage constituted by said defendant in their favor to secure the payment of
the loan in question be ordered foreclosed.lâwphi1.nêt

The defendant, answering the complaint, admitted the material facts alleged therein as
well as the conditions set forth in the documents Exhibit "A" attached thereto, stating
that he had never refused to pay any balance of the debt resulting after a rendition of
accounts by the plaintiffs and a liquidation; and by way of counterclaim and cross-
complaint, alleged that the sixty-five salt beds administered by the plaintiffs, by virtue of
the above-stated documents, yielded a net produced of a about 6,500 cavans of salt
every six months at P1 a cavan; that the plaintiffs should render to the defendant an
account of said products so that they may be applied to the payment of his loan or debt;
that the approximate total value of half of the number of cavans of salt reaped and
availed of by the plaintiffs from the sixty-five salt beds administered by them during
three years and eleven months, that is, from February 23, 1931, to February 8, 1935,
the date of the filing of the answer, was P13,000; that after deducting from said P13,000
the total amount of the defendant's debt to the plaintiffs under the above-stated
contracts, that is, P8,193.60, there would still remain a balance in favor of the defendant
in the sum of P4,806.40, which he is entitled to collect from the plaintiffs. He prayed that
judgment be rendered, ordering the plaintiffs to render an account of their administration
and to pay jointly and severally the sum of P4,806.40, with the legal interest thereon,
plus the damages that would result if the contract of mortgage already perfected with
Melchor de Lara should be frustrated and should he fail to find another to execute said
contract of mortgage in the sum of P25,000.

The plaintiffs, replying to the special defense and cross-complaint, denied each and
every one of the facts alleged therein, stating that the salt gathered from the 60 salt
beds mentioned in the complaint was for the exclusive use, benefit and enjoyment of
the plaintiffs who, under the provisions of Exhibit A and the intention of the parties, were
not obliged to submit to the defendant a liquidation of the salt produced and gathered, in
order that the same may be deducted from the principal.

On February 25, 1935, the parties to civil case No. 3025 submitted the following
stipulation to the court, to wit:

Come now the parties to this case, assisted by their respective attorney, and
respectfully submit the following stipulation:
 1. That, aside from this case, the same plaintiffs had instituted against the
same defendant in the justice of the peace court of Kawit, Cavite, civil
case No. 165, for the recovery of the sum of P556.60 representing a loan
made by the plaintiffs on a portion of the same parcel of land which is the
subject matter of the mortgage in this case before this Honorable Court of
First Instance, as evidenced by another notarial document dated August
13, 1932. And in this stipulation, said case shall be understood to be
consolidated with the present one.

2. That the defendants agrees and is disposed to make immediate

delivery to the plaintiffs of the total amount of P8,193.60, without prejudice
to his right to prosecute the case in connection with his contention of their
administration. In must render to him an account of their administration. In
consideration hereof, the plaintiffs, in turn, agree and bind themselves now
to secure the amount in question, or the receipt thereof, for the due
compliance with the judgment to be rendered by the court on said
rendition of accounts, with sufficient property of their own worth not less
than the 14th instant,; and likewise forthwith to respect, turn over and
restore now, as they hereby do so, to the defendant or his assignees, the
conclusive possession, administration, benefit and use of the mortgaged
property in question, particularly the sixty-five salt beds administered by
said plaintiffs to date.

Wherefore, both parties sign this stipulation and pray this honorable court to
render its decision in accordance herewith, upon acting on the motion of the
defendant, dated February 7, 1935.

Cavite, Cavite, February 9, 1935.

In view of the foregoing stipulation, the court a quo rendered contracts entered into
between the plaintiffs Licerio Legaspi and Julian Salcedo, on the one hand, and
Damaso Celestial, on the other hand, appearing in the instruments Exhibits A and C-1
are of mortgage or antichresis.

The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the following
stipulation:

That during the existence of this Contract, the Party of the SECOND PART
(Licerio Legaspi and Julian Salcedo) or their representative shall administer and
enjoy the benefits and fruits gathered and harvested thereon; and that the Party
of the FIRST PART (Damaso Celestial) shall give and turn over to the Party of
the SECOND PART the administration and to possession of the said 5 salt beds
during the term of this contract.

In the contract Exhibit A, the parties stipulated the following:

(a) The term of this mortgage is three (3) years to be counted from February 23,
1931, and should the party of the first part, after the expiration of this term, fail to
pay to the party of the second part the amount of this mortgage, this contract
shall subsist in full force and effect and continue the debt or amount of the
mortgage is fully paid.

(b) During the term of the mortgage, the party of the second part of the
mortgagees shall administer or take charge of the work and harvest of the 60 salt
beds and pay for the maintenance of the croppers and defray the expenses for
the improvement thereof; and the party of the first part shall turn over to the party
of the second part the administration of the sixty salt beds mortgaged for the
duration of the stipulation contract.

(c) The crop from the sixty salt beds shall be shared equally by the croppers and
the party of the second part, after deducting the expenses paid by the party of
the second part during each harvest period and throughout the existence of this
mortgage.
It should be noted that the contract Exhibit C-1 is entitled "Contract of Artichresis" while
the contract Exhibit A is entitled "Contract of Mortgage". Both in the contract Exhibit C-1
and in the contract Exhibit A, the defendant Damaso Calestial, as debtor, agrees to turn
over to the plaintiffs, as creditors, the possession of the salt beds so that the latter, after
paying the expenses for the production, administration and harvest of the salt with one-
half of the produce, may keep the other half of the use, benefit and enjoyment. It is not
stipulated that the net produce of the salt beds shall first be applied to the payment of
the interest, if any, and afterwards to that of the principal of their credit. Both contracts
merely provide that the creditors shall keep one-half of the products. Therefore, they are
not contracts of antichresis, as defined by article 1881 of the Civil Code. In a contract of
mortgage, the mortgagor, as a general rule, retains the possession of the property
mortgaged as security for the payment of the sum of money borrowed from the
mortgagee, and pays the latter a certain per cent thereof as interest on his principal by
way of compensation for his sacrifice in depriving himself of the use of said money and
the enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is not
an essential requisite of the contract of mortgage that the property mortgaged remain in
the possession of the mortgagor (article 1857 of the Civil Code), the latter may deliver
said property to the mortgagee, without thereby altering the nature of the contract. It not
being an essential requisite of said contract of mortgage that the principal of the
mortgage credit bear interest, or that the interest, as compensation for the use of the
principal and enjoyment of its fruits, be in the form of a certain per cent thereof, such
interest may be in the form of fruits of the property mortgage, without the contract's
longing thereby its character of a mortgage contract. It is stipulated in the contracts
under consideration that, during the term thereof and while the total amount of the loan
remains unpaid by the debtor, the salt beds constituted as security for the payment of
said loan, shall be administered by the creditors who shall destine one-half of the
products thereof for the maintenance and support of the croppers and the
improvements of the property, keeping the other half for themselves. It appears,
therefore, that the debtor, instead of paying a certain per cent of the principal of the loan
as compensation for the sacrifice made by the creditors in depriving themselves of the
use of their principal and the enjoyment of its fruits, so as to give them to the debtor,
has delivered to them the property constituted as a security for the payment of the loan,
so that they may administer and use it, enjoying its fruits, by way of compensation for
their said sacrifice in lending said debtor their money. Therefore, the contracts, which
are the subject matter of this action, have all the essential requsites of a mortgage,
enumerated in article 1857 of the Civil Code and, consequently, are mortgage contracts.

With respects to the second assignment of alleged error, this court, having arrived at the
conclusion that the contracts entered into between the plaintiffs and the defendant are
contracts of mortgage and not of antichresis, finds the same to be well founded.

This court likewise finds the third assignment of alleged error to be well founded.

From the foregoing considerations, this court is of the opinion and so holds, that when a
contracts of loan with security does not stipulate the payment of interest but provides for
the delivery to the creditor by the debtor of the real property constituted as security for
the payment thereof, in order that the creditor may administer the same and avail
himself of its fruits, without stating that said fruits are to be applied to the payment of
interest, if any, and afterwards to that of the principal of the credit, the contract shall be
considered to be one of mortgage and not of antichresis.

Wherefore, the appealed judgment is reversed, and the defendant's debt to the plaintiffs
is declared paid and the deeds of security executed by both parties cancelled,
dismissing the counterclaim and cross-complained filed by said defendant and appellee
Damaso Celestial, with costs to the latter. So ordered.

15. [G.R. No. 106435. July 14, 1999]

PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G. TEVES, VICTORIA V.
TEVES and HIRAM DIDAY R. PULIDO, petitioners, vs. HON. COURT OF APPEALS
and DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

DECISION

GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals
in CA G.R. CV No. 27861, promulgated on April 23, 1992,[1] affirming in toto the
decision of the Regional Trial Court of Makati[2] to award respondent banks deficiency
claim, arising from a loan secured by chattel mortgage.

The antecedents of the case are as follows:

On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA)
obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from respondent
Bank. By virtue of this loan, petitioner PAMECA, through its President, petitioner
Herminio C. Teves, executed a promissory note for the said amount, promising to pay
the loan by installment. As security for the said loan, a chattel mortgage was also
executed over PAMECAs properties in Dumaguete City, consisting of inventories,
furniture and equipment, to cover the whole value of the loan.

On January 18, 1984, and upon petitioner PAMECAs failure to pay, respondent
bank extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public
auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29,
1984, respondent bank filed a complaint for the collection of the balance of
P4,366,332.46[3] with Branch 132 of the Regional Trial Court of Makati City against
petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA
under the promissory note.

On February 8, 1990, the RTC of Makati rendered a decision on the case, the
dispositive portion of which we reproduce as follows:
WHEREFORE, judgment is hereby rendered ordering the defendants to pay jointly and
severally plaintiff the (1) sum of P4,366,332.46 representing the deficiency claim of the
latter as of March 31, 1984, plus 21% interest per annum and other charges from April
1, 1984 until the whole amount is fully paid and (2) the costs of the suit. SO
ORDERED.[4]

The Court of Appeals affirmed the RTC decision. Hence, this Petition.

The petition raises the following grounds:

1. Respondent appellate court gravely erred in not reversing the decision of the trial
court, and in not holding that the public auction sale of petitioner PAMECAs chattels
were tainted with fraud, as the chattels of the said petitioner were bought by private
respondent as sole bidder in only 1/6 of the market value of the property, hence
unconscionable and inequitable, and therefore null and void.

2. Respondent appellate court gravely erred in not applying by analogy Article 1484 and
Article 2115 of the Civil Code by reading the spirit of the law, and taking into
consideration the fact that the contract of loan was a contract of adhesion.

3. The appellate court gravely erred in holding the petitioners Herminio Teves, Victoria
Teves and Hiram Diday R. Pulido solidarily liable with PAMECA Wood Treatment Plant,
Inc. when the intention of the parties was that the loan is only for the corporations
benefit.

Relative to the first ground, petitioners contend that the amount of P322,350.00 at
which respondent bank bid for and purchased the mortgaged properties was
unconscionable and inequitable considering that, at the time of the public sale, the
mortgaged properties had a total value of more than P2,000,000.00. According to
petitioners, this is evident from an inventory dated March 31, 1980 [5], which valued the
properties at P2,518,621.00, in accordance with the terms of the chattel mortgage
contract[6] between the parties that required that the inventories be maintained at a level
no less than P2 million. Petitioners argue that respondent banks act of bidding and
purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their actual
value in a public sale in which it was the sole bidder was fraudulent, unconscionable
and inequitable, and constitutes sufficient ground for the annulment of the auction sale.

To this, respondent bank contends that the above-cited inventory and chattel
mortgage contract were not in fact submitted as evidence before the RTC of Makati,
and that these documents were first produced by petitioners only when the case was
brought to the Court of Appeals.[7] The Court of Appeals, in turn, disregarded these
documents for petitioners failure to present them in evidence, or to even allude to them
in their testimonies before the lower court.[8] Instead, respondent court declared that it is
not at all unlikely for the chattels to have sufficiently deteriorated as to have fetched
such a low price at the time of the auction sale.[9] Neither did respondent court find
anything irregular or fraudulent in the circumstance that respondent bank was the sole
bidder in the sale, as all the legal procedures for the conduct of a foreclosure sale have
been complied with, thus giving rise to the presumption of regularity in the performance
of public duties.[10]

Petitioners also question the ruling of respondent court, affirming the RTC, to hold
private petitioners, officers and stockholders of petitioner PAMECA, liable with PAMECA
for the obligation under the loan obtained from respondent bank, contrary to the doctrine
of separate and distinct corporate personality.[11] Private petitioners contend that they
became signatories to the promissory note only as a matter of practice by the
respondent bank, that the promissory note was in the nature of a contract of adhesion,
and that the loan was for the benefit of the corporation, PAMECA, alone.[12]

Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that
Articles 1484[13] and 2115[14] of the Civil Code be applied in analogy to the instant case
to preclude the recovery of a deficiency claim.[15]

Petitioners are not the first to posit the theory of the applicability of Article 2115 to
foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio[16], the lower
court dismissed the complaint for collection of deficiency judgment in view of Article
2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge
shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel
Mortgage Law. It was the lower courts opinion that, by virtue of Article 2141, the
provisions of Article 2115 which deny the creditor-pledgee the right to recover deficiency
in case the proceeds of the foreclosure sale are less than the amount of the principal
obligation, will apply.

This Court reversed the ruling of the lower court and held that the provisions of the
Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage, being
contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141, may
not be applied to the case.

Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:

xxx

The officer making the sale shall, within thirty days thereafter, make in writing a return of
his doings and file the same in the office of the Registry of Deeds where the mortgage is
recorded, and the Register of Deeds shall record the same. The fees of the officer for
selling the property shall be the same as the case of sale on execution as provided in
Act Numbered One Hundred and Ninety, and the amendments thereto, and the fees of
the Register of Deeds for registering the officers return shall be taxed as a part of the
costs of sale, which the officer shall pay to the Register of Deeds. The return shall
particularly describe the articles sold, and state the amount received for each article,
and shall operate as a discharge of the lien thereon created by the mortgage. The
proceeds of such sale shall be applied to the payment, first, of the costs and expenses
of keeping and sale, and then to the payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to persons holding subsequent mortgages
in their order, and the balance, after paying the mortgage, shall be paid to the
mortgagor or persons holding under him on demand. (Emphasis supplied)

It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of the sale in excess of the amount of
the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles the
mortgagor to the balance of the proceeds, upon satisfaction of the principal obligation
and costs.

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtor-
mortgagee to pay the deficiency in case of a reduction in the price at public auction. As
explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co. [17], cited in
Ablaza vs. Ignacio, supra:

While it is true that section 3 of Act No. 1508 provides that a chattel mortgage is a
conditional sale, it further provides that it is a conditional sale of personal property
as security for the payment of a debt, or for the performance of some other obligation
specified therein. The lower court overlooked the fact that the chattels included in the
chattel mortgage are only given as security and not as a payment of the debt, in case of
a failure of payment.

The theory of the lower court would lead to the absurd conclusion that if the chattels
mentioned in the mortgage, given as security, should sell for more than the amount of
the indebtedness secured, that the creditor would be entitled to the full amount for which
it might be sold, even though that amount was greatly in excess of the
indebtedness. Such a result certainly was not contemplated by the legislature when it
adopted Act No. 1508. There seems to be no reason supporting that theory under the
provision of the law. The value of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should greatly increase in value
and a sale under that condition should result in largely overpaying the indebtedness,
and if the creditor is not permitted to retain the excess, then the same token would
require the debtor to pay the deficiency in case of a reduction in the price of the chattels
between the date of the contract and a breach of the condition.

Mr. Justice Kent, in the 12th Edition of his Commentaries, as well as other authors on
the question of chattel mortgages, have said, that in case of a sale under a foreclosure
of a chattel mortgage, there is no question that the mortgagee or creditor may maintain
an action for the deficiency, if any should occur. And the fact that Act No. 1508 permits
a private sale, such sale is not, in fact, a satisfaction of the debt, to any greater extent
than the value of the property at the time of the sale. The amount received at the time of
the sale, of course, always requiring good faith and honesty in the sale, is only a
payment, pro tanto, and an action may be maintained for a deficiency in the debt.

We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases
reiterating it[18]

Neither do We find tenable the application by analogy of Article 1484 of the Civil
Code to the instant case. As correctly pointed out by the trial court, the said article
applies clearly and solely to the sale of personal property the price of which is payable
in installments. Although Article 1484, paragraph (3) expressly bars any further action
against the purchaser to recover an unpaid balance of the price, where the vendor opts
to foreclose the chattel mortgage on the thing sold, should the vendees failure to pay
cover two or more installments, this provision is specifically applicable to a sale on
installments.

To accommodate petitioners prayer even on the basis of equity would be to expand

the application of the provisions of Article 1484 to situations beyond its specific purview,
and ignore the language and intent of the Chattel Mortgage Law. Equity, which has
been aptly described as justice outside legality, is applied only in the absence of, and
never against, statutory law or judicial rules of procedure.[19]

We are also unable to find merit in petitioners submission that the public auction
sale is void on grounds of fraud and inadequacy of price. Petitioners never assailed the
validity of the sale in the RTC, and only in the Court of Appeals did they attempt to
prove inadequacy of price through the documents, i.e., the Open-End Mortgage on
Inventory and inventory dated March 31, 1980, likewise attached to their Petition before
this Court. Basic is the rule that parties may not bring on appeal issues that were not
raised on trial.

Having nonetheless examined the inventory and chattel mortgage document as part
of the records, We are not convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on January 18, 1984, the date
of the foreclosure sale. At best, the chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the inventory at a value of at least
P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn, was
as of March 31, 1980, or even prior to April 17, 1980, the date when the parties entered
into the contracts of loan and chattel mortgage, and is far from being an accurate
estimate of the market value of the properties at the time of the foreclosure sale four
years thereafter. Thus, even assuming that the inventory and chattel mortgage contract
were duly submitted as evidence before the trial court, it is clear that they cannot suffice
to substantiate petitioners allegation of inadequacy of price.

Furthermore, the mere fact that respondent bank was the sole bidder for the
mortgaged properties in the public sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious allegation that requires full and
convincing evidence,[20] and may not be inferred from the lone circumstance that it was
only respondent bank that bid in the sale of the foreclosed properties. The sparseness
of petitioners evidence in this regard leaves Us no discretion but to uphold the
presumption of regularity in the conduct of the public sale.

We likewise affirm private petitioners joint and several liability with petitioner
corporation in the loan. As found by the trial court and the Court of Appeals, the terms of
the promissory note unmistakably set forth the solidary nature of private petitioners
commitment. Thus:

On or before May 12, 1980, for value received, PAMECA WOOD TREATMENT PLANT,
INC., a corporation organized and existing under the laws of the Philippines, with
principal office at 304 El Hogar Filipina Building, San Juan, Manila, promise to pay to
the order of DEVELOPMENT BANK OF THE PHILIPPINES at its office located at
corner Buendia and Makati Avenues, Makati, Metro Manila, the principal sum of TWO
HUNDRED SIXTY SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE &
67/100 US DOLLARS (US$ 267,881.67) with interest at the rate of three per cent (3%)
per annum over DBPs borrowing rate for these funds. Before the date of maturity, we
hereby bind ourselves, jointly and severally, to make partial payments as follows:
xxx

In case of default in the payment of any installment above, we bind ourselves to pay
DBP for advances xxx

xxx

We further bind ourselves to pay additional interest and penalty charges on loan
amortizations or portion thereof in arrears as follows:

xxx

"In addition to the above, we also bind ourselves to pay for bank advances for insurance
premiums, taxes xxx

xxx

"We further bind ourselves to reimburse DBP on a pro-rata basis for all costs incurred
by DBP on the foreign currency borrowings from where the loan shall be drawn xxx

xxx

In case of non-payment of the amount of this note or any portion of it on demand, when
due, or any other amount or amounts due on account of this note, the entire obligation
shall become due and demandable, and if, for the enforcement of the payment thereof,
the DEVELOPMENT BANK OF THE PHILIPPINES is constrained to entrust the case to
its attorneys, we jointly and severally bind ourselves to pay for attorneys fees as
provided for in the mortgage contract, in addition to the legal fees and other incidental
expenses. In the event of foreclosure of the mortgage securing this note, we further bind
ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied)[21]

The promissory note was signed by private petitioners in the following manner:

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

(For himself & as President of above-named corporation)

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES[22]

From the foregoing, it is clear that private petitioners intended to bind themselves
solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent
bank, private petitioners are not made to answer for the corporate act of petitioner
PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note.

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the
Court of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby
AFFIRMED. Costs against petitioners.

SO ORDERED.
16. G.R. No. 146555
JOSE C. CORDOVA, Petitioner
-versus-
CORONA, AZCUNA and REYES DAWAY LIM BERNARDO LINDO ROSALES LAW
OFFICES, ATTY. WENDELL CORONEL and the SECURITIES AND EXCHANGE
COMMISSION,*** Respondents

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.

Sometime in 1977 and 1978, petitioner Jose C. Cordova bought from Philippine
Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity Sports
Plaza Incorporated (CSPI) and shares of stock of various other corporations. He was
issued a confirmation of sale.[4] The CSPI shares were physically delivered by
Philfinance to the former Filmanbank[5] and Philtrust Bank, as custodian banks, to hold
these shares in behalf of and for the benefit of petitioner.[6]

On June 18, 1981, Philfinance was placed under receivership by public

respondent Securities and Exchange Commission (SEC). Thereafter, private
respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell
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 banks. [8] On May 27,
1996, they sold the shares to Northeast Corporation and included the proceeds thereof
in the funds of Philfinance. Petitioner learned about the unauthorized sale of his shares
only on September 10, 1996.[9] He lodged a complaint with private respondents but the
latter ignored it[10] prompting him to file, on May 6, 1997,[11] a formal complaint against
private respondents in the receivership proceedings with the SEC, for the return of the
shares.
 Meanwhile, on April 18, 1997, the SEC approved a 15% rate of recovery for
Philfinances creditors and investors.[12] On May 13, 1997, the liquidators began the
process of settling the claims against Philfinance, from its assets.[13]

On April 14, 1998, the SEC rendered judgment dismissing the petition. However,
it reconsidered this decision in a resolution dated September 24, 1999 and granted the
claims of petitioner. It held that petitioner was the owner of the CSPI shares by 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 status was converted into that of an
ordinary creditor for the value of such shares. Thus, it ordered private respondents to
pay petitioner the amount of P5,062,500 representing 15% of the monetary value of his
CSPI shares plus interest at the legal rate from the time of their unauthorized sale.

On October 27, 1999, the SEC issued an order clarifying its September 24, 1999
resolution. While it reiterated its earlier order to pay petitioner the amount
of P5,062,500, it deleted the award of legal interest. It clarified that it never meant to
award interest since this would be unfair to the other claimants.

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the
owner of the CSPI shares but the recovery of such shares had become impossible. It
also declared that the clarificatory order merely harmonized the dispositive portion with
the body of the resolution. Petitioners motion for reconsideration was denied.

Hence this petition raising the following issues:

1) whether petitioner should be considered as a preferred (and
secured) creditor of Philfinance;
2) whether petitioner can recover the full value of his CSPI shares or
merely 15% thereof like all other ordinary creditors of Philfinance and
3) whether petitioner is entitled to legal interest.[14]
 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
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 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.
17. [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."

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
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 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.
18. [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 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 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, possession, or the right of possession to specific property, or requiring its
transfer or sale[17] (Emphasis supplied)

Pea adds that even if a party initially avails itself of a notice of lis pendens upon the
filing of a case in court, such notice is rendered nugatory if the case turns out to be a
purely personal action. We quote him as follows:

It may be possible also that the case when commenced may justify a resort to lis
pendens, but during the progress thereof, it develops to be purely a personal action for
damages or otherwise. In such event, the notice of lis pendens has become functus
officio.[18] (Emphasis supplied)

Thus, when a complaint or an action is determined by the courts to be in personam,

the rationale for or purpose of the notice of lis pendens ceases to exist. To be sure, this
Court has expressly and categorically declared that the annotation of a notice of lis
pendens on titles to properties is not proper in cases wherein the proceedings instituted
are actions in personam.[19]

Second Issue:
Jurisdiction of the Trial Court

Petitioner argues that the RTC had no jurisdiction to issue the Order canceling the
Notice of Lis Pendens as well as the Order reinstating it. Supposedly, since both Orders
were issued by the trial court without jurisdiction, the annotation made by the Register of
Deeds of Tagaytay City must remain in force.

Petitioner avers that the trial court finally declared that the latter had no jurisdiction
over the case on July 27, 1998, in an Order denying the formers Motion for
Reconsideration of the March 17, 1998 Order dismissing the Complaint. Petitioner
insists that the subsequent July 30, 1998 Order cancelling the subject Notice of Lis
Pendens is void, because it was issued by a court that had no more jurisdiction over the
case.

Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from regional
trial courts, expressly provides that RTCs lose jurisdiction over a case when an appeal
is filed. The rule reads thus:

SEC. 9. Perfection of appeal; effect thereof. -- A partys appeal by notice of appeal is

deemed perfected as to him upon the filing of the notice of appeal in due time.

xxxxxxxxx

In appeals by notice of appeal, the court loses jurisdiction over the case upon the
perfection of the appeals filed in due time and the expiration of the time to appeal of the
other parties. (Emphasis supplied)

On the basis of the foregoing rule, the trial court lost jurisdiction over the case only
on August 31, 1998, when petitioner filed its Notice of Appeal.[20] Thus, any order issued
by the RTC prior to that date should be considered valid, because the court still had
jurisdiction over the case. Accordingly, it still had the authority or jurisdiction to issue the
July 30, 1998 Order canceling the Notice of Lis Pendens. On the other hand,
the November 4, 1998 Order that set aside the July 30, 1998 Order and reinstated that
Notice should be considered without force and effect, because it was issued by the trial
court after it had already lost jurisdiction.

In any case, even if we were to adopt petitioners theory that both the July 30, 1998
and the November 4, 1998 Orders were void for having been issued without jurisdiction,
the annotation is still improper for lack of factual and legal bases.

As discussed previously, erroneously misplaced is the reliance of petitioner on the

premise that its money claim is an action for the enforcement of a contractors
lien. Verily, the annotation of the Notice of Lis Pendens on the subject property titles
should not have been made in the first place. The Complaint filed before the Makati
RTC -- for the collection of a sum of money and for damages -- did not provide sufficient
legal basis for such annotation.

Finally, petitioner vehemently insists that the trial court had no jurisdiction to cancel
the Notice. Yet, the former filed before the CA an appeal, docketed as CA-GR CV No.
65647,[21]questioning the RTCs dismissal of the Complaint for lack of
jurisdiction. Moreover, it must be remembered that it was petitioner which had initially
invoked the jurisdiction of the trial court when the former sought a judgment for the
recovery of money and damages against respondent. Yet again, it was also petitioner
which assailed that same jurisdiction for issuing an order unfavorable to the 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.
19. G.R. No. 187581 October 20, 2014

PHILIPPINE BANK OF COMMUNICATIONS, Petitioner ,

vs.
BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.

DECISION

BERSAMIN, J.:

This appeal is taken from the decision promulgated on December 16, 2008 in C.A.-G.R.
CV No. I 02484 entitled Philippine Bank of Communications, v. Basic Polyprinters and
Packaging Corporation,1 whereby the Court of Appeals (CA) affirmed the order issued
on January 11, 2008 by the Regional Trial Court (RTC), Branch 21, in Imus, Cavite, viz:

WHEREFORE, the instant petition is hereby DISMISSED. ACCORDINGLY, the Order

dated January 11, 2008 of the Regional Trial Court oflmus, Cavite, Branch 21, is hereby
AFFIRMED.

SO ORDERED.2

Antecedents

Respondent Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was a

domestic corporation engaged in the business of printing greeting cards, gift wrappers,
gift bags, calendars, posters, labels and other novelty items.3

On February 27, 2004, Basic Polyprinters, along with the eight other corporations
belonging to the Limtong Group of Companies (namely: Cuisine Connection, Inc., Fine
Arts International, Gibson HP Corporation, Gibson Mega Corporation, Harry U. Limtong
Corporation, Main Pacific Features, Inc., T.O.L. Realty & Development Corp., and
Wonder Book Corporation), filed a joint petition for suspension of paymentswith
approval of the proposed rehabilitation in the RTC (docketed as SEC Case No. 031-
04).4 The RTC issued a stay order, and eventually approved the rehabilitation plan, but
the CA reversed the RTC on October 25, 2005,5 and directed the petitioning
corporations tofile their individual petitions for suspension of payments and rehabilitation
in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, 6 averring therein that: (a)
its business since incorporation had been very viable and financially profitable; (b) it had
obtained loans from various banks, and had owed accounts payable to various
creditors; (c) the Asian currency crisis, devaluation of the Philippine peso, and the
current state of affairs of the Philippine economy, coupled with: (i) high interest rates,
penalties and charges by its creditors; (ii) low demand for gift items and cards due to the
economic recession and the use of cellular phones; (iii) direct competition from stores
like SM, Gaisano, Robinson and other malls; and (iv) the fire of July 19, 2002 that had
destroyed its warehouse containing inventories worth ₱264,000,000.00, resulting in
difficulty of meeting its obligations; (d) its operations would be hampered and would
render rehabilitation difficult should its creditors enforce their claims through legal
actions, including foreclosure proceedings; (e) included in its overall Rehabilitation
Program was the full payment of its outstanding loans in favor of petitioner Philippine
Bank of Communications (PBCOM), RCBC, Land Bank, EPCI Bank and AUB via
repayment over 15 years with moratorium of two-years for the interestand five years for
the principal at 5% interest per annumand a dacion en pagoof its affiliate property in
favor of EPCI Bank; and (f) its assets worth ₱15,374,654.00 with net liabilities
amounting to ₱13,031,438.00.7

Finding the petition sufficient in formand substance, the RTC issued the stay order
dated August 31, 2006.8 It appointed Manuel N. Cacho III as the rehabilitation receiver,
and required all creditors and interested parties, including the Securities and Exchange
Commission (SEC), to file their comments.

After the initial hearing and evaluation of the comments and opposition of the creditors,
including PBCOM, the RTC gave due course to the petition and referred it to the
rehabilitation receiver for evaluation and recommendation.9

On October 18, 2007, the rehabilitation receiver submitted his report recommending the
approval of the rehabilitation plan. On December 19, 2007, the rehabilitation receiver
submitted his clarifications and corrections to his report and recommendations. 10

Ruling of the RTC

On January 11, 2008, the RTC issued an order approving the rehabilitation plan, 11 the
pertinent portion of which reads:

Petitioner’s primary business is in the printing business. Based on its updated financial
report, the financial condition has greatly improved.
However, because of the indebtedness and the slowdown in sales brought about by a
depressed economy, the present income from the operations will be insufficient to pay
off its maturing obligations. Thus, the success of the rehabilitation planlargely depends
on its ability to reduce its debt obligation to a manageable level by the suspension of
payments of obligations and the proposed "dacion en pago."

The projected cash flow attached to the report and the repayment program
demonstrates the ability of the company to settle its debt liability.

Other factors which justify the approval of the Rehabilitation Plan are as follows:

1. The petitioner has a positive net worth and inventory that can be converted
into resources.

2. The Plan ensures preservation of assets, optimizes recovery of creditors’

claims and provides ofan orderly payment of debts.

3. The plan will restore petitioner to profitability and solvency and maintain it as
an on-going concern to the benefit of the stockholders, investors and creditors.

4. The rehabilitation and the continuous operation of the company will generate
employment.

5. The plan is endorsed by the Rehabilitation Receiver.

CONSIDERING THE FOREGOING, the Court hereby approves the detailed

Rehabilitation Plan including the Receiver’s Report and Recommendations and its
clarifications and corrections and enjoins the petitioner to comply strictly with the
provisions of the plan, perform its obligations thereunder and take all actions necessary
to carry out the plan, failing which, the Court shall either, upon motion, motu proprio or
upon the recommendation of the Rehabilitation Receiver, terminate the proceedings
pursuant to Section 27, Rule 1 of the Interim Rules of Procedure on Corporate
Rehabilitation.
The Rehabilitation Receiver is directed to strictly monitor the implementation of the Plan
and submit a quarterly report on the progress thereon.

SO ORDERED.

PBCOM appealed to the CA in due course.

Ruling of the CA

In the assailed decision promulgated on December 16, 2008, 12 the CA affirmed the
questioned order of the RTC, agreeing with the finding of the rehabilitation receiver that
there were sufficient evidence, factors and actual opportunities in the rehabilitation plan
indicating that Basic Polyprinters could be successfully rehabilitated in due time. 13

Emphasizing the equitable and rehabilitative purposes of rehabilitation proceedings, the

CA stated that Presidential Decree No. 902-A, as amended, sought to "effect a feasible
and viable rehabilitation by preserving a foundering business as going concern"
because it would be more valuable to preserve the assets of the corporation 14 rather
than to pursue its liquidation; and observed in closing:

One last word. The purpose of rehabilitation proceedings is to enable the company to
gain new lease on life and thereby allows creditors to be paid their claims from its
earnings. Rehabilitation contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the financially distressed corporation to its former position
of successful operation and solvency. This is in consonance with the State’s objective to
promote a wider and moremeaningful equitable distribution of wealth to protect
investments and the public. The approval of the Rehabilitation Plan by the trial court is
precisely in furtherance of the rationale behind the Interim Rules of Corporate
Rehabilitation is to effect a feasible and viable rehabilitation ofailing corporations which
affect the public welfare.15

PBCOM moved for reconsideration,16 but its motion was denied.

Issues
Hence, this appeal by PBCOM upon the following issues, namely:

THE COURT OF APPEALS GRAVELY ERRED IN DISMISSING PETITIONER’S

PETITION FOR REVIEW AND AFFIRMING THE ORDER DATED JANUARY 11, 2008,
CONSIDERING THAT:

A PETITION FILED PURSUANT TO THE INTERIM RULES OF PROCEDURE ON

CORPORATE REHABILITATION PRESUPPOSES THAT THE PETITIONING
CORPORATION HAS SUFFICIENT PROPERTY TO COVER ALL ITS
INDEBTEDNESS. RESPONDENT IS INSOLVENT AS ITS ASSETS ARE LESS THAN
ITS OBLIGATIONS;

THE "DETAILED REHABILITATION PLAN" DOES NOT PROVIDE MATERIAL

FINANCIAL COMMITMENTS FROM RESPONDENT ITSELF OR WOULD-BE
INVESTORS

THE TERMS AND CONDITIONS OF THE "APPROVED REHABILITATION PLAN" ARE

TOO ONEROUS PARTICULARLY THE REHABILITATION TERM OF FIFTEEN (15)
YEARS AS WELL AS THE "WAIVER" OF ALL INTEREST AND PENALTIES
BEGINNING FEBRUARY 2004 UPTO THE TIME OF ITS APPROVAL.17

The petitioner claims that the CA did not pass upon the issues presented in its petition,
particularly Basic Polyprinters’ liquidity that was material in proceedings for corporate
rehabilitation; that a petition for rehabilitation presupposed that the petitioning
corporation had sufficient property to cover all its indebtedness, but Basic Polyprinters
did not show so because its assets were much less thanits outstanding obligations; that
Basic Polyprinters had under-declared its outstanding loans, i.e., its total loan
obligations with the petitioner was at ₱118,411,702.70 as of June 30, 2006, and not just
₱71,315,086.00 as it claimed; that the independent appraisal by the Professional Asset
Valuers, Inc. (PAVI) on Basic Polyprinters’ machineries and printing equipment
mortgaged to it (PBCOM) had a fair market value of only ₱6,531,000.00, and a prompt
sale value of only ₱4,572,000.00, as compared to the fair market value of
₱15,110,000.00 declared by Basic Polyprinters; that the rehabilitation plandid not
contain the material financial commitments required by Section 5, Rule 4 of the Interim
Rules of Procedure for Corporate Rehabilitation (Interim Rules); that, accordingly, the
proposed repayment scheme did not constitute a material financial commitment, and
the proposed dacion en pagowas not proper because the property subject thereof had
been mortgaged in its favor; and that the absence of capital infusion rendered
impossible the proposal to invest in new machineries that would increase sales and
improve quality and capacity.18

The petitioner posits that the assailed decision of the CA effectively gave Basic
Polyprinters a moratoriumfor seven years on both interest and principal payments
counted from the issuance of the stay order in 2004 that effectively prejudiced its
creditors.19

Basic Polyprinters refutes the petitioner, saying that the petitioner raises factual issues
improper under Rule 45 of the Rules of Court; that as long as the rehabilitation court
found that the petitioning corporation could still be rehabilitated, its findings of fact
should be binding when they were supported by substantial evidence; that the
independent appraisal report by PAVI was unauthorized by the RTC; and that the
validity of the rehabilitation plan could be upheld for its complete satisfaction of the
requirements of Section 5, Rule4 of the Interim Rules.

In fine, we shall determine whether the approval of the rehabilitation plan was proper
despite: (a) the alleged insolvency of Basic Polyprinters; and (b) absence of a material
financial commitment pursuant to Section 5, Rule 4 of the Interim Rules.
Ruling

We reverse the judgment of the CA.

Liquidity was not an issue in a petition for rehabilitation

The petitioner contends that the sole issue in corporate rehabilitation is one of liquidity;
hence, the petitioning corporation should have sufficient assets to cover all its
indebtedness because it only foresees the impossibility of paying the indebtedness
falling due. It claims that rehabilitation became inappropriate because Basic Polyprinters
was insolvent due to its assets being inadequate to cover the outstanding obligations.20

We disagree with the contention of the petitioner.

Under the Interim Rules, rehabilitation is the process of restoring "the debtor to a
position of successful operation and solvency, if it is shown that its continuance of
operation is economically feasible and its creditors can recover by way of the present
value of payments projected in the plan more if the corporation continues as a going
concern that if it is immediately liquidated."21 It contemplates a continuance ofcorporate
life and activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency.22

In Asiatrust Development Bank v. First Aikka Development, Inc., 23 we said that

rehabilitation proceedings have a two-pronged purpose, namely: (a) to efficiently and
equitably distribute the assets of the insolvent debtor to its creditors; and (b) to provide
the debtor with a fresh start, viz: Rehabilitation proceedings in our jurisdiction have
equitable and rehabilitative purposes. On the one hand, they attempt to provide for the
efficient and equitable distribution ofan insolvent debtor's remaining assets to its
creditors; and on the other, to provide debtors with a "fresh start" by relieving them of
the weight of their outstanding debts and permitting them to reorganize their affairs. The
purpose of rehabilitation proceedings is to enable the company to gain a new lease on
life and thereby allow creditors to be paidtheir claims from its earnings.24

Consequently, the basic issues inrehabilitation proceedings concern the viability and
desirability of continuing the business operations of the petitioning corporation. The
determination of such issues was to be carried out by the court-appointed rehabilitation
receiver,25 who was Cacho in this case.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act (FRIA)
of 2010), a law that is applicable hereto,26 has defined a corporate debtor as a
corporation duly organized and existing under Philippine laws that has become
insolvent.27 The term insolventis defined in Republic Act No. 10142 as "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."28

As such, the contention that rehabilitation becomes inappropriate because of the

perceived insolvency of BasicPolyprinters was incorrect.

II

A material financial commitment is significant in a rehabilitation plan

The petitioner next argues that Basic Polyprinters did not present any material financial
commitment in the rehabilitation plan, thereby violating Section 5, Rule 4 of the Interim
Rules, the rule applicable at the time of the filing of the petition for rehabilitation. In that
regard, Basic Polyprinters made no commitment in relation to the infusion of fresh
capital by its stakeholders,29 and presented only a "lopsided" protracted repayment
schedule that included the dacion en pago involving an asset mortgaged to the
petitioner itself in favor of another creditor.

A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith ofthe distressed corporation in financing the
proposed rehabilitation plan.30 This commitment may include the voluntary undertakings
ofthe stockholders or the would-be investors of the debtor-corporation indicating their
readiness, willingness and ability to contribute funds or property to guarantee the
continued successful operation of the debtor corporation during the period of
rehabilitation.31

Basic Polyprinters presented financial commitments, as follows:

(a) Additional ₱10 million working capital to be sourced from the insurance claim;

(b) Conversion of the directors’ and shareholders’ deposit for future subscription
to common stock;32

(c) Conversion of substituted liabilities, if any, to additional paid-in capital to

increase the company’s equity; and

(d) All liabilities (cash advances made by the stockholders) of the company from
the officers and stockholders shall be treated as trade payables.33

However, these financial commitments were insufficient for the purpose.1âwphi1 We

explain.

The commitment to add ₱10,000,000.00 working capital appeared to be doubtful

considering that the insurance claim from which said working capital would be sourced
had already been written-off by Basic Polyprinters’s affiliate, Wonder Book
Corporation.34 A claim that has been written-off is considered a bad debt or a worthless
asset,35 and cannot be deemed a material financial commitment for purposes of
rehabilitation. At any rate, the proposed additional ₱10,000,000.00 working capital was
insufficient to cover at least half ofthe shareholders’ deficit that amounted to
₱23,316,044.00 as of June 30, 2006.

We also declared in Wonder Book Corporation v. Philippine Bank of Communications

(Wonder Book)36 that the conversion of all deposits for future subscriptions to common
stock and the treatment of all payables to officers and stockholders as trade payables
was hardly constituting material financial commitments. Such "conversion" of cash
advances to trade payables was, in fact, a mere re-classification of the liability entry and
had no effect on the shareholders’ deficit. On the other hand, we cannot determine the
effect of the "conversion"of the directors’ and shareholders’ deposits for future
subscription to common stock and substituted liabilities on the shareholders’ deficit
because their amounts were not reflected in the financial statements contained in the
rollo.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it
intended to address the low demands for their products and the effect of direct
competition from stores like SM, Gaisano, Robinsons, and other malls. Even the ₱245
million insurance claim that was supposed to cover the destroyed inventories worth
₱264 million appears to have been written-off with no probability of being realized later
on.

We observe, too, that Basic Polyprinters’s proposal to enter into the dacion en pagoto
create a source of "fresh capital" was not feasible because the object thereof would not
be its own property but one belonging to its affiliate, TOL Realty and Development
Corporation, a corporation also undergoing rehabilitation. Moreover, the negotiations
(for the return of books and magazines from Basic Polyprinters’s trade creditors) did not
partake of a voluntary undertaking because no actual financial commitments had been
made thereon.

Worthy of note here is that Wonder Book Corporation was a sister company of Basic
Polyprinters, being one of the corporations that had filed the joint petition for suspension
of payments and rehabilitation in SEC Case No. 031-04 adverted to earlier. Both of
them submitted identical commitments in their respective rehabilitation plans. As a
result, as the Court observed in Wonder Book,37 the commitments by Basic Polyprinters
could not be considered as firm assurances that could convince creditors, future
investors and the general public of its financial and operational viability.

Due to the rehabilitation plan being an indispensable requirement in corporate

rehabilitation proceedings,38 Basic Polyprinters was expected to exert a conscious effort
in formulating the same, for such plan would spell the future not only for itself but also
for its creditors and the public in general. The contents and execution of the
rehabilitation plan could not be taken lightly. We are not oblivious to the plight of
corporate debtors like Basic Polyprinters that have inevitably fallen prey to economic
recession and unfortunate incidents in the course of their operations. However, we must
endeavor to balance the interests of all the parties that had a stake in the success of
rehabilitating the debtors. In doing so here, we cannot now find the rehabilitation plan
for Basic Polyprinters to be genuine and in good faith, for it was, in fact, unilateral and
detrimental to its creditors and the public.

ACCORDINGLY, the Court GRANTS the petition for review on certiorari; SETS ASIDE
and REVERSES the decision promulgated on December 16, 2008 and the resolution
promulgated on April 22, 2009, both by the Court of Appeals, as well as the order
issued on January 11, 2008 by the Regional Trial Court approving the rehabilitation plan
submitted by Basic Polyprinters and Packaging Corporation; DISMISSES the petition for
suspension of payments and rehabilitation of Basic Polyprinters and Packaging
Corporation; and DIRECTS Basic Polyprinters and Packaging Corporation to pay the
costs of suit.

SO ORDERED

20. G.R. No. 175844 July 29, 2013

BANK OF THE PHILIPPINE ISLANDS, Petitioner ,

vs.
SARABIA MANOR HOTEL CORPORATION, Respondent.

DECISION
PERLAS-BERNABE, J.:

Before the Court is a petition for review on certiorari1 assailing the Decision2 dated April
24, 2006 and Resolution3dated December 6, 2006 of the Court of Appeals, Cebu City
(CA) in CA-G.R. CV. No. 81596 which affirmed with modification the rehabilitation plan
of respondent Sarabia Manor Hotel Corporation (Sarabia) as approved by the Regional
Trial Court of Iloilo City, Branch 39 (RTC) through its Order4 dated August 7, 2003.

The Facts

Sarabia is a corporation duly organized and existing under Philippine laws, with
principal place of business at 101 General Luna Street, Iloilo City. 5 It was incorporated
on February 22, 1982, with an authorized capital stock of ₱10,000,000.00, fully
subscribed and paid-up, for the primary purpose of owning, leasing, managing and/or
operating hotels, restaurants, barber shops, beauty parlors, sauna and steam baths,
massage parlors and such other businesses incident to or necessary in the
management or operation of hotels.6

In 1997, Sarabia obtained a ₱150,000,000.00 special loan package from Far East Bank
and Trust Company (FEBTC) in order to finance the construction of a five-storey hotel
building (New Building) for the purpose of expanding its hotel business. An additional
₱20,000,000.00 stand-by credit line was approved by FEBTC in the same year.7

The foregoing debts were secured by real estate mortgages over several parcels of
land8 owned by Sarabia and a comprehensive surety agreement dated September 1,
1997 signed by its stockholders.9 By virtue of a merger, Bank of the Philippine Islands
(BPI) assumed all of FEBTC’s rights against Sarabia.10

Sarabia started to pay interests on its loans as soon as the funds were released in
October 1997. However, largely because of the delayed completion of the New Building,
Sarabia incurred various cash flow problems. Thus, despite the fact that it had more
assets than liabilities at that time,11 it, nevertheless, filed, on July 26, 2002, a
Petition12 for corporate rehabilitation (rehabilitation petition) with prayer for the issuance
of a stay order before the RTC as it foresaw the impossibility to meet its maturing
obligations to its creditors when they fall due.

In the said petition, Sarabia claimed that its cash position suffered when it was forced to
take-over the construction of the New Building due to the recurring default of its
contractor, Santa Ana – AJ Construction Corporation (contractor),13 and its subsequent
abandonment of the said project.14 Accordingly, the New Building was completed only in
the latter part of 2000, or two years past the original target date of August 1998, thereby
skewing Sarabia’s projected revenues. In addition, it was compelled to divert some of its
funds in order to cover cost overruns. The situation became even more difficult when
the grace period for the payment of the principal loan amounts ended in 2000 which
resulted in higher amortizations. Moreover, external events adversely affecting the hotel
industry, i.e., the September 11, 2001 terrorist attacks and the Abu Sayyaf issue, also
contributed to Sarabia’s financial difficulties.15 Owing to these circumstances, Sarabia
failed to generate enough cash flow to service its maturing obligations to its creditors,
namely: (a) BPI (in the amount of ₱191,476,421.42); (b) Rural Bank of Pavia (in the
amount of ₱2,500,000.00); (c) Vic Imperial Appliance Corp. (Imperial Appliance) (in the
amount of ₱5,000,000.00); (d) its various suppliers (in the amount of ₱7,690,668.04);
(e) the government (for minimum corporate income tax in the amount of ₱547,161.18);
and (f) its stockholders (in the amount of ₱18,748,306.35).16

In its proposed rehabilitation plan,17 Sarabia sought for the restructuring of all its
outstanding loans, submitting that the interest payments on the same be pegged at a
uniform escalating rate of: (a) 7% per annum (p.a.) for the years 2002 to 2005; (b) 8%
p.a. for the years 2006 to 2010; (c) 10% p.a. for the years 2011 to 2013; (d) 12% p.a. for
the years 2014 to 2015; and (e) 14% p.a. for the year 2018. Likewise, Sarabia sought to
make annual payments on the principal loans starting in 2004, also in escalating
amounts depending on cash flow. Further, it proposed that it should pay off its
outstanding obligations to the government and its suppliers on their respective due
dates, for the sake of its day to day operations.
Finding Sarabia’s rehabilitation petition sufficient in form and substance, the RTC issued
a Stay Order18 on August 2, 2002. It also appointed Liberty B. Valderrama as Sarabia’s
rehabilitation receiver (Receiver). Thereafter, BPI filed its Opposition.19

After several hearings, the RTC gave due course to the rehabilitation petition and
referred Sarabia’s proposed rehabilitation plan to the Receiver for evaluation.20

In a Recommendation21 dated July 10, 2003 (Receiver’s Report), the Receiver found
that Sarabia may be rehabilitated and thus, made the following recommendations:

(1) Restructure the loans with Sarabia’s creditors, namely, BPI, Imperial
Appliance, Rural Bank of Pavia, and Barcelo Gestion Hotelera, S.L. (Barcelo),
under the following terms and conditions: (a) the total outstanding balance as of
December 31, 2002 shall be recomputed, with the interest for the years 2001 and
2002 capitalized and treated as part of the principal; (b) waive all penalties; (c)
extend the payment period to seventeen (17) years, i.e., from 2003 to 2019, with
a two-year grace period in principal payment; (d) fix the interest rate at 6.75%
p.a. plus 10% value added tax on interest for the entire term of the restructured
loans;22 (e) the interest and principal based on the amortization schedule shall be
payable annually at the last banking day of each year; and (f) any deficiency shall
be paid personally by Sarabia’s stockholders in the event it fails to generate
enough cash flow; on the other hand, any excess funds generated at the end of
the year shall be paid to the creditors to accelerate the debt servicing; 23

(2) Pay Sarabia’s outstanding payables with its suppliers and the government so
as not to disrupt hotel operations;24

(3) Convert the Advances from stockholders amounting to ₱18,748,306.00 to

stockholder’s equity and other advances amounting to ₱42,688,734.00 as of the
December 31, 2002 tentative financial statements to Deferred Credits; the said
conversion should increase stockholders’ equity to ₱268,545,731.00 and bring
the debt to equity ratio to 0.85:1;25
 (4) Require Sarabia’s stockholders to pay its payables to the hotel recorded as
Accounts Receivable – Trade, amounting to ₱285,612.17 as of December 31,
2001, and its remaining receivables after such date;26

(5) No compensation or cash dividends shall be paid to the stockholders during

the rehabilitation period, except those who are directly employed by the hotel as
a full time officer, employee or consultant covered by a valid contract and for a
reasonable fee;27

(6) All capital expenditures which are over and above what is provided in the
case flow of the rehabilitation plan which will materially affect Sarabia’s cash
position but which are deemed necessary in order to maintain the hotel’s
competitiveness in the industry shall be subject to the RTC’s approval prior to its
implementation;28

(7) Terminate the management contract with Barcelo, thereby saving an

estimated ₱25,830,997.00 in management fees, over and above the salaries and
benefits of certain managerial employees;29

(8) Appoint a new management team which would be required to submit a

comprehensive business plan to support the generation of the target revenue as
reported in the rehabilitation plan;30

(9) Open a debt servicing account and transfer all excess funds thereto, which in
no case should be less than ₱500,000.00 at the end of the month; the funds will
be drawn payable to the creditors only based on the amortization schedule; 31 and

(10) Release the surety obligations of Sarabia’s stockholders, considering the

adequate collaterals and securities covered by the rehabilitation plan and the
continuing mortgages over Sarabia’s properties.32

The RTC Ruling

In an Order33 dated August 7, 2003, the RTC approved Sarabia’s rehabilitation plan as
recommended by the Receiver, finding the same to be feasible. In this accord, it
observed that the rehabilitation plan was realistic since, based on Sarabia’s financial
history, it was shown that it has the inherent capacity to generate funds to pay its loan
obligations given the proper perspective.34 The recommended rehabilitation plan was
also practical in terms of the interest rate pegged at 6.75% p.a. since it is based on
Sarabia’s ability to pay and the creditors’ perceived cost of money.35 It was likewise
found to be viable since, based on the extrapolations made by the Receiver, Sarabia’s
revenue projections, albeit projected to slow down, remained to have a positive
business/profit outlook altogether.36

The RTC further noted that while it may be true that Sarabia has been unable to comply
with its existing terms with BPI, it has nonetheless complied with its obligations to its
employees and suppliers and pay its taxes to both local and national government
without disrupting the day-to-day operations of its business as an on-going concern.37

More significantly, the RTC did not give credence to BPI’s opposition to the Receiver’s
recommended rehabilitation plan as neither BPI nor the Receiver was able to
substantiate the claim that BPI’s cost of funds was at the 10% p.a. threshold. In this
regard, the RTC gave more credence to the Receiver’s determination of fixing the
interest rate at 6.75% p.a., taking into consideration not only Sarabia’s ability to pay
based on its proposed interest rates, i.e., 7% to 14% p.a., but also BPI’s perceived cost
of money based on its own published interest rates for deposits, i.e., 1% to 4.75% p.a.,
as well as the rates for treasury bills, i.e., 5.498% p.a. and CB overnight borrowings,
i.e., 7.094%. p.a.38

The CA Ruling

In a Decision39 dated April 24, 2006, the CA affirmed the RTC’s ruling with the
modification of reinstating the surety obligations of Sarabia’s stockholders to BPI as an
additional safeguard for the effective implementation of the approved rehabilitation
plan.40 It held that the RTC’s conclusions as to the feasibility of Sarabia’s rehabilitation
was well-supported by the company’s financial statements, both internal and
independent, which were properly analyzed and examined by the Receiver. 41 It also
upheld the 6.75%. p.a. interest rate on Sarabia’s loans, finding the said rate to be
reasonable given that BPI’s interests as a creditor were properly accounted for. As
published, BPI’s time deposit rate for an amount of ₱5,000,000.00 (with a term of 360-
364 days) is at 5.5% p.a.; while the benchmark ninety one-day commercial paper, which
banks used to price their loan averages to 6.4% p.a. in 2005, has a three-year average
rate of 6.57% p.a.42 As such, the 6.75% p.a. interest rate would be higher than the
current market interest rates for time deposits and benchmark commercial papers.
Moreover, the CA pointed out that should the prevailing market interest rates change as
feared by BPI, the latter may still move for the modification of the approved
rehabilitation plan.43

Aggrieved, BPI moved for reconsideration which was, however, denied in a

Resolution44 dated December 6, 2006.

Hence, this petition.

The Issue Before the Court

The primordial issue raised for the Court’s resolution is whether or not the CA correctly
affirmed Sarabia’s rehabilitation plan as approved by the RTC, with the modification on
the reinstatement of the surety obligations of Sarabia’s stockholders.

BPI mainly argues that the approved rehabilitation plan did not give due regard to its
interests as a secured creditor in view of the imposition of a fixed interest rate of 6.75%
p.a. and the extended loan repayment period. 45 It likewise avers that Sarabia’s
misrepresentations in its rehabilitation petition remain unresolved.46

On the contrary, Sarabia essentially maintains that: (a) the present petition improperly
raises questions of fact;47 (b) the approved rehabilitation plan takes into consideration
all the interests of the parties and the terms and conditions stated therein are more
reasonable than what BPI proposes;48 and (c) BPI’s allegations of misrepresentation are
mere desperation moves to convince the Court to overturn the rulings of the courts a
quo.49

The Court’s Ruling

The petition has no merit.

A. Propriety of BPI’s petition procedural considerations.

It is fundamental that a petition for review on certiorari filed under Rule 45 of the Rules
of Court covers only questions of law. In this relation, questions of fact are not
reviewable and cannot be passed upon by the Court unless, the following exceptions
are found to exist: (a) when the findings are grounded entirely on speculations,
surmises, or conjectures; (b) when the inference made is manifestly mistaken, absurd,
or impossible; (c) when there is a grave abuse of discretion; (d) when the judgment is
based on misappreciation of facts; (e) when the findings of fact are conflicting; (f) when
in making its findings, the same are contrary to the admissions of both parties; (g) when
the findings are contrary to those of the trial court; (h) when the findings are conclusions
without citation of specific evidence on which they are based; (i) when the facts set forth
in the petition as well as in the petitioner’s main and reply briefs are not disputed by the
respondent; and (j) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record.50

The distinction between questions of law and questions of fact is well-defined. A

question of law exists when the doubt or difference centers on what the law is on a
certain state of facts. A question of fact, on the other hand, exists if the doubt centers on
the truth or falsity of the alleged facts. This being so, the findings of fact of the CA are
final and conclusive and the Court will not review them on appeal.51

In view of the foregoing, the Court finds BPI’s petition to be improper – and hence,
dismissible52 – as the issues raised therein involve questions of fact which are beyond
the ambit of a Rule 45 petition for review.
To elucidate, the determination of whether or not due regard was given to the interests
of BPI as a secured creditor in the approved rehabilitation plan partakes of a question of
fact since it will require a review of the sufficiency and weight of evidence presented by
the parties – among others, the various financial documents and data showing
Sarabia’s capacity to pay and BPI’s perceived cost of money – and not merely an
application of law. Therefore, given the complexion of the issues which BPI presents,
and finding none of the above-mentioned exceptions to exist, the Court is constrained to
dismiss its petition, and prudently uphold the factual findings of the courts a quo which
are entitled to great weight and respect, and even accorded with finality. This especially
obtains in corporate rehabilitation proceedings wherein certain commercial courts have
been designated on account of their expertise and specialized knowledge on the subject
matter, as in this case.

In any event, even discounting the above-discussed procedural considerations, the

Courts still finds BPI’s petition lacking in merit.

B.Approval of Sarabia’s rehabilitation plan; substantive considerations.

Records show that Sarabia has been in the hotel business for over thirty years, tracing
its operations back to 1972. Its hotel building has been even considered a landmark in
Iloilo, being one of its kind in the province and having helped bring progress to the
community.23 Since then, its expansion was continuous which led to its decision to
commence with the construction of a new hotel building. Unfortunately, its contractor
defaulted which impelled Sarabia to take-over the same. This significantly skewed its
projected revenues and led to various cash flow difficulties, resulting in its incapacity to
meet its maturing obligations.

Recognizing the volatile nature of every business, the rules on corporate rehabilitation
have been crafted in order to give companies sufficient leeway to deal with debilitating
financial predicaments in the hope of restoring or reaching a sustainable operating form
if only to best accommodate the various interests of all its stakeholders, may it be the
corporation’s stockholders, its creditors and even the general public. In this light, case
law has defined corporate rehabilitation as an attempt to conserve and administer the
assets of an insolvent corporation in the hope of its eventual return from financial stress
to solvency. It contemplates the continuance of corporate life and activities in an effort
to restore and reinstate the corporation to its former position of successful operation and
liquidity. Verily, the purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paid their claims from its
earnings.54Thus, rehabilitation shall be undertaken when it is shown that the continued
operation of the corporation is economically more feasible and its creditors can recover,
by way of the present value of payments projected in the plan, more, if the corporation
continues as a going concern than if it is immediately liquidated.55

Among other rules that foster the foregoing policies, Section 23, Rule 4 of the Interim
Rules of Procedure on Corporate Rehabilitation56 (Interim Rules) states that a
rehabilitation plan may be approved even over the opposition of the creditors holding a
majority of the corporation’s total liabilities if there is a showing that rehabilitation is
feasible and the opposition of the creditors is manifestly unreasonable. Also known as
the "cram-down" clause, this provision, which is currently incorporated in the FRIA, 57 is
necessary to curb the majority creditors’ natural tendency to dictate their own terms and
conditions to the rehabilitation, absent due regard to the greater long-term benefit of all
stakeholders. Otherwise stated, it forces the creditors to accept the terms and
conditions of the rehabilitation plan, preferring long-term viability over immediate but
incomplete recovery.

It is within the parameters of the aforesaid provision that the Court examines the
approval of Sarabia’s rehabilitation.

i. Feasibility of Sarabia’s rehabilitation.

In order to determine the feasibility of a proposed rehabilitation plan, it is imperative that

a thorough examination and analysis of the distressed corporation’s financial data must
be conducted. If the results of such examination and analysis show that there is a real
opportunity to rehabilitate the corporation in view of the assumptions made and financial
goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation
is feasible. In this accord, the rehabilitation court should not hesitate to allow the
corporation to operate as an on-going concern, albeit under the terms and conditions
stated in the approved rehabilitation plan. On the other hand, if the results of the
financial examination and analysis clearly indicate that there lies no reasonable
probability that the distressed corporation could be revived and that liquidation would, in
fact, better subserve the interests of its stakeholders, then it may be said that a
rehabilitation would not be feasible. In such case, the rehabilitation court may convert
the proceedings into one for liquidation.58 As further guidance on the matter, the Court’s
pronouncement in Wonder Book Corporation v. Philippine Bank of
Communications59 proves instructive:

Rehabilitation is x x x available to a corporation [which], while illiquid, has assets that

can generate more cash if used in its daily operations than sold. Its liquidity issues can
be addressed by a practicable business plan that will generate enough cash to sustain
daily operations, has a definite source of financing for its proper and full implementation,
and anchored on realistic assumptions and goals. This remedy should be denied to
corporations whose insolvency appears to be irreversible and whose sole purpose is to
delay the enforcement of any of the rights of the creditors, which is rendered obvious by
the following: (a) the absence of a sound and workable business plan; (b) baseless and
unexplained assumptions, targets and goals; (c) speculative capital infusion or complete
lack thereof for the execution of the business plan; (d) cash flow cannot sustain daily
operations; and (e) negative net worth and the assets are near full depreciation or fully
depreciated.60 (Emphasis and underscoring supplied)

Keeping with these principles, the Court thus observes that:

First, Sarabia has the financial capability to undergo rehabilitation.

Based on the Receiver’s Report, Sarabia’s financial history shows that it has the
inherent capacity to generate funds to repay its loan obligations if applied through the
proper financial framework. The Receiver’s examination and analysis of Sarabia’s
financial data reveals that the latter’s business is not only an on-going but also a
growing concern. Despite its financial constraints, Sarabia likewise continues to be
profitable with its hotelier business as its operations have not been disrupted. 61 Hence,
given its current fiscal position, the prospect of substantial and continuous revenue
generation is a realistic goal.

Second, Sarabia has the ability to have sustainable profits over a long period of time.

As concluded by the Receiver, Sarabia’s projected revenues shall have a steady year-
on-year growth from the time that it applied for rehabilitation until the end of its
rehabilitation plan in 2018, albeit with decreasing growth rates (growth rate is at 26% in
2003, 5% in 2004-2007, 3% in 2008-2018).62 Should such projections come through,
Sarabia would have the ability not just to pay off its existing debts but also to carry on
with its intended expansion. The projected sustainability of its business, as mapped out
in the approved rehabilitation plan, makes Sarabia’s rehabilitation a more viable option
to satisfy the interests of its stakeholders in the long run as compared to its immediate
liquidation.

Third, the interests of Sarabia’s creditors are well-protected.

As correctly perceived by the CA, adequate safeguards are found under the approved
rehabilitation plan, namely: (a) any deficiency in the required minimum payments to
creditors based on the presented amortization schedule shall be paid personally by
Sarabia’s stockholders;

(b) the conversion of the advances from stockholders amounting to ₱18,748,306.00 and
deferred credits amounting to ₱42,688,734 as of the December 31, 2002 tentative
audited financial statements to stockholder’s equity was granted; 64 (c) all capital
expenditures which are over and above what is provided in the cash flow of the
approved rehabilitation plan which will materially affect the cash position of the hotel but
which are deemed necessary in order to maintain the hotel’s competitiveness in the
industry shall be subject to the approval by the Court prior to implementation;65 (d) the
formation of Sarabia’s new management team and the requirement that the latter shall
be required to submit a comprehensive business plan to support the generation of
revenues as reported in the Rehabilitation Plan, both short term and long term; 66 (e) the
maintenance of all Sarabia’s existing real estate mortgages over hotel properties as
collaterals and securities in favor of BPI until the former’s full and final liquidation of its
outstanding loan obligations with the latter;67 and (f) the reinstatement of the
comprehensive surety agreement of Sarabia’s stockholders regarding the former’s debt
to BPI.68 With these terms and conditions69 in place, the subsisting obligations of
Sarabia to its creditors would, more likely than not, be satisfied.

Therefore, based on the above-stated reasons, the Court finds Sarabia’s rehabilitation
to be feasible.

ii. Manifest unreasonableness of BPI’s opposition.

Although undefined in the Interim Rules, it may be said that the opposition of a
distressed corporation’s majority creditor is manifestly unreasonable if it counter-
proposes unrealistic payment terms and conditions which would, more likely than not,
impede rather than aid its rehabilitation. The unreasonableness becomes further
manifest if the rehabilitation plan, in fact, provides for adequate safeguards to fulfill the
majority creditor’s claims, and yet the latter persists on speculative or unfounded
assumptions that his credit would remain unfulfilled.

While Section 23, Rule 4 of the Interim Rules states that the rehabilitation court shall
consider certain incidents in determining whether the opposition is manifestly
unreasonable,70 BPI neither proposes Sarabia’s liquidation over its rehabilitation nor
questions the controlling interest of Sarabia’s shareholders or owners. It only takes
exception to: (a) the imposition of the fixed interest rate of 6.75% p.a. as recommended
by the Receiver and as approved by the courts a quo, proposing that the original
escalating interest rates of 7%, 8%, 10%, 12%, and 14%, over seventeen years be
applied instead;71 and (b) the fact that Sarabia’s misrepresentations in the rehabilitation
petition, i.e., that it physically acquired additional property whereas in fact the increase
was mainly due to the recognition of Revaluation Increment and because of capital
expenditures, were not taken into consideration by the courts a quo.72

Anent the first matter, it must be pointed out that oppositions which push for high
interests rates are generally frowned upon in rehabilitation proceedings given that the
inherent purpose of a rehabilitation is to find ways and means to minimize the expenses
of the distressed corporation during the rehabilitation period. It is the objective of a
rehabilitation proceeding to provide the best possible framework for the corporation to
gradually regain or achieve a sustainable operating form. Hence, if a creditor, whose
interests remain well-preserved under the existing rehabilitation plan, still declines to
accept interests pegged at reasonable rates during the period of rehabilitation, and, in
turn, proposes rates which are largely counter-productive to the rehabilitation, then it
may be said that the creditor’s opposition is manifestly unreasonable.

In this case, the Court finds BPI’s opposition on the approved interest rate to be
manifestly unreasonable considering that: (a) the 6.75% p.a. interest rate already
constitutes a reasonable rate of interest which is concordant with Sarabia’s projected
rehabilitation; and (b) on the contrary, BPI’s proposed escalating interest rates remain
hinged on the theoretical assumption of future fluctuations in the market, this
notwithstanding the fact that its interests as a secured creditor remain well-preserved.

The following observations impel the foregoing conclusion: first, the 6.75% p.a. interest
rate is actually higher than BPI’s perceived cost of money as evidenced by its published
time deposit rate (for an amount of ₱5,000,000.00, with a term of 360-364 days) which
is only set at 5.5% p.a.; second, the 6.75% p.a. is also higher than the benchmark
ninety one-day commercial paper, which is used by banks to price their loan averages
to 6.4% p.a. in 2005, and has a three-year average rate of 6.57% p.a.; and third, BPI’s
interests as a secured creditor are adequately protected by the maintenance of all
Sarabia’s existing real estate mortgages over its hotel properties as collateral as well as
by the reinstatement of the comprehensive surety agreement of Sarabia’s stockholders,
among other terms in the approved rehabilitation plan.
As to the matter of Sarabia’s alleged misrepresentations, records disclose that Sarabia
already clarified its initial statements in its rehabilitation petition by submitting, on its
own accord, a supplemental affidavit dated October 24, 200273 that explains that the
increase in its properties and assets was indeed by recognition of revaluation
increment.74 Proceeding from this fact, the CA observed that BPI actually failed to
establish its claimed defects in light of Sarabia’s assertive and forceful explanation that
the alleged inaccuracies do not warrant the dismissal of its petition. 75 Thus, absent any
compelling reason to disturb the CA's finding on this score, the Court deems it proper to
dismiss BPI's allegations of misrepresentation against Sarabia.

As a final point, BPI claims that Sarabia's projections were "too optimistic," its
management was "extremely incompetent"76 and that it was even forced to pay a pre-
termination penalty due to its previous loan with the Landbank of the
Philippines.77 Suffice it to state that bare allegations of fact should not be entet1ained as
they are bereft of any probative value.78 In any event, even if it is assumed that the said
allegations are substantiated by clear and convincing evidence, the Court, absent any
cogent basis to proceed otherwise, remains steadfast in its preclusion to thresh out
matters of fact on a Rule 45 petition, as in this case.

All told, Sarabia's rehabilitation plan, as approved and modified by the CA, is hereby
sustained. In view of the foregoing pronouncements, the Court finds it unnecessary to
delve on the other ancillary issues as herein raised.

WHEREFORE, the petition is DENIED. Accordingly, the Decision dated April 24, 2006
and Resolution dated December 6, 2006 of the Court of Appeals, Cebu City in CA-G.R.
CV. No. 81596 are hereby AFFIRMED.

SO ORDERED.