FIRST DIVISION

G.R. No. 103576 August 22, 1996

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF
OF CALOOCAN CITY,respondents.
VITUG, J.
FACTS:
• 27 June 1978 - Chua Pac (general manager) of Acme Shoe, Rubber & Plastic
Corporation executed in behalf of Acme, a chattel mortgage in favour of Producers
Bank of the Philippines. This is to secure a corporate loan of P3M.
• Chattel mortgage had a provision
(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. . . .
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.
• Loan of P3M paid. Obtained another loan in 1981 P2.7M and was also paid.
• 10 and 11 January 1984, bank again obtained loan of P1M in 4 promissory
notes of 250K each. Due to financial constraints, the loan was not settled at maturity.
• Bank applied for extrajudicial foreclosure of chattel mortgage. Acme filed
action for injunction however RTC ultimately dismissed complaint and ordered
foreclosure saying Acme was bound by stipulations.
• CA dismissed appeal and affirmed RTC.
ISSUE: WON it is valid and effective to have a clause in a chattel mortgage that
extends its coverage to obligations yet to be contracted or incurred
HELD: No. RTC and CA decisions set aside.
Ratio:
Chattel mortgage can cover only obligations existing at the time mortgage is
constituted [Act 1508 Chattel Mortgage Law]
• While a pledge, real estate mortgage, or antichresis may exceptionally secure
after-incurred obligations so long as these future debts are accurately described, 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.
• 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.
Affidavit of Good Faith requirement makes it obvious that the obligation is current
• A chattel mortgage, as hereinbefore so intimated, must comply substantially
with the form prescribed by the Chattel Mortgage Law itself. Sec 5 thereof requires
an affidavit of good faith. If this is not appended to the agreement chattel mortgage
would still be valid between the parties (not against third persons acting in good
faith ), The fact, however, that the statute has provided that the parties to the
contract must execute an oath that —
. . . (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.
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.
• Sec 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. 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. [Belgian
Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.] Payment of the P3M loan
caused the extinguishment of chattel mortgage.
Other notes:
Damages: Acme cannot claim moral damages. Artifical person. No feelings ☺
LegProf: Lawyers have to observe and maintain the respect due to the courts of
justice and judicial officers. Lawyer for Acme admonished by the court for calling
magistrates of CA incompetent and dishonest.
DE BARRETO VS. VILLANUEVA, G.R. L-14938, DECEMBER 29, 1962
Facts:
Cruzado sold land (which was foreclosed by RFC but later resold to Cruzado)
to Villanueva with a stipulation that Villanueva will continue payment to RFC (for
the reselling price). Villanueva mortgaged the land to De Barreto when it obtained a
loan from the latter. Villanueva failed to pay both Cruzado and De Barreto. On the
one hand, De Barreto sued for foreclosure and won. On the other hand, Cruzado filed
a motion in that foreclosure proceeding for the recognition of his “vendor’s lien.”
RTC: granted Cruzado’s motion that his lien be satisfied by the foreclosure
proceeds.
SC: affirmed RTC. But on Motion For Reconsideration, reversed RTC ruling.
Issue:
WON Cruzado’s lien can be satisfied by the foreclosure proceedings in
accordance with the relevant provisions of the Civil Code?
Held:
The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by Article 2243, Civil Code. The preferences named in Articles
2241 and 2242 are to be enforced in accordance with the Involvency Law.
Thus, it becomes evident that one preferred creditor's third-party claim to
the proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend corresponding to each, because
the rights of the other creditors likewise enjoying preference under Article 2242 can
not be ascertained. Wherefore, the order of the Court of First Instance of Manila now
appealed from decreeing that the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect and must be reversed.
In the absence of insolvency proceedings (or other equivalent general
liquidation of the debtor's estate), the conflict between the parties now before us
must be decided pursuant to the well established principle concerning register
lands; that a purchaser in good faith and for value (as the appellant concededly is)
takes registered property free from liens and encumbrances other than statutory
liens and those recorded in the certificate of title. There being no insolvency or
liquidation, the claim of the appellee, as unpaid vendor, did not acquire the
character and rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
Metropolitan Waterworks and Sewerage System v. Hon. Reynaldo Daway
G.R. No. 160732. 21 June 2004.
Azcuna, J.

FACTS: Metropolitan Water and Sewerage System (MWSS) granted Maynilad Water
Services, Inc. (MWSI), under a Concession Agreement (“agreement”), a 20-year
period to manage, operate, repair, decommission and refurbish the existing MWSS
water delivery and sewerage services in the West Zone Service Area, for which
MWSI undertook to pay the corresponding concession fees on the dates agreed
upon in said agreement which, among other things, consisted of payments of
MWSS’s mostly foreign loans. To secure the concessionaire’s performance of its
obligations under the agreement, MWSI was required to put up a bond, bank
guarantee or other security acceptable to MWSS. In compliance with this
requirement, MWSI arranged for a 3-year facility with a number of foreign banks,
led by Citicorp International Limited (CIL), for the issuance of an Irrevocable
Standby Letter of Credit (L/C) in favor of MWSS for the full and prompt performance
of MWSI’s obligations to MWSS.
A few years later, however, MWSI served upon MWSS a Notice of Event of
Termination, claiming that MWSS failed to comply with its obligations under the
agreement and an amendment thereto regarding the adjustment mechanism that
would cover MWSI’s foreign exchange losses. Consequently, MWSI filed a Notice of
Early Termination of the agreement, which was challenged by MWSS. This matter
was eventually brought by MWSS before the Appeals Panel, which eventually ruled
that there was no Event of Termination as defined under the agreement and that,
therefore, MWSI should pay the concession fees that had fallen due.
Upon the finality of the panel’s award, MWSS submitted a written notice to
CIL, as agent for the participating banks, that by virtue of MWSI’s failure to perform
its obligations under the agreement, it was drawing on the Irrevocable Standby L/C
and thereby demanded payment. Prior to this demand, however, MWSI filed a
petition for rehabilitation before the Regional Trial Court of Quezon City – which
resulted in the issuance of a Stay Order enjoining MWSS from drawing on the
Standby L/C.

ISSUE: Is the Standby L/C within the in rem jurisdiction of a rehabilitation court
because it is a “claim against the debtor, its guarantors and sureties not solidarily
liable with the debtor” and that since there is nothing in the Standby L/C nor in law
nor in the nature of the obligation that would show or require the obligation of the
banks with MWSI is solidary?

HELD: No. The concept of guarantee vis-à-vis the concept of an irrevocable L/C are
inconsistent with each other. The guarantee theory destroys the independence of
the bank’s responsibility from the contract upon which it was opened and the
nature of both contracts is mutually in conflict with each other. In contracts of
guarantee, the guarantor’s obligation is merely collateral and it arises only upon the
default of the person primarily liable. On the other hand, in an irrevocable L/C, the
bank undertakes a primary obligation. We have also defined a L/C as an engagement
by a bank or other person made at the request of a customer that the issuer shall
honor drafts or other demands of payment upon compliance with the conditions
specified in the credit.
L/C were developed for the purpose of insuring to a seller payment of a
definite amount upon the presentation of documents and is thus a commitment by
the issuer that the party in whose favor it is issued and who can collect upon it will
have his credit against the applicant of the letter, duly paid in the amount specified
in the letter. They are in effect absolute undertakings to pay the money advanced or
the amount for which credit is given on the faith of the instrument. They are
primary obligations and not accessory contracts and while they are security
arrangements, they are not converted thereby into contracts of guaranty. What
distinguishes L/C from other accessory contracts is the engagement of the issuing
bank to pay the seller once the draft and other required shipping documents are
presented to it. They are definite undertakings to pay at sight once the documents
stipulated therein are presented.
Taking into consideration our own rulings on the nature of L/C and the
customs and usage developed over the years in the banking and commercial
practice of L/C, we hold that except when a L/C specifically stipulates otherwise, the
obligation of the banks issuing L/C are solidary with that of the person or entity
requesting for its issuance, the same being a direct, primary, absolute and definite
undertaking to pay the beneficiary upon the presentation of the set of documents
required therein.