UNION BANK OF G.R. No.

171569
THE PHILIPPINES,
Petitioner,
Present:

- versus- CORONA, C.J., Chairperson,

LEONARDO-DE CASTRO,
BERSAMIN,
ALAIN JUNIAT, WINWOOD DEL CASTILLO, and
APPAREL, INC., WINGYAN VILLARAMA, JR. JJ.
APPAREL, INC., NONWOVEN
FABRIC PHILIPPINES, Promulgated:
Respondents. August 1, 2011
x--------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

To have a binding effect on third parties, a contract of pledge must appear in a public
instrument.[1]

This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails
the June 23, 2005 Decision[3] and the February 9, 2006 Resolution[4] of the Court of
Appeals (CA) in CA-G.R. CV No. 66392.

Factual Antecedents

Petitioner Union Bank of the Philippines (Union Bank) is a universal

banking corporation organized and existing under Philippine laws.[5]

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc.

(Wingyan) are domestic corporations engaged in the business of apparel
manufacturing.[6] Both respondent corporations are owned and operated by respondent
Alain Juniat (Juniat), a French national based in Hongkong.[7] Respondent Nonwoven
Fabric Philippines, Inc. (Nonwoven) is a Philippine corporation engaged in the
manufacture and sale of various types of nonwoven fabrics.[8]
 On September 3, 1992, petitioner filed with the Regional Trial Court (RTC)
of Makati, Branch 57, a Complaint[9] with prayer for the issuance of ex-parte writs of
preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession of the mortgaged motorized sewing machines and equipment.[10] Petitioner
alleged that Juniat, acting for and in behalf of Winwood and Wingyan, executed a
promissory note[11] dated April 11, 1992 and a Chattel Mortgage[12] dated March 27, 1992
over several motorized sewing machines and other allied equipment to secure their
obligation arising from export bills transactions to petitioner in the amount
of P1,131,134.35;[13] that as additional security for the obligation, Juniat executed a
Continuing Surety Agreement[14] dated April 11, 1992 in favor of petitioner;[15] that the
loan remains unpaid;[16] and that the mortgaged motorized sewing machines
are insufficient to answer for the obligation.[17]

On September 10, 1992, the RTC issued writs of preliminary attachment and
replevin in favor of petitioner.[18] The writs were served by the Sheriff upon Nonwoven as
it was in possession of the motorized sewing machines and equipment.[19] Although
Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise served
summons upon Nonwoven since it was in possession of the motorized sewing machines
and equipment.[20]

On September 28, 1992, Nonwoven filed an Answer,[21] contending that the

unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on
Nonwoven and that it has a better title over the motorized sewing machines and equipment
because these were assigned to it by Juniat pursuant to their Agreement[22] dated May 9,
1992.[23] Juniat, Winwood, and Wingyan, on the other hand, were declared in default for
failure to file an answer within the reglementary period.[24]

On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by

Replevin,[25] praying that the motorized sewing machines and equipment be sold to avoid
depreciation and deterioration.[26] However, on May 18, 1993, before the RTC could act
on the motion, petitioner sold the attached properties for the amount of P1,350,000.00.[27]

Nonwowen moved to cite the officers of petitioner in contempt for selling the
attached properties, but the RTC denied the same on the ground that Union Bank acted in
good faith.[28]
Ruling of the Regional Trial Court

On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in
favor of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992
in favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have
no obligatory effect on third persons because these documents were not
notarized.[31] However, since the Chattel Mortgage in favor of petitioner was executed
earlier, petitioner has a better right over the motorized sewing machines and equipment
under the doctrine of first in time, stronger in right (prius tempore, potior jure).[32] Thus,
the RTC disposed of the case in this wise:

WHEREFORE, above premises considered, judgment is hereby

rendered as follows:

1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES,

as having the better right to the goods and/or machineries subject of the Writs
of Preliminary Attachment and Replevin issued by this Court on September 10,
1992.

2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the
subject machineries in the amount of P1,350,000.00;

3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and

Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner], for
the deficiency between the proceeds of the sale of the machineries subject of
this suit [P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in
the amount of P569,907.03, with legal interest at the rate of 12% per annum
from date of this judgment until fully paid; and

4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and

Wingyan Apparel, Inc. to be jointly and severally liable to the [petitioner] for
the amount of P50,000.00 as reasonable attorneys fees; and

5.] Cost of this suit against the [respondents].

SO ORDERED.[33]

Nonwoven moved for reconsideration[34] but the RTC denied the same in its
Order[35] dated July 14, 1999.

Ruling of the Court of Appeals

On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract
of pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by virtue
of a dacion en pago.[36] Thus, the CA declared Nonwoven entitled to the proceeds of the
sale of the attached properties.[37] The fallo reads:

WHEREFORE, premises considered, the assailed decision is

hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of the
Philippines is hereby DIRECTED to pay Nonwoven Fabric Philippines,
Inc. P1,350,000.00, the amount it holds in escrow, realized from the May 18,
1993 sale of the machineries to avoid deterioration during pendency of suit. No
pronouncement as to costs.

SO ORDERED.[38]

Petitioner sought reconsideration[39] which was denied by the CA in a

Resolution[40] dated February 9, 2006.

Issues

Hence, the present recourse where petitioner interposes the following issues:

1. Whether x x x the Court of Appeals committed serious reversible error in

setting aside the Decision of the trial court holding that Union Bank of the
Philippines had a better right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of the sale thereof;
2. Whether x x x the Court of Appeals seriously erred in holding that
[Nonwoven] has a valid claim over the subject sewing machines.[41]

Petitioners Arguments
 Echoing the reasoning of the RTC, petitioner insists that it has a better title to the
proceeds of the sale.[42] Although the Chattel Mortgage executed in its favor was not
notarized, petitioner insists that it is nevertheless valid, and thus, has preference over a
subsequent unnotarized agreement.[43] Petitioner further claims that except for the said
agreement, no other evidence was presented by Nonwoven to show that the motorized
sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.[44]

Respondent Nonwovens Arguments

Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article
1544[45] of the Civil Code on double sale, which it claims can be applied by analogy in the
instant case.[46] Nonwoven contends that since its prior possession over the motorized
sewing machines and equipment was in good faith, it has a better title over the proceeds of
the sale.[47] Nonwoven likewise maintains that petitioner has no right over the proceeds of
the sale because the Chattel Mortgage executed in its favor was unnotarized, unregistered,
and without an affidavit of good faith.[48]

Our Ruling

The petition has merit.

Nonwoven lays claim to the attached motorized sewing machines and equipment
pursuant to the Agreement it entered into with Juniat, to wit:

Hong Kong, 9th May, 1992

With reference to talks held this morning at the Holiday Inn Golden Mile Coffee
Shop, among the following parties:

a. Redflower Garments Inc. Mrs. Maglipon

b. Nonwoven Fabrics Phils. Inc. Mr. J. Tan
c. Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S.
Juniat

IT WAS AGREED THAT:

 a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and
Winwood Apparel Inc./Wing Yan Apparel, Inc. should be effected as agreed
through partial payment by L/C with the balance to be settled at a later date
for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3
snap machines and 2 boilers, presently in the care of Redflower Garments
Inc., to the care of Nonwoven Fabrics Phils., Inc. as guarantee. Meanwhile,
Nonwoven will resume delivery to Winwood/Win Yang as usual.

x x x x[49] (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a
better right over the proceeds of the sale of the attached properties than petitioner, whose
claim is based on an unnotarized Chattel Mortgage.

We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of
Wingyan and Winwood, in favor of petitioner does not bind Nonwoven.[50] However, it
must be pointed out that petitioners primary cause of action is for a sum of money with
prayer for the issuance of ex-parte writs of attachment and replevin against Juniat,
Winwood, Wingyan, and the person in possession of the motorized sewing machines and
equipment.[51] Thus, the fact that the Chattel Mortgage executed in favor of petitioner was
not notarized does not affect petitioners cause of action. Petitioner only needed to show
that the loan of Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the
issuance of the writs prayed for. Considering that writs of attachment and replevin were
issued by the RTC,[52] Nonwoven had to prove that it has a better right of possession or
ownership over the attached properties. This it failed to do.

A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing
machines, snap machines and boilers were pledged to Nonwoven by Juniat to guarantee
his obligation. However, under Article 2096 of the Civil Code, [a] pledge shall not take
effect against third persons if a description of the thing pledged and the date of the pledge
do not appear in a public instrument. Hence, just like the chattel mortgage executed in favor
of petitioner, the pledge executed by Juniat in favor of Nonwoven cannot bind petitioner.
 Neither can we sustain the finding of the CA that: The machineries were ceded to
THIRD PARTY NONWOVEN by way of dacion en pago, a contract later entered into by
WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.[53] As aptly pointed out
by petitioner, no evidence was presented by Nonwoven to show that the attached properties
were subsequently sold to it by way of a dacion en pago. Also, there is nothing in the
Agreement dated May 9, 1992 to indicate that the motorized sewing machines, snap
machines and boilers were ceded to Nonwoven as payment for the Wingyans and
Winwoods obligation. It bears stressing that there can be no transfer of ownership if the
delivery of the property to the creditor is by way of security.[54] In fact, in case of doubt as
to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a
pledge as this involves a lesser transmission of rights and interests.[55]

In view of the foregoing, we are constrained to reverse the ruling of the

CA. Nonwoven is not entitled to the proceeds of the sale of the attached properties because
it failed to show that it has a better title over the same.

WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005
Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No.
66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of the
Regional Trial Court of Makati, Branch 145, is
hereby REINSTATED and AFFIRMED.

SO ORDERED.

MARIANO C. DEL CASTILLO

Associate Justice

WE CONCUR:

RENATO C. CORONA
Chairperson
Chief Justice
 TERESITA J. LEONARDO-DE CASTRO LUCAS P. BERSAMIN
Associate Justice Associate Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the
conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA
Chief Justice
FIRST DIVISION

[G.R. No. 103576. August 22, 1996]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA

PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
 DECISION
VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? This question
is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme
Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the
company, a chattel mortgage in favor of private respondent Producers Bank of the
Philippines. The mortgage stood by way of security for petitioner's corporate loan of three
million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect -

"(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof,
then this mortgage shall be null and void. x x x.

"In case the MORTGAGOR executes subsequent promissory note or notes either as a
renewal of the former note, as an extension thereof, or as a new loan, or is given any
other kind of accommodations such as overdrafts, letters of credit, acceptances and
bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage
shall also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage
shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR
to the MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this mortgage." [1]

In due time, the loan of P3,000,000.00 was paid by petitioner

corporation. Subsequently, in 1981, it obtained from respondent bank additional financial
accommodations totalling P2,700,000.00.[2] These borrowings were on due date also fully
paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a
loan of one million pesos (P1,000,000.00) covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was not settled at
maturity.[3] Respondent bank thereupon applied for an extrajudicial foreclosure of the
chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a prayer
for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil
Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by the
stipulations, aforequoted, of the chattel mortgage.
 Petitioner corporation appealed to the Court of Appeals [4] which, on 14 August 1991,
affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration
was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04
March 1992 by this Court for having been insufficient in form and substance. Private
respondent filed a motion to dismiss the petition while petitioner corporation filed a
compliance and an opposition to private respondent's motion to dismiss. The Court
denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to
comment thereon.[5]
Except in criminal cases where the penalty of reclusion perpetua or death is
imposed[6] which the Court so reviews as a matter of course, an appeal from judgments of
lower courts is not a matter of right but of sound judicial discretion. The circulars of the
Court prescribing technical and other procedural requirements are meant to weed out
unmeritorious petitions that can unnecessarily clog the docket and needlessly consume
the time of the Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid enforcement of the
rules may thus be allowed to attain the prime objective for, after all, the dispensation of
justice is the core reason for the existence of courts. In this instance, once again, the
Court is constrained to relax the rules in order to give way to and uphold the paramount
and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security,
such as a guaranty or a suretyship, the faithful performance of the obligation by the
principal debtor is secured by the personalcommitment of another (the guarantor or
surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that
fulfillment is secured by an encumbrance of property - in pledge, the placing of movable
property in the possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real property covered
thereby; and in antichresis, by a written instrument granting to the creditor the right to
receive the fruits of an immovable property with the obligation to apply such fruits to the
payment of interest, if owing, and thereafter to the principal of his credit - upon the
essential condition that if the principal obligation becomes due and the debtor defaults,
then the property encumbered can be alienated for the payment of the obligation, [7] but
that should the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory character[8] of the agreement. As the law so puts it, once
the obligation is complied with, then the contract of security becomes, ipso facto, null and
void.[9]
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-
incurred obligations so long as these future debts are accurately described, [10] a chattel
mortgage, however, can only cover obligations existing at the time the mortgage is
constituted. Although a promise expressed in a chattel mortgage to include debts that are
yet to be contracted can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding
a fresh chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law.[11] Refusal on the part of the borrower to execute
the agreement so as to cover the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement whereon the promise is written
but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the
form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section
5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage would still be valid between the parties
(not against third persons acting in good faith[12]), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that -

"x x x (the) mortgage is made for the purpose of securing the obligation specified in
the conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud." [13]

makes it obvious that the debt referred to in the law is a current, not an obligation that is
yet merely contemplated. In the chattel mortgage here involved, the only obligation
specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner
corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.,[14] the
Court said -

"x x x A mortgage that contains a stipulation in regard to future advances in the credit
will take effect only from the date the same are made and not from the date of the
mortgage." [15]

The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan,[16] there no longer was any chattel mortgage that could cover the new loans that were
concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a specific finding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against it."[17] This
prayer is not reflected in its complaint which has merely asked for the amount of
P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of
Appeals,[19] we have said:

"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent
bank as an artificial person."[20]

While Chua Pac is included in the case, the complaint, however, clearly states that he
has merely been so named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his
client's cause. It instead turned out to be, however, a source of disappointment for this
Court to read in petitioner's reply to private respondent's comment on the petition his so-
called "One Final Word;" viz:

"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is
one positive step in ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate jurisdiction." (Italics
[21]

supplied.)

The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor;[22] thus:

"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the
respect due to the courts of justice and judicial officers and x x x (to) insist on similar
conduct by others.' This respectful attitude towards the court is to be observed, `not
for the sake of the temporary incumbent of the judicial office, but for the maintenance
of its supreme importance.' And it is `through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect due to the
courts and judicial officers x x x.'"[23]

The virtues of humility and of respect and concern for others must still live on even in an
age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court
are set aside without prejudice to the appropriate legal recourse by private respondent as
may still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in
dealing with the courts.
SO ORDERED.
 Kapunan and Hermosisima, Jr., JJ., concur.
Padilla, J., took no part in view of lessor-lessee relationship with respondent bank.
Bellosillo, J., on leave.

[1]
Rollo, p. 45.
[2]
Ibid., p. 34.
[3]
Ibid.
Associate Justice Consuelo Ynares Santiago, ponente, with Associate Justices Ricardo L. Pronove, Jr.
[4]

and Nicolas P. Lapea, Jr., concurring.

[5]
In the Court's resolution, dated 27 May 1992, Rollo, p. 91.
[6]
Sec. 5 (2) (d), Art. VIII, 1987 Constitution.
[7]
See Arts. 2085, 2087, 2093, 2125, 2126, 2132, 2139 and 2140, Civil Code.
[8]
See Manila Surety & Fidelity Co. vs. Velayo, 21 SCRA 515.
[9]
See Sec. 3, Act 1508.
[10]
See Mojica vs. Court of Appeals, 201 SCRA 517; Lim Julian vs. Lutero, 49 Phil. 703.
[11]
Act No. 1508.
[12]
See Philippine Refining Co. vs. Jarque, 61 Phil. 229.
[13]
Civil Code, Vol. 3, 1990 Edition by Ramon C. Aquino and Carolina C. Grio-Aquino, pp. 610-611.
[14]
49 Phil. 647.
[15]
At p. 655. This ruling was reiterated in Jaca vs. Davao Lumber Company, 113 SCRA 107.
[16]
Being merely accessory in nature, it cannot exist independently of the principal obligation.
[17]
Petitioner's Memorandum, p. 5; Rollo, p. 119.
[18]
Complaint, p. 6; Record, p. 9.
[19]
236 SCRA 602.
[20]
At p. 607.
[21]
Rollo, p. 113.