PNB v Mallorca
redemption as decreed by the court.
Ruperta Lavilles mortgaged a 48.965 square meter-parcel
of land situated in Passi, Iloilo to the PNB as security for a
loan of P1,800.00. The mortgage was duly recorded.
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.
Mallorca moved the Iloilo cadastral court to have the sale
to her duly annotated on the title,3 and, 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
Mallorca sued PNB to enforce her right of redemption with
damages
LC
-dismissed 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
sale could not have any impairing effect upon its rights as
Issue:
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.
Ruling
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.12
This 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
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.16 Second.
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.
VICTORIA YAU CHU, assisted by her husband
MICHAEL CHU, petitioners,
vs.
HON. COURT OF APPEALS, FAMILY SAVINGS
BANK and/or CAMS TRADING ENTERPRISES, INC.
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
Ruling: 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 Binauganan, Tarlac City and covered by TCT No.
intended to protect the obligor, pledgor, or mortgagor
297840.1[1]
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 On February 12, 2001, petitioners and respondent
debtors' overdue obligation, with the latter's consent. executed an Amendment to Amended Real Estate
Mortgage2[2] consolidating their loans inclusive of charges
Whether the debt had already been paid as now alleged by
the debtor, is a factual question which the Court of Appeals thereon which totaled P5,916,117.50. On even date, the
found not to have been proven for the evidence which the parties executed a Dacion in Payment Agreement 3 [3]
debtor sought to present on appeal, were receipts for
payments made prior to July 18, 1980. Since the petitioner wherein petitioners assigned the properties covered by
signed on July 18, 1980 a letter admitting her indebtedness TCT No. 297840 to respondent in settlement of their total
to be in the sum of P404,500, and there is no proof of
payment made by her thereafter to reduce or extinguish her obligation, and a Memorandum of Agreement4[4] reading:
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.
Sps Ong v. Roban Lending That the FIRST PARTY
[Roban Lending Corporation] and
the SECOND PARTY [the
DECISION 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
CARPIO MORALES, J.: [sic] another promissory note in the
amount of P5,916,117.50 (a copy
of which is hereto attached and
On different dates from July 14, 1999 to March forms xxx an integral part of this
document), with a promise to pay
20, 2000, petitioner-spouses Wilfredo N. Ong and Edna
the FIRST PARTY in full within
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
 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[5]
In April 2002 (the day is illegible), petitioners
filed a Complaint,6[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[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[8] and in addition, respondent
exacted certain sums denominated as EVAT/AR. 9 [9] c) Declaring
the interests, penalties, Evat [sic]
Petitioners decried these additional charges as illegal,
and attorneys fees assessed and
iniquitous, unconscionable, and revolting to the conscience loaded into the loan accounts of the
plaintiffs with defendant as unjust,
as they hardly allow any borrower any chance of survival in
iniquitous, unconscionable and
case of default.10[10] illegal and therefore, stricken out or
set aside;
d) Ordering an
accounting on plaintiffs loan
accounts to determine the true and
Petitioners further alleged that they had correct balances on their obligation
previously made payments on their loan accounts, but against legal charges only; and
because of the illegal exactions thereon, the total balance e) Ordering
appears not to have moved at all, hence, accounting was in defendant to [pay] to the plaintiffs:
--
order.11[11]
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
Petitioners thus prayed for judgment:
P50,000.00 plus P1,000.00 appearance fee
per hearing; and
e.3 The cost of suit.12[12]as well as other
just and equitable reliefs.
a) Declaring
the Real Estate Mortgage Contract
In its Answer with Counterclaim, 13 [13]
and its amendments x x x as null
and void and without legal force respondent maintained the legality of its transactions with
and effect for having been
petitioners, alleging that:
renounced, abandoned, and given
up;
xxx
b) Declaring
the Memorandum of Agreement
xxx and Dacion in Payment x x x
as null and void for being pactum If the voluntary execution of the
commissorium; 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[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[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[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 [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 [18]
(Underscoring supplied)
At the scheduled April 14, 2004 hearing, both
counsels appeared but only the counsel of respondent filed
a memorandum.19[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[20]
On appeal, 21 [21] the Court of Appeals 22 [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[23]
 ARE VERY MUCH IN This Court finds that the Memorandum of
Nevertheless, finding the error in DISPUTE;
Agreement and Dacion in Payment constitute pactum
nomenclature to be mere semantics with no
bearing on the merits of the case,24[24] the commissorium, which is prohibited under Article 2088 of
Court of Appeals upheld the RTC decision
the Civil Code which provides:
that there was no pactum
commissorium.25[25] III. . . . WHEN IT
FAILED AND
REFUSED TO HOLD
THAT THE
MEMORANDUM OF The creditor cannot
AGREEMENT (MOA) appropriate the things given by way
Their Motion for Reconsideration 26 [26] having been
AND THE DACION EN of pledge or mortgage, or dispose
denied, 27 [27] petitioners filed the instant Petition for PAGO AGREEMENT of them. Any stipulation to the
(DPA) WERE contrary is null and void.
Review on Certiorari,28[28] faulting the Court of Appeals
DESIGNED TO
for having committed a clear and reversible error CIRCUMVENT THE The elements of pactum commissorium, which
LAW AGAINST
PACTUM enables the mortgagee to acquire ownership of the
COMMISSORIUM; and mortgaged property without the need of any foreclosure
proceedings, 30 [30] are: (1) there should be a property
I. . . . WHEN IT
FAILED AND REFUSED TO mortgaged by way of security for the payment of the
APPLY PROCEDURAL IV. . . . WHEN IT FAILED principal obligation, and (2) there should be a stipulation
REQUISITES WHICH WOULD TO CONSIDER THAT
WARRANT THE SETTING THE MEMORANDUM for automatic appropriation by the creditor of the thing
ASIDE OF THE SUMMARY OF AGREEMENT mortgaged in case of non-payment of the principal
JUDGMENT IN VIOLATION OF (MOA) AND THE
APPELLANTS RIGHT TO DUE DACION EN PAGO obligation within the stipulated period.31[31]
PROCESS; (DPA) ARE NULL AND
VOID FOR BEING
II. . . . WHEN IT CONTRARY TO LAW
FAILED TO CONSIDER AND PUBLIC
THAT TRIAL IN THIS POLICY.29[29] In the case at bar, the Memorandum of
CASE IS NECESSARY
BECAUSE THE FACTS Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption.
The petition is meritorious
Under the Memorandum of Agreement, the failure by the
petitioners to pay their debt within the one-year period
Both parties admit the execution and contents of gives respondent the right to enforce the Dacion in
the Memorandum of Agreement and Dacion in Payment. Payment transferring to it ownership of the properties
They differ, however, on whether both contracts constitute covered by TCT No. 297840. Respondent, in effect,
pactum commissorium or dacion en pago.
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[32] This does not persuade. In a
true dacion en pago, the assignment of the property
extinguishes the monetary debt.33[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[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[35]
Respondent cites Solid Homes, Inc. v. Court of
Appeals36[36] where this Court upheld a Memorandum of
Agreement/Dacion en Pago. 37 [37] That case did not compounded monthly42[42] unconscionable and reduces it
involve the issue of pactum commissorium.38[38] to a yearly rate of 12% of the amount due, to be computed
from the time of demand. 43 [43] This Court finds the
attorneys fees of 25% of the principal, interests and
interests thereon, and the penalty fees unconscionable, and
That the questioned contracts were freely and thus reduces the attorneys fees to 25% of the principal
voluntarily executed by petitioners and respondent is of no amount only.44[44]
moment, pactum commissorium being void for being
prohibited by law.39[39]
The prayer for accounting in petitioners
complaint requires presentation of evidence, they claiming
Respecting the charges on the loans, courts may
to have made partial payments on their loans, vis a vis
reduce interest rates, penalty charges, and attorneys fees if
respondents denial thereof.45[45] A remand of the case is
they are iniquitous or unconscionable.40[40]
thus in order.
This Court, based on existing
Prescinding from the above disquisition, the trial
jurisprudence, 41 [41] finds the monthly interest rate of
court and the Court of Appeals erred in holding that a
3.5%, or 42% per annum unconscionable and thus reduces
summary judgment is proper. A summary judgment is
it to 12% per annum. This Court finds too the penalty fee at
permitted only if there is no genuine issue as to any
the monthly rate of 5% (60% per annum) of the total
material fact and a moving party is entitled to a judgment
amount due and demandable principal plus interest, with
as a matter of law.46[46] A summary judgment is proper if,
interest not paid when due added to and becoming part of
while the pleadings on their face appear to raise issues, the
the principal and likewise bearing interest at the same rate,
affidavits, depositions, and admissions presented by the
moving party show that such issues are not genuine.47[47]
A genuine issue, as opposed to a fictitious or contrived one,
is an issue of fact that requires the presentation of
evidence.48[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[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[50] Respondent disputed too petitioners
allegation of bad faith.51[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 being pactum 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.
DBP v CA
DECISION
DAVIDE, JR., J.:
These two consolidated cases stemmed from a
complainti[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:ii[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.
Defendant Caperal admitted only the facts stated in
paragraphs 14 and 15 of the pre-trial order. iii[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, iv[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 v[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,vi[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. vii[7]
Simultaneous with the execution of the notes was the
execution of Assignments of Leasehold Rights viii[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,ix[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.x[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.xi[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.xii[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,xiii[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.xiv[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.xv[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.xvi[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.xvii[17] It must point out specific
facts which could afford a basis for measuring whatever
compensatory or actual damages are borne.xviii[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,xix[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.xx[20] There being an award
of exemplary damages, attorneys fees are also
recoverable.xxi[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.
Calibo v. CA
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.xxii[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.
Issue:
Ruling:
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.xxiii[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.xxiv[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.xxv[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.xxvi[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.xxvii[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.
EL BANCO ESPAÑOL-FILIPINO, plaintiff-appellant,
vs.
JAMES PETERSON, sheriff of the city of Manila, ET
AL
Facts: 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 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.
Betita v. Ganzon
Facts:
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.
“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”
LC- 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.
Ruling:
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 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.
Fort Bonifacio v. Yllas
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari52[1] of
the Orders issued on 7 March 200353[2] and 3 July
200354[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 Court of Taguig. Tirreno also filed a complaint for specific
declaration;
performance with a prayer for the issuance of a temporary
xxx 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.
Section 22, on the other hand, reads:
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.55[4]

In the Deed of Chattel Mortgage, Tirreno, Eloisa,

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
On 4 March 2002, Yllas Lending Corporation and Antonio made the following warranties to respondents:
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 1. WARRANTIES: The MORTGAGOR hereby
declares and warrants that:
and third party claim. FBDC found out that on 27
September 2001, respondents filed a complaint for
Foreclosure of Chattel Mortgage with Replevin, docketed
a. The MORTGAGOR is the absolute owner of the
as Civil Case No. 01-1452, against Tirreno, Eloisa Poblete
above named properties subject of this mortgage, free from
Todaro (Eloisa), and Antonio D. Todaro (Antonio), in their all liens and encumbrances.
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,
b. There exist no transaction or documents affecting
Eloisa, and Antonio. On 9 November 2000, Tirreno, Eloisa the same previously presented for, and/or pending
transaction.56[5]
and Antonio executed a Deed of Chattel Mortgage in favor
of respondents as security for the loan. The following Despite FBDCs service upon him of an affidavit
properties are covered by the Chattel Mortgage: of title and third party claim, the sheriff proceeded with the
seizure of certain items from FBDCs premises. The sheriffs

to Tirrenos alleged failure to settle its outstanding partial return indicated the seizure of the following items

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
a. Furniture, Fixtures and Equipment of Savoia Ristorante from FBDC:
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.

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]57[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 properties which [FBDC] took and appropriated in payment
of [Tirrenos] unpaid lease rentals.58[7]
and to admit complaint in intervention, the trial court stated
the facts as follows:
The Ruling of the Trial Court
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 In its order dated 7 March 2003, the trial court
Intervene and to Admit Complaint in Intervention.
stated that the present case raises the questions of who has
a better right over the properties of Tirreno and whether
Third party claimant, FBDC, anchors its claim
over the subject properties on Sections 20.2(i) and 22 of the FBDC has a right to intervene in respondents complaint for
Contract of Lease executed by [FBDC] with Tirreno.
Pursuant to said Contract of Lease, FBDC took possession foreclosure of chattel mortgage.
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].
In deciding against FBDC, the trial court declared
that Section 22 of the lease contract between FBDC and
FBDC, likewise filed a Motion to Admit its
Complaint-in-Intervention. Tirreno is void under Article 2088 of the Civil Code.59[8]
The trial court stated that Section 22 of the lease contract
In Opposition to the third-party claim and the
pledges the properties found in the leased premises as
motion to intervene, [respondents] posit that the basis of
[FBDCs] third party claim being anchored on the aforesaid security for the payment of the unpaid rentals. Moreover,
Contract [of] Lease is baseless. [Respondents] contend that
Section 22 provides for the automatic appropriation of the
the stipulation of the contract of lease partakes of a pledge
which is void under Article 2088 of the Civil Code for properties owned by Tirreno in the event of its default in
being pactum commissorium.
the payment of monthly rentals to FBDC. Since Section 22
is void, it cannot vest title of ownership over the seized
xxx
properties. Therefore, FBDC cannot assert that its right is
By reason of the failure of [Tirreno] to pay its superior to respondents, who are the mortgagees of the
lease rental and fees due in the amount of P5,027,337.91,
after having notified [Tirreno] of the termination of the disputed properties.
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

The trial court quoted from Bayer Phils. v.
Agana60[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.61[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.62[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.63[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. Pineda64[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 We agree with FBDC.
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 A lease contract may be terminated without
FBDC has means of collecting past due rent from Tirreno judicial intervention. Consing v. Jamandre upheld the
other than direct payment. The trial court concluded that validity of a contractually-stipulated termination clause:
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; This stipulation is in the nature of a resolutory
Tirreno is the absolute owner of the said properties; and the condition, for upon the exercise by the [lessor] of his right
to take possession of the leased property, the contract is
persons representing Tirreno have legal authority to deemed terminated. This kind of contractual stipulation is
constitute the pledge. However, the fourth requisite, that not illegal, there being nothing in the law proscribing such
kind of agreement.
the thing pledged is placed in the possession of the
creditor, is absent. There is non-compliance with the xxx
fourth requisite even if Tirrenos personal properties are
found in FBDCs real property. Tirrenos personal properties
are in FBDCs real property because of the Contract of
Judicial permission to cancel the agreement was
not, therefore necessary because of the express stipulation
Lease, which gives Tirreno possession of the personal
in the contract of [lease] that the [lessor], in case of failure
properties. Since Section 22 is not a contract of pledge,
of the [lessee] to comply with the terms and conditions
thereof, can take-over the possession of the leased
there is no pactum commissorium.
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.65[14]
FBDC admits that it took Tirrenos properties
from the leased premises without judicial intervention after
terminating the Contract of Lease in accordance with
A lease contract may contain a forfeiture clause.
Section 20.2. FBDC further justifies its action by stating
Country Bankers Insurance Corp. v. Court of Appeals
that Section 22 is a forfeiture clause in the Contract of
upheld the validity of a forfeiture clause as follows:
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.
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.66[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. Agana67[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)68[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)69[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.70[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.71[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.
People’s Banking and Trust Co v. Dahican
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.
Prudential Bank v. Alviar
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 interests and penalty charges. The public auction sale of the I. The trial court
erred in holding that the real
discontinuance of overdrafts.[7] mortgaged property was set on 15 January 1980.[10]
estate mortgage covers only
the promissory note
Respondents filed a complaint for damages with a prayer BD#75/C-252 for the sum of
P250,000.00.
for the issuance of a writ of preliminary injunction with the
On 16 March 1977, petitioner wrote Donalco Trading, Inc., RTC of Pasig,[11] claiming that they have paid their II. The trial court
erred in holding that the
informing the latter of its approval of a straight loan of principal loan secured by the mortgaged property, and thus promissory note BD#76/C-
P545,000.00, the proceeds of which shall be used to the mortgage should not be foreclosed. For its part, 345 for P2,640,000.00
(P382,680.83 outstanding
liquidate the outstanding loan of P545,000.00 TOD. The petitioner averred that the payment of P2,000,000.00 made principal balance) is not
letter likewise mentioned that the securities for the loan on 6 March 1979 was not a payment made by respondents, covered by the real estate
mortgage by expressed
were the deed of assignment on two promissory notes but by G.B. Alviar Realty and Development Inc., which has agreement.
executed by Bancom Realty Corporation with Deed of a separate loan with the bank secured by a separate
Guarantee in favor of A.U. Valencia and Co. and the III. The trial court
mortgage.[12]
erred in holding that
chattel mortgage on various heavy and transportation Promissory Note BD#76/C-
equipment.[8] On 15 March 1994, the trial court dismissed the complaint 430 for P545,000.00 is not
covered by the real estate
and ordered the Sheriff to proceed with the extra-judicial mortgage.
foreclosure.[13] Respondents sought reconsideration of the
IV. The trial court
decision.[14] On 24 August 1994, the trial court issued an erred in holding that the real
On 06 March 1979, respondents paid petitioner
Order setting aside its earlier decision and awarded estate mortgage is a contract
P2,000,000.00, to be applied to the obligations of G.B. of adhesion.
attorneys fees to respondents.[15] It found that only the
Alviar Realty and Development, Inc. and for the release of
P250,000.00 loan is secured by the mortgage on the land V. The trial court
the real estate mortgage for the P450,000.00 loan covering erred in holding defendant-
covered by TCT No. 438157. On the other hand, the
the two (2) lots located at Vam Buren and Madison Streets, appellant liable to pay
P382,680.83 loan is secured by the foreign currency deposit plaintiffs-appellees attorneys
North Greenhills, San Juan, Metro Manila. The payment fees for P20,000.00.[16]
account of Don A. Alviar, while the P545,000.00 obligation
was acknowledged by petitioner who accordingly released
was an unsecured loan, being a mere conversion of the The Court of Appeals affirmed the Order of the
the mortgage over the two properties.[9]
temporary overdraft of Donalco Trading, Inc. in trial court but deleted the award of attorneys fees.[17] It
compliance with a Central Bank circular. According to the ruled that while a continuing loan or credit accommodation
trial court, the blanket mortgage clause relied upon by based on only one security or mortgage is a common
On 15 January 1980, petitioner moved for the extrajudicial petitioner applies only to future loans obtained by the practice in financial and commercial institutions, such
foreclosure of the mortgage on the property covered by mortgagors, and not by parties other than the said agreement must be clear and unequivocal. In the instant
TCT No. 438157. Per petitioners computation, respondents mortgagors, such as Donalco Trading, Inc., for which case, the parties executed different promissory notes
had the total obligation of P1,608,256.68, covering the respondents merely signed as officers thereof. agreeing to a particular security for each loan. Thus, the
three (3) promissory notes, to wit: PN BD#75/C-252 for appellate court ruled that the extrajudicial foreclosure sale
P250,000.00, PN BD#76/C-345 for P382,680.83, and PN On appeal to the Court of Appeals, petitioner made the of the property for the three loans is improper.[18]
BD#76/C-340 for P545,000.00, plus assessed past due following assignment of errors:
 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
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,
and
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 may hereafter be erected or constructed
thereon, of which the Mortgagor
execute additional security documents, thereby saving time,
declares that he/it is the absolute owner
travel, loan closing costs, costs of extra legal services, free from all liens and incumbrances. . .
.[43] (Emphasis supplied.)
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 Thus, contrary to the finding of the Court of Appeals,
limit the amount for which the mortgage may stand as petitioner and respondents intended the real estate
security if from the four corners of the instrument the intent mortgage to secure not only the P250,000.00 loan from the
to secure future and other indebtedness can be petitioner, but also future credit facilities and advancements
gathered.[42] 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 blanket mortgage clause in the instant case states:
That for and in consideration The cases cited by petitioner, while affirming the
of certain loans, overdraft and other validity of dragnet clauses or blanket mortgage clauses, are
credit accommodations obtained from
the Mortgagee by the Mortgagor and/or of a different factual milieu from the instant case. There,
________________ hereinafter referred the subsequent loans were not covered by any security
to, irrespective of number, as
DEBTOR, and to secure the payment other than that for the mortgage deeds which uniformly
of the same and those that may contained the dragnet clause.
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
In the case at bar, the subsequent loans obtained
to the Mortgagor and/or DEBTOR,
including interest and expenses or by respondents were secured by other securities, thus: PN
any other obligation owing to the
BD#76/C-345, executed by Don Alviar was secured by a
Mortgagee, whether direct or
indirect, principal or secondary as hold-out on his foreign currency savings account, while PN
appears in the accounts, books and
BD#76/C-430, executed by respondents for Donalco
records of the Mortgagee, the
Mortgagor does hereby transfer and Trading, Inc., was secured by Clean-Phase out TOD CA
convey by way of mortgage unto the
3923 and eventually by a deed of assignment on two
Mortgagee, its successors or assigns,
the parcels of land which are described promissory notes executed by Bancom Realty Corporation
in the list inserted on the back of this
with Deed of Guarantee in favor of A.U. Valencia and Co.,
document, and/or appended hereto,
together with all the buildings and and by a chattel mortgage on various heavy and
improvements now existing or which
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 intention, a mortgage containing a dragnet clause will not
California court in the cited case made an inquiry whether be extended to cover future advances unless the document
the second loan was made in reliance on the original evidencing the subsequent advance refers to the mortgage
security containing a dragnet clause. Accordingly, finding a as providing security therefor.[49]
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
It was therefore improper for petitioner in this
said, was that the dragnet clause in the first security
case to seek foreclosure of the mortgaged property because
instrument constituted a continuing offer by the borrower to
of non-payment of all the three promissory notes. While the
secure further loans under the security of the first security
existence and validity of the dragnet clause cannot be
instrument, and that when the lender accepted a different
denied, there is a need to respect the existence of the other
security he did not accept the offer.[47]
security given for PN BD#76/C-345. The foreclosure of the
mortgaged property should only be for the P250,000.00
In another case, it was held that a mortgage with
loan covered by PN BD#75/C-252, and for any amount not
a dragnet clause is an offer by the mortgagor to the bank to
covered by the security for the second promissory note. As
provide the security of the mortgage for advances of and
held in one case, where deeds absolute in form were
when they were made. Thus, it was concluded that the offer
executed to secure any and all kinds of indebtedness that
was not accepted by the bank when a subsequent advance
might subsequently become due, a balance due on a note,
was made because (1) the second note was secured by a
after exhausting the special security given for the payment
chattel mortgage on certain vehicles, and the clause therein
of such note, was in the absence of a special agreement to
stated that the note was secured by such chattel mortgage;
the contrary, within the protection of the mortgage,
(2) there was no reference in the second note or chattel
notwithstanding the giving of the special security.[50] This
mortgage indicating a connection between the real estate
is recognition that while the dragnet clause subsists, the
mortgage and the advance; (3) the mortgagor signed the
security specifically executed for subsequent loans must
real estate mortgage by her name alone, whereas the second
first be exhausted before the mortgaged property can be
note and chattel mortgage were signed by the mortgagor
resorted to.
doing business under an assumed name; and (4) there was
no allegation by the bank, and apparently no proof, that it
One other crucial point. The mortgage contract, as well as
relied on the security of the real estate mortgage in making
the promissory notes subject of this case, is a contract of
the advance.[48]
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
Indeed, in some instances, it has been held that in the ready-made form of contract which the other party may
absence of clear, supportive evidence of a contrary 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.
PNB v. Sps Maranon
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, 19917 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.
RTC- RTC rendered its Decision13 in favor of the
respondents after finding, based on the expert
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.
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.
Issue: 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: 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.
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
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.
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.
Tumalad v. Vicencio
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.,15 cited 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.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro,
Fernando, Teehankee, Barredo, Villamor and Makasiar,
JJ., concur.
Diego v. Fernando
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.
Issue: 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)..
Ruling: 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.
Legaspi v. Celestiel
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