G.R. No.
L-9451 March 29, 1957 seizure of the car on August 4, 1952, and in addition thereto,
OLAF N. BORLOUGH, petitioner,
vs.
FORTUNE ENTERPRISES, INC. and THE HONORABLE
COURT OF APPEALS (2nd DIVISION), respondents.
Arturo M. del Rosario and Alfredo G. Fernando for petitioner.
Laurel & Salonga for respondents.
LABRADOR, J.:
Appeal by certiorari against a judgment of the Court of
Appeals, Second Division. The facts of the case have been
briefly stated as follows:
On March 8, 1952, the United Car Exchange sold to the
Fortune Enterprises, Inc., the following described car —
Make: Chevrolet (1947); Plate No. 34-1465
Type : Sedan; Motor No. EAA-20834
(Exhibit D).
The same car was sold by the Fortune Enterprises, Inc. to one
Salvador Aguinaldo, and for not having paid it in full, the latter
executed on the same date a promissory note in the amount of
P2,400 payable in 20 installments including interest thereon at
12 per cent per annum, the last of which installments fell due
on January 9, 1953 (Exhibit "A").
To secure the payment of this note, Aguinaldo executed a
deed of chattel mortgage over said car. The deed was duly
registered in the office of the Register of Deeds of Manila at
1:12 p.m. on March 11, 1952 (Exhibit "B"). As the buyer-
mortgagor defaulted in the payment of the installments due,
counsel for Fortune Enterprises Inc. addressed a letter on May
16, 1952 (Exhibit "C"), requesting him to make the necessary
payment and to keep his account up to date, to that no court
action would be resorted to.
It further appears that the above-described car found its way
again into the United Car Exchange which sold the same in
cash for P4,000 to one O. N. Borlough on April 6, 1952.
Accordingly, he registered it on the following day with the Motor
Vehicles Office. (Decision, Court of Appeal.).
It also appears from the record that defendant 0. N. Borlough
took possession of the vehicle from the time he purchased it,
On July 10, 1952, Fortune Enterprises, Inc. brought action
against Salvador Aguinaldo to recover the balance of the
purchase price. Borlough filed a third-party complaint, claiming
the vehicle. Thereupon, Fortune Enterprises, Inc. amended its
complaint, including Borlough as a defendant and alleging that
he was in connivance with Salvador Aguinaldo and was
unlawfully hiding and concealing the vehicle in order to evade
seizure by judicial process. Borlough answered alleging that he
was in legal possession thereof, having purchased it in good
faith and for the full price of P4,000, and that he had a
certificate of registration of the vehicle issued by the Motor
Vehicles Office, and he prayed for the dismissal of the
complaint, the return of the vehicle and for damages against
the plaintiff.
The vehicle was seized by the sheriff of Manila on August 4,
1952 and was later sold at public auction. The Court of First
Instance rendered judgment in favor of Borlough, and against
plaintiff, ordering the latter to pay Borlough the sum of P4,000,
with interest at 6 per cent per annum, from the date of the
attorney's fees in the sum of P1,000.
Upon appeal to the Court of Appeals, this court rendered
judgment ordering that Emil B. Fajardo pay Borlough P4,000
plus attorney's fees and that plaintiff pay to Borlough any
amount received by it in excess of its credits and judicial
expenses. The reason for the modification of the judgment is
that the mortgage was superior, being prior in point of time, to
whatever rights may have been acquired by Borlough by
reason of his possession and by the registration of his title in
the Motor Vehicle Office.
The question involved in the appeal in this case is one of law
and may be stated thus: As between a prior mortgage
executed over a motor vehicle, registered under the Chattel
Mortgage Law only, without annotation thereof in the Motor
Vehicles Office, and a subsequent registration of the vehicle in
the Motor Vehicles Office accompanied by actual possession
of the motor vehicle, which should prevail. While the question
can be resolved by the general principles found in the Civil
Code and expressly stated in Article 559, there is no need
resorting thereto (the general principles) in view of the express
provisions of the Revised Motor Vehicles Law, which expressly
and specifically regulate the registration, sale or transfer and
mortgage of motor vehicles. The following provisions of said
law may help decide the legal question now under
consideration:
SEC. 5 (c) Reports of motor vehicle sales. — On the first day
of each month, every dealer in motor vehicles shall furnish the
Chief of the Motor Vehicles Office a true report showing the
name and address of each purchase of a motor vehicle during
the previous month and the manufacturer's serial number and
motor number; a brief description of the vehicle, and such other
information as the Chief of the Motor Vehicles Office may
require.
SEC. 5 (e) Report of mortgages. — Whenever any owner
hypothecates or mortgage any motor vehicle as surety for a
debt or other obligation, the creditor or person in whose favor
the mortgage is made shall, within seven days, notify the Chief
of the Motor Vehicles Office in writing to the effect, stating the
registration number of the motor vehicle, date of mortgage,
names and addresses of both parties, and such other
information as the Chief of the Motor Vehicles Office may
require. This notice shall be signed jointly by the parties to the
mortgage.
On termination, cancellation or foreclosure of the mortgage, a
similar written notice signed by both parties, shall be forwarded
to the Chief of the Motor Vehicles Office by the owner.
These notice shall be filed by the Chief of the Motor Vehicles
Office in the motor records, and in the absence of more
specific information, shall be deemed evidence of the true
status of ownership of the motor vehicle. (Revised Motor
Vehicles Law.)
It is to be noted that under section 4 (b) of the Revised Motor
Vehicles Law the Chief of the Motor Vehicles Office is required
to enter or record, among other things, transfers of motor
vehicles "with a view of making and keeping the same and
each all of them as accessible as possible to and for persons
and officers properly interested in the same," and to "issue
such reasonable regulations governing the search and
examination of the documents and records . . . as will be
consistent with their availability to the public and their safe and
secure prevention."
1

Two recording laws are here being invoked, one by each
contending party — the Chattel Mortgage Law (Act No. 1508),
by the mortgagor and the Revised Motor Vehicles Law (Act No.
3992), by a purchaser in possession. What effect did the
passenger of the Revised Motor Vehicles Law have on the
previous enactment?
The Revised Motor Vehicles Law is a special legislation
enacted to "amend and compile the laws relative to motor
vehicles," whereas the Chattel Mortgage Law is a general law
covering mortgages of all kinds of personal property. The
former is the latest attempt to assemble and compile the motor
vehicle laws of the Philippines, all the earlier laws on the
subject having been found to be very deficient in form as well
as in substance (Villar and De Vega, Revised Motor Vehicles
Law, p. 1); it had been designed primarily to control the
registration and operation of motor vehicles (section 2, Act No.
3992).
Counsel for petitioner contends that the passage of the
Revised Motor Vehicles Law had the effect of repealing the
Chattel Mortgage Law, as regards registration of motor
vehicles and of the recording of transaction affecting the same.
We do not believe that it could have been the intention of the
legislature to bring about such a repeal. In the first place, the
provisions of the Revised Motor Vehicles Law on registration
are not inconsistent with does of the Chattel Mortgage Law. In
the second place, implied repeals are not favored; implied
repeals are permitted only in cases of clear and positive
inconsistency. The first paragraph of section 5 indicates that
the provisions of the Revised Motor Vehicles Law regarding
registration and recording of mortgage are not incompatible
with a mortgage under the Chattel Mortgage Law. The section
merely requires report to the Motor Vehicles Office of a
mortgage; it does not state that the registration of the mortgage
under the Chattel Mortgage Law is to be dispensed with. We
have, therefore, an additional requirements in the Revised
Motor Vehicles Law, aside from the registration of a chattel
mortgage, which is to report a mortgage to the Motor Vehicles
Office, if the subject of the mortgage is a motor vehicle; the
report merely supplements or complements the registration.
motor vehicles, such as statutes providing for the notation of
liens or claims against the motor vehicle certificate of title or
manufacturer's certificate, or for the issuance to the mortgagee
of a new certificate of ownership. Where the lien holder has
satisfied himself that the existence of the lien is recited in the
certificate of title, he has done all that the law contemplates
that he should do, and there is notice to the public of the
existing lien, which continues valid until the record shows that it
has been satisfied and a new certificate issued on legal
authority, even through another certificate which does not
disclose the lien is procured as the result of false statements
made in the application therefore, and the vehicle is purchased
by a bona fide purchaser.
The holder of a lien who is derelict in his duty to comply and
require compliance with the statutory provisions acts at his own
peril, and must suffer the consequence of his own negligence;
and accordingly, he is not entitled to the lien as against a
subsequent innocent purchaser filed as provided by other
chattel mortgage statutes. The rule is otherwise, however, as
against claimants not occupying the position of innocent
purchaser, such as a judgment creditor, or one acquiring title
with actual notice of an unregistered lien, and the statutes do
not protect a purchaser holding under registered title if a link in
the title is forgery. Moreover, such statute will not impair vested
rights of a mortgage under a chattel mortgage duly recorded.
(60 C.J.S., pp. 181-182.)
The above authorities leave no room for doubt that purchaser
O. N. Borlough's right to the vehicle as against the previous
and prior mortgage Fortune Enterprises, Inc., which failed to
record its lien in accordance with the Revised Motor Vehicles
Law, should be upheld.
For the foregoing consideration, the judgment of the Court of
Appeals is hereby reversed and that of the Court of First
Instance affirmed, with costs against respondent.

The recording provisions of the Revised Motor Vehicles Law,

therefore, are merely complementary to those of the Chattel
Mortgage Law. A mortgage in order to affect third persons
should not only be registered in the Chattel Mortgage Registry,
but the same should also be recorded in the motor Vehicles
Office as required by section 5 (e) of the Revised Motor
Vehicles Law. And the failure of the respondent mortgage to
report the mortgage executed in its favor had the effect of
making said mortgage ineffective against Borlough, who had
his purchase registered in the said Motor Vehicles Office.

On failure to comply with the statute, the transferee's title is

rendered invalid as against a subsequent purchaser from the
transferor, who is enabled by such failure of compliance to
retain the indicia of ownership, such as a subsequent
purchaser in good faith, or a purchaser from a conditional
buyer in possession; and the lien of a chattel mortgage given
by the buyer to secure a purchase money loan never becomes
effective in such case as against an innocent purchaser. (60
Corpus Juris Secundum, p. 171.)

One holding a lien on a motor vehicle, in so far as he can

reasonably do so, must protect himself and others thereafter
dealing in good faith by complying and requiring compliance
with the provisions of the laws concerning certificates of title to

2
G.R. No. L-20329 March 16, 1923
THE STANDARD OIL COMPANY OF NEW YORK, petitioner,
vs.
JOAQUIN JARAMILLO, as register of deeds of the City of
Manila, respondent.
Ross, Lawrence and Selph for petitioner.
City Fiscal Revilla and Assistant City Fiscal Rodas for
respondent.
STREET, J.:
This cause is before us upon demurrer interposed by the
respondent, Joaquin Jaramillo, register of deeds of the City of
Manila, to an original petition of the Standard Oil Company of
New York, seeking a peremptory mandamus to compel the
respondent to record in the proper register a document
purporting to be a chattel mortgage executed in the City of
Manila by Gervasia de la Rosa, Vda. de Vera, in favor of the
Standard Oil Company of New York.
It appears from the petition that on November 27, 1922,
Gervasia de la Rosa, Vda. de Vera, was the lessee of a parcel
of land situated in the City of Manila and owner of the house of
strong materials built thereon, upon which date she executed a
document in the form of a chattel mortgage, purporting to
convey to the petitioner by way of mortgage both the leasehold
interest in said lot and the building which stands thereon.
The clauses in said document describing the property intended
to be thus mortgage are expressed in the following words:
Now, therefore, the mortgagor hereby conveys and transfer to
the mortgage, by way of mortgage, the following described
personal property, situated in the City of Manila, and now in
possession of the mortgagor, to wit:
(1) All of the right, title, and interest of the mortgagor in and to
the contract of lease hereinabove referred to, and in and to the
premises the subject of the said lease;
(2) The building, property of the mortgagor, situated on the
aforesaid leased premises.
After said document had been duly acknowledge and
delivered, the petitioner caused the same to be presented to
the respondent, Joaquin Jaramillo, as register of deeds of the
City of Manila, for the purpose of having the same recorded in
the book of record of chattel mortgages. Upon examination of
the instrument, the respondent was of the opinion that it was
not a chattel mortgage, for the reason that the interest therein
mortgaged did not appear to be personal property, within the
meaning of the Chattel Mortgage Law, and registration was
refused on this ground only.
We are of the opinion that the position taken by the respondent
is untenable; and it is his duty to accept the proper fee and
place the instrument on record. The duties of a register of
deeds in respect to the registration of chattel mortgage are of a
purely ministerial character; and no provision of law can be
cited which confers upon him any judicial or quasi-judicial
power to determine the nature of any document of which
registration is sought as a chattel mortgage.
The original provisions touching this matter are contained in
section 15 of the Chattel Mortgage Law (Act No. 1508), as
amended by Act No. 2496; but these have been transferred to
section 198 of the Administrative Code, where they are now
found. There is nothing in any of these provisions conferring
upon the register of deeds any authority whatever in respect to
the "qualification," as the term is used in Spanish law, of chattel
mortgage. His duties in respect to such instruments are
ministerial only. The efficacy of the act of recording a chattel
mortgage consists in the fact that it operates as constructive
notice of the existence of the contract, and the legal effects of
the contract must be discovered in the instrument itself in
relation with the fact of notice. Registration adds nothing to the
instrument, considered as a source of title, and affects
nobody's rights except as a specifies of notice.
Articles 334 and 335 of the Civil Code supply no absolute
criterion for discriminating between real property and personal
property for purpose of the application of the Chattel Mortgage
Law. Those articles state rules which, considered as a general
doctrine, are law in this jurisdiction; but it must not be forgotten
that under given conditions property may have character
different from that imputed to it in said articles. It is undeniable
that the parties to a contract may by agreement treat as
personal property that which by nature would be real property;
and it is a familiar phenomenon to see things classed as real
property for purposes of taxation which on general principle
might be considered personal property. Other situations are
constantly arising, and from time to time are presented to this
court, in which the proper classification of one thing or another
as real or personal property may be said to be doubtful.
The point submitted to us in this case was determined on
September 8, 1914, in an administrative ruling promulgated by
the Honorable James A. Ostrand, now a Justice of this Court,
but acting at that time in the capacity of Judge of the fourth
branch of the Court of First Instance of the Ninth Judicial
District, in the City of Manila; and little of value can be here
added to the observations contained in said ruling. We
accordingly quote therefrom as follows:
It is unnecessary here to determine whether or not the property
described in the document in question is real or personal; the
discussion may be confined to the point as to whether a
register of deeds has authority to deny the registration of a
document purporting to be a chattel mortgage and executed in
the manner and form prescribed by the Chattel Mortgage Law.
Then, after quoting section 5 of the Chattel Mortgage Law (Act
No. 1508), his Honor continued:
Based principally upon the provisions of section quoted the
Attorney-General of the Philippine Islands, in an opinion dated
August 11, 1909, held that a register of deeds has no authority
to pass upon the capacity of the parties to a chattel mortgage
which is presented to him for record. A fortiori a register of
deeds can have no authority to pass upon the character of the
property sought to be encumbered by a chattel mortgage. Of
course, if the mortgaged property is real instead of personal
the chattel mortgage would no doubt be held ineffective as
against third parties, but this is a question to be determined by
the courts of justice and not by the register of deeds.
In Leung Yee vs. Frank L. Strong Machinery Co. and
Williamson (37 Phil., 644), this court held that where the
interest conveyed is of the nature of real, property, the placing
of the document on record in the chattel mortgage register is a
futile act; but that decision is not decisive of the question now
before us, which has reference to the function of the register of
deeds in placing the document on record.
In the light of what has been said it becomes unnecessary for
us to pass upon the point whether the interests conveyed in the
3
instrument now in question are real or personal; and we
declare it to be the duty of the register of deeds to accept the
estimate placed upon the document by the petitioner and to
register it, upon payment of the proper fee.

The demurrer is overruled; and unless within the period of five

days from the date of the notification hereof, the respondent
shall interpose a sufficient answer to the petition, the writ of
mandamus will be issued, as prayed, but without costs. So
ordered.

4
G.R. No. L-13194 January 29, 1960
BUENAVENTURA T. SALDANA, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-
appellees.
Gatchalian & Padilla for appellant.
Emiliano Tabasondra for appellee Company.Teodoro Padilla
for the other appellees.
REYES, J.B.L., J.:
This case arose from a complaint for damages filed by
Buenaventura Saldana (docketed as Civil Case No. 32703 of
the Court of First Instance of Manila) that was dismissed by
order of the Court dated August 20, 1957, for lack of sufficient
cause of action. In another order of September 30, 1957 of the
same court, plaintiff's motion for reconsideration was denied,
and the case was appealed to this Court.
The facts are that on May 8, 1953, in order to secure an
indebtedness of P15,000.00, Josefina Vda. de Aleazar
executed in favor of the plaintiff-appellant Buenaventura
Saldana a chattel mortgage covering properties described as
follows:
A building of strong materials, used for restaurant business,
located in front of the San Juan de Dios Hospital at Dewey
Boulevard, Pasay City, and the following personal properties
therein contained:
1 Radio, Zenith, cabinet type.
1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside.
1 Sala set upholstered, 6 pieces.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment found in the said
premises.
Subsequent to the execution of said mortgage and while the
same was still in force, the defendant Hospital de San Juan de
Dios, Inc. obtained, in Civil Case No. 1930 of the Municipal
Court of Pasay City, a judgment was duly Josewfina Vda. de
Eleazar. A writ of execution was duly issued and, on January
28, 1957, the same was served on the judgment debtor by the
sheriff of Pasay City; whereupon the following properties of
Josefina Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8 tubes).
2 Showcases (big, with mirrors).
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .
1 Wooden drawer.
1 Tocador (brown with mirror).
1 Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with 4 burners).
1 Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldana filed a
third-party claim asserting that the above-described properties
levied are subject to his chattel mortgage of May 8, 1953. In
virtue thereof, the sheriff released only some of the property
originally included in the levy of January 28, 1957, to wit:
1 Radio, Zenith, cabinet type.
8 Tables, stateside.
32 Chromiun chairs, stateside.
1 G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties
still under levy, the defendants-appellees Hospital de San Juan
de Dios, Inc. and the Philippine Guaranty Co., Inc., executed
an indemnity bond to answer for any damages that plaintiff
might suffer. Accordingly, on February 13, 1957, the said
properties were sold to the defendant hospital as the highest
bidder, for P1,500.00.
Appellants claims that the phrase in the chattel mortgage
contract — "and all other furnitures, fixtures and equipment
found in the said premises", validly and sufficiently covered
within its terms the personal properties disposed of in the
auction sale, as to warrant an action for damages by the
plaintiff mortgagee.
There is merit in appellant's contention. Section 7 of Act No.
1508, commonly and better known as the Chattel Mortgage
Law, does not demand a minute and specific description of
every chattel mortgaged in the deal of mortgage but only
requires that the description of the properties be such "as to
enable the parties in the mortgage, or any other person, after
reasonable inquiry and investigation to identify the same".
Gauged by this standard, general description have been held
by this Court. (See Stockholder vs. Ramirez, 44 Phil., 993;
Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).
A similar rule obtains in the United States courts and decisions
there have repeatedly upheld clauses of general import in
mortgages of chattels other than goods for trade, and
containing expressions similar to that of the contract now
before us. Thus, "and all other stones belonging to me and all
other goods and chattels" (Russel vs. Winne, 97 Am. Dec.
755); "all of the property of the said W.W. Allen used or
situated upon the leased premises" (Dorman vs. Crooks State
Bank, 64 A.L.R. 614); "all goods in the store where they are
doing business in E. City, N.C." (Davis vs. Turner, 120 Fed.
5
605); "all and singular the goods, wares, stock, iron tools or less fixed, or at least permanently situated or used in the
manufactured articles and property of every description, being premises of the mortgagor's restaurant.
situated in or about the shop or building now occupied by me in
Howley Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. The rule in the Jureidini case is further weakened by the court's
368,) were held sufficient description, on the theory that parol observation that (44 Phil., p. 220) —
evidence could supplement it to render identification rule is
expressed in Walker vs. Johnson (Mont.) 1254 A.L.R. 937: Moreover, if there should exist any doubts on the questions we
have just discussed, they should be treshed out in the
The courts and textbook writers have developed several rules insolvency proceedings,
for determination of the sufficiency of the description in a
chattel mortgage. The rules are general in nature and are which appears inconsistent with the definitive character of the
different where the controversy is between the parties to the rulings invoked.
mortgage from the situation where third parties with out actual
notice come in. In 11 C.J. 457, it is said: "Ad against third We find that the ground for the appealed order (lack of cause
persons the description in the mortgage must point out its of action) does not appear so indubitable as to warrant a
subject matter so that such person may identify the chattels dismissal of the action without inquiry into the merits and
observed, but it is not essential that the description be so without the description in the deed of mortgage (Nico vs.
specific that the property may be identified by it alone, if such Blanco, 81 Phil., 213; Zobel vs. Abreau, 52 Off. Gaz., 3592).
description or means of identification which, if pursued will
disclose the property conveyed." In 5 R.C.L. 423 the rule is Wherefore, the orders appealed from are set aside and the
stated that a description which will enable a third person, aided case remanded to the lower court for further proceedings.
by inquires which the instrument itself suggest to identify the Costs against appellee.
property is sufficiently definite." In 1 Jones on Chattel
Mortgages and Conditional Sales, Bowers Edition, at page 95
the writer says: "As to them (third persons), the description is
sufficient if it points to evidence whereby the precise thing
mortgaged may be ascertained with certainty." Here there is
nothing in the description "873 head of sheep" from which
anyone, the mortgagee or third persons, could ascertain with
any certainty what chattels were covered by the mortgage.

In many instances the courts have held the description good

where, though otherwise faulty, the mortgage explicity states
that the property is in the possession of the mortgagor, and
especially where it is the only property of that kind owned by
him.

The specifications in the chattel mortgage contract in the

instant case, we believe, in substantial compliance with the
"reasonable description rule" fixed by the chattel Mortgage Act.
We may notice in the agreement, moreover, that the phrase in
question is found after an enumeration of other specific
articles. It can thus be reasonably inferred therefrom that the
"furnitures, fixture and equipment" referred to are properties of
like nature, similarly situated or similarly used in the restaurant
of the mortgagor located in front of the San Juan de Dos
Hospital at Dewey Boulevard, Pasay City, which articles can be
definitely pointed out or ascertain by simple inquiry at or about
the premises. Note that the limitation found in the last
paragraph of section 7 of the Chattel Mortgage Law1 on "like
or subsituated properties" make reference to those "thereafter
acquired by the mortgagor and placed in the same depository
as the property originally mortgaged", not to those already
existing and originally included at the date of the constitution of
the chattel mortgage. A contrary view would unduly impose a
more rigid condition than what the law prescribes, which is that
the description be only such as to enable identification after a
reasonable inquiry and investigation.

The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216,

219, cited by the appellees and the lower court, cannot be
likened to the case at bar, for there, what were sought to be
mortgaged included two stores wit all its merchandise, effects,
wares, and other bazar goods which were being constantly
disposed of and replaced with new supplies in connection with
the business, thereby making any particular or definite
identification either impractical or impossible under the
circumstances. Here, the properties deemed overed were more

6
G.R. No. 42551 September 4, 1935
ALEKO E. LILIUS, for himself and as guardian ad litem of his
minor child, Brita Marianne Lilius, and SONJA MARIA LILIUS,
plaintiffs-appellees,
vs.
MANILA RAILROAD COMPANY, defendant.
LAURA LINDLEY SHUMAN, MANILA WINE MERCHANTS,
LTD., BANK OF THE PHILIPPINE ISLANDS AND MANILA
MOTOR CO., INC., intervenors-appellants, and
W.H. WATEROUS, M. MARFORI, JOHN R. MCFIE, JR.,
ERLANGER & GALINGER, INC., PHILIPPINE EDUCATION
CO., INC., HAMILTON BROWN SHOE CO., ESTRELLA DEL
NORTE and EASTERN & PHILIPPINE SHIPPING AGENCIES,
LTD., intervenors-appellees.
J.W. Ferrier for intervenor-appellant Shuman.
Franco and Reinoso for intervenor-appellant Manila Wine
Merchants, Ltd.
Feria and La O for intervenor-appellant Bank of the Philippine
Islands.
Gibbs and McDonough for intervenor-appellant Manila Motor
Co.
Harvey and O'Brien for plaintiffs-appellees.
John R. Mcfie, Jr., in his behalf and for the intervenors-
appellees.
GODDARD, J.:
In this case Laura Lindley Shuman, the Manila Wine
Merchants, Ltd., the Bank of the Philippine Islands and the
Manila Motor Co., Inc., have appealed from an order of the
Court of First Instance of Manila fixing the degree of preference
of the claimants and distributing the proceeds of the judgment
of this court in the case of Lilius vs. Manila Railroad Co. (59
Phil., 758), the amount of which judgment in the sum of
P33,525.03, including interest and costs, was deposited by the
railroad company with the clerk of the lower court in that case.
After deducting the attorneys' fees in the sum of P8,016.88,
which is not questioned, the net amount in the hands of the
clerk of the lower court pertaining to each of the plaintiffs in the
original action is follows:
Aleko E. Lilius
P13,181.33
Sonja Maria Lilius
8,218.54
Brita Marianne Lilius
4,109.28
There was a total of twenty-eight claimants to these funds,
whose claims were presented and decided without objection in
the original case in the lower court.
The trial court in its order from which these appeals are taken,
allowed:
(a) As against the sum of P8,218.54, separately awarded
to the plaintiff Sonja Lilius, the following claims or portions
thereof in the order stated:
One-half of the claim of Dr. W.H. Waterous by virtue of a
written assignment of March 9, 1933, by the said Sonja Maria
Lilius to him
P1,500.00
One-third of the claim of the appellant Laura Lindley
Shuman by virtue of a joint judgement obtained by her on
August 10, 1933, in the Case No. 44254 of the Court of First
Instance of Manila, against the said Sonja Maria Lilius, Aleko
E. Lilius and Brita Marianne Lilius
661.13
One-third of the claim of the St. Paul's Hospital by
virtue of a joint written assignment of September 21, 1933, by
the said Sonja Maria Lilius, Aleko E. Lilius and Brita Marianne
Lilius to it
518.19
and the balance of the award was ordered paid to the said
Brita Marianne Lilius, and
(b) As against the sum of P4,109.28, separately awarded to the
plaintiff Brita Marriane Lilius, the following claims or portions
thereof in the order stated:
One-third of the claim of Laura Lindley Shuman by virtue of a
joint judgment obtained by her on August 10, 1933, in Case
No. 44254 of the Court of First Instance of Manila, against the
said Brita Marianne Lilius, Sonja Maria Lilius and Aleko E.
Lilius
P661.13
One-third of the claim of St. Paul's Hospital by virtue
of a joint written assignment of September 21, 1933, by the
said Brita Marianne Lilius, Sonia Maria Lilius and Aleko
E. Lilius
518.18
and the balance of the award was ordered paid to the said
Brita Marianne Lilius, and
(c) As against the sum of P13,181.33, awarded to the
plaintiff Aleko E. Lilius, the following claims or portions thereof
in the order stated:
The other half of the claim of Dr. W.H. Waterous by virtue of
the final judgement in the original case, G.R. No. 39587
P1,500.00
The claim of Dr. M. Marfori, by virtue of the final judgment in
the original case, G.R. No. 39587
250.00
The claim of John R. McFie, Jr., by virtue of a written
assignment to him by the said Aleko E. Lilius of November 13,
1931
500.00
The balance of P10, 931.33 of the judgment pertaining to the
said Aleko E. Lilius was allowed and distributed by the lower
court proportionately among the following claimants by virtue of
their written assignment of January 27, 1932:
Erlanger & Galinger, Inc.
7

3,374.50
Philippine Education Co., Inc.,
3,394.94
Hamilton Brown Shoe Co.
1,878.98
Estrella del Norte
1,850.76
Eastern & Philippine Shipping Agencies, Ltd.
432.15
APPEAL OF LAURA LINDLEY SHUMAN
First assignments of error: "The lower court erred in holding
that Dr. W.H. Waterous and Dr. M. Marfori had a claim against
the plaintiff, Aleko E. Lilius superior to the claim of the
appellant, Laura Lindley Shuman, against him."
One of the contentions of this appellant under this assignment
of error is that her claim, having been made the basis of the
plaintiffs' action and of the award for damages, as shown in the
original decision herein, should constitute, and does constitute
a superior lien against the funds awarded said plaintiffs, to
those of any other claimants, except the two doctors, the
hospital and the other nurse, and that as to the claims of the
two doctors, the hospital and the other nurse the claim of this
appellant has equal preference with their claims.
The following items were made the basis of a part of the
judgment for damages awarded to the plaintiffs in the original
action against the Manila Railroad Company:
Por honorarios del Dr. Waterous (Exhibit N-2)
P3,000.00
Por la primera cura hecha en el Hospital de Calauang (Exhibit
N-5)
250.00
Por el alquiler de la ambulancia del Hospital General (Exhibit
N-4)
10.00
Por la estancia en el Hospital Saint Paul (Exhibit N-3)
3,355.00
Por los servicios prestados por la enfermera Laura Shuman
(Exhibit N-6)
2,156.00
Por los servisios prestados por la enfermera Alejandra
Alcayaga (Exhibit N-9)
1,450.00
Porlos servicios prestados por la enfermera Carmen Villanueva
(Exhibit N-11)
240.00
Por la perdida de la camara fotografica, pluma fuente y lapiz
(Exhibit N-1)
43.00
Por trajes dañados en el choque
131.00
Total
10,635.00
The trial court in that case directed the defendant Railroad
Company to pay P3,000 to Dr. Waterous and to pay to Dr.
Marfori P250, but failed to direct the defendant to pay the
corresponding sums to the other persons and entities
mentioned in the portion of the decision copied above.
It must be admitted that the amounts due Dr. Waterous and the
others mentioned is the original decision, including the
appellant Shuman, were all used as a basis for a part of the
judgment which plaintiffs secured against the defendants
Railroad Company.
From the foregoing it is clear that the claim of this appellant
rests upon the same ground as those of Doctors Waterous and
Marfori. She was also among those who rendered services to
plaintiffs in aid of their recover from the injuries received by
them in the accident for which damages were awarded them in
the case against the Railroad Company. The fact that the trial
court did not direct the defendant Railroad Company to pay
directly to this appellant the amount of her claim does not
modify or do away with her equitable right to the same status
as that given to the two doctors mentioned above. The
inevitable conclusion is that the claims of Waterous and Marfori
have no preference over her claim for her services as a nurse.
This assignment of error should be and is hereby sustained.
This appellant in her second assignment of error contends that
the trial court erred in failing to allow her claim in the sum of
P61.94 as costs in the case in which judgment was rendered in
her favor against the herein plaintiffs-appellees. The record
shows that the reason for the disallowance of this item was
because no proof was offered as to the amount of such costs.
The only thing appearing in the transcript on this point is the
statement of counsel that the amount of costs in case No.
44254, as shown by the bill of costs, was P6l.94. Rule 38 of the
Revised Rules of Courts of First Instance requires that ". . .
costs shall be taxed by the clerk on five days' written notice
given by the prevailing party to the adverse party, with which
notice given by the prevailing party, verified by his oath or that
of his attorney, shall be served. . . ." The proper evidence,
therefore, of the costs in that case would have been the bill of
costs and the taxation of such costs by the clerk. In order to
recover such costs in a separate proceeding, such as this,
evidence must be presented as to the amount of the same. As
there was no evidence offered in this case as to the amount of
said costs, the lower court was correct in disallowing that item.
This assignment of error is overruled.
Under her third assignment of error this appellant contends (1)
that the funds separately awarded the wife, Sonja Maria Lilius,
partake of the nature of conjugal property, at least to the extent
8
of the sum of P800 awarded to her as interest on the principal
award of P10,000 made in her favor by the trial court, and as
such should respond for the support of the family, including
medical expenses and (2) that even assuming that the sums
awarded separately to Sonja Maria Lilius are not conjugal
property, but her own paraphernal property, still under the
provisions of the Civil Code payment may be required out of
said funds, her husband being insolvent, under her liability for
the medical expenses incurred by her husband, one of the
obligations imposed by law upon the wife.
The second contention under this assignment of error can be
disposed of by calling attention to the fact that there is no proof
in this case that her husband is insolvent. It has not been
proved that Aleko E. Lilius had no other property outside of the
sum awarded to him in the case against the Railroad
Company.
APPEAL OF THE MANILA WINE MERCHANTS, LTD., AND
THE BANK OF THE PHILIPPINE ISLANDS.
The appellants, the Manila Wine Merchants. Ltd., and the Bank
of the Philippine islands also contend that the sum separately
awarded Sonja Maria Lilius is conjugal property and therefore
liable for the payment of the private debts of her husband,
Aleko E. Lilius, contracted during her marriage.
it is contended that the damages awarded for personal injury
are not classified as separate property of each of the spouses
in article 1396 of the Civil Code and they should therefore be
resumed conjugal. In answer to this, article 1401 of the same
Code, in enumerating the property belonging to the conjugal
partnership, does not mention damages for personal injury.
The question raised by these appellants is one of first
impression in this jurisdiction and apparently has never been
passed upon by the Supreme Court of Spain.
The following comment is found in Colin y Capitant, Vol. 6,
pages 217 and 218:
"No esta resuelta expresamente en la legislacion espa_¤_ola
la cuestion de si las indemnizaciones debidas por accidentes
del trabajo tienen la consideracion de gananciales o son
bienes particulares de los conyuges.
"Inclinan a la solucion de que estas indemnizaciones deben
ser consideradas como gananciales, el hecho de que la
sociedad pierde la capacidad de trabajo con el accidente, que
a ella le pertenece, puesto que de la sociedad son los frutos de
ese trabajo; en cambio, la consideracion de que de igual
manera que los bienes que sustituyen a los que cada conyuge
lleva al matrimonio como propios tienen el caracter de propios,
hace pensar que las indemnizaciones que vengan a suplir la
capacidad de trabajo aportada por cada conyuge a la
sociedad, deben ser juridicamente reputadas como bienes
propios del conyuge que haya sufrido el accidente. Asi se Ilega
a la misma solucion aportada por la jurisprudencia francesa.".
From the above it appears that there are two distinct theories
as to whether damages rising from an injury suffered by one of
the spouses should be considered conjugal or separate
property of the injured spouse. The theory holding that such
damages should form part of the conjugal partnership property
is based wholly on the proposition, also advanced by the
Manila Wine Merchants, Ltd., that by the injury the earning
capacity of the injured spouse is diminished to the consequent
prejudice of the conjugal partnership.
Assuming the correctness of this theory, a reading of the
decision of this court in G. R. No. 39587 will show that the sum
of P10,000 was awarded to Sonja Maria Lilius "by way of
indemnity for patrimonial and moral damages." The pertinent
part of that decision on this point reads:
"Taking into consideration the fact that the plaintiff Sonja Maria
Lilius, wife of the plaintiff Aleko E. Lilius is-in the language of
the court, which saw her at the trial "young and beautiful and
the big scar, which she has on her forehead caused by the
lacerated wound received by her from the accident, disfigures
her face and that the fracture of her left leg has caused a
permanent deformity which renders it very difficult for her to
walk', and taking into further consideration her social standing,
neither is the sum of P10,000, adjudicated to her by the said
trial court by way, of indemnity for patrimonial and moral
damages, excessive.".
It should be added that the interest on that sum is part of the
damages "patrimonial and moral" awarded to Sonja Maria
Lilius.
Furthermore it appears in the decision of the trial court in G. R.
No. 39587 that Aleko E. Lilius claimed the sum of P10,000 as
damages on account of the loss of the services of Sonja Maria
Lilius as secretary and translator, her particular work as a
member of the conjugal partnership. The trial court disallowed
this claim and neither of the plaintiffs in that case appealed to
this court.
In view of the foregoing it is held that the sum of P10,000 with
interest thereon awarded to Sonja Maria Lilius as damages is
paraphernal property.
The third assignment of error of the appellant Shuman, the
second assignment of error of the appellant Bank of the
Philippine Islands and the sole assignment of error of the
appellant Manila Wine Merchants, Ltd., are overruled.
In its first assignment of error it is contended by the Bank of the
Philippines Islands that by virtue of its writ of garnishment
served on the Manila Railroad Company of February 8, 1933, it
acquired a lilen superior to the preference granted by article
1924 of the Civil Code to prior judgments. This error, if at all, is
however non-prejudicial as the record shows that all the
creditors declared by the court as having a right to participate
in the proceeds of the judgment in favor of Aleko E. Lilius were
so held by virtue of deeds of assignment executed prior to the
date of the service of notice of the bank's writ of garnishment
on the Manila Railroad Company. These creditors are John R.
McFie, jr., whose claim is based on a deed of assignment
dated November 13, 1931, and Erlanger & Galinger, Philippine
Education Co., Inc., Hamilton Brown Shoe Co., Estrella del
Norte and Eastern & Philippine Shipping Agencies, Ltd., whose
claims are based on a deed of assignment dated November
17, 1931. As the record shows that whatever was left of the
judgment in favor of Aleko E. Lilius is not sufficient to pay in full
the credits of the above mentioned creditors and furthermore,
in view of the fact that strictly speaking, there was no existing
credit in favor of Aleko E. Lilius to be garnished on February 3,
1933, as it had been assigned, before that date, to his
creditors, this assignment of error, therefore, must be
overruled.
APPEAL OF THE THE MANILA MOTOR CO., INC.
The two error assigned by this appellant read as follows:
9
"I. The lower court erred in considering the date of the date
judgment, Exhibit A, Manila Motor Co., Inc., instead of the date
of the public document upon which it was based in determining
the preference among the several claims filed and litigated in
this proceeding.
"ll. The lower court erred in not holding the claim of the
claimant-appellant, Manila Motor Co., Inc., preferred over all
other claims against Aleko E. Lilius evidenced by public
instruments and final judgments.".
The claimant has not proven that its credit is evidenced by a
public document within the meaning of article 1924 of the Civil
Code. The only evidence offered by the Manila Motor Co., Inc.,
in support of its claim of preference against the fund of Aleko
E. Lilius was a certified copy of its judgment against him in civil
case No. 41159 of the Court of First Instance of Manila,
together with a certified copy of the writ of execution and the
garnishment issued by virtue of said judgment. These
documents appear in the record as Exhibits A, B and C. The
alleged public document evidencing its claim was not offered in
evidence and counsel of the Manila Motor Co., Inc., merely
stated at the hearing in the lower court that its judgment was
based on a public document dated May 10, 1931. There is no
explanation as to why it was not presented as evidence along
with Exhibits A, B, and C. In their brief in this court, counsel for
the Motor Co., Inc., merely assume that its credit is evidenced
by a public document dated may 10, 1931, because the court,
in its judgment in said civil case No. 41159, refers to a
mortgage appearing in the evidence as Exhibit A, as the basis
of its judgment, without mentioning the date of the execution of
the exhibit. This reference in said judgment to a mortgage is
not competent or satisfactory evidence as against third persons
upon which to base a finding that the Manila Motor Company's
credit evidenced by a public document within the meaning of
article 1924 of the Civil Code. This court is not authorized to
make use of that judgment as a basis for its findings of fact in
this proceeding. This is shown by the decision of this court in
the case of Martinez vs. Diza 920 Phil., 498). In that syllabus of
that decision it is stated:
"1. COURTS OF FIRST INSTANCE; JUDGMENT IN FORMER
CIVIL ACTION AS BASIC FOR FINDINGS OF FACT;
ERROR.-A person who was not a party to a former civil action,
or who did not acquire his rights from one of the parties thereto
after the entry of judgment therein, is not bound by such
judgment; nor can it be used against him as a basis for the
findings of fact in a judgment rendered in a subsequent
action.".
But even if the court is authorized to accept the statement in
that judgment as a basis for its finding of fact in relation to this
claim, still it would not establish the claim of preference of the
Manila Motor Co., Inc. Granting that a mortgage existed
between the Manila Motor Co., Inc., and Aleko E. Lilius, this
does not warrant the conclusion that the instrument evidencing
that mortgage is a public document entitled to preference
under article 1924 of the Civil Code. Under section 5 of Act No.
1507 as amended by Act No. 2496, a chattel does not have to
be acknowledge before a notary public. As against creditors
and subsequent encumbrances, the law does require an
affidavit of good faith appended to the mortgage and recorded
with it. (See Giberson vs. A. N. Jureidini Bros., 44 Phil., 216,
and Betita vs. Ganzon, 49 Phil., 87.) A chattel mortgage may,
however, be valid as between the parties without such an
affidavit of good faith. In 11 Corpus Juris, 482, the rule is
expressly stated that as between the parties and as to third
persons who have no rights against the mortgagor, no affidavit
of good faith is necessary. It will thus be seen that under the
law, a valid mortgage may exist between the parties without its
being evidenced by a public document. This court would not be
justified, merely from the reference by the lower court in that
case to a mortgage, in assuming that its date appears in a
public document. if the Manila motor Co., Inc., desired to rely
upon a public document in the form of a mortgagor as
establishing its preference in this case, it should have offered
that document in evidence, so that the court might satisfy itself
as to its nature and unquestionably fix the date of its execution.
There is nothing either in the judgment relied upon or in the
evidence to show the date of said mortgage. The burden was
upon the claimant to prove that it actually had a public Code. It
is essential that the nature and the date of the document be
established by competent evidence before the court can allow
a preference as against the other parties to this proceeding.
Inasmuch as the claimant failed to establish its preference,
based on a public document, the lower court properly held that
its claim against the said Aleko E. Lilius was based on the final
judgment in civil case No. 41159 of the Court of First Instance
of Manila of May 3, 1932. The court, therefore, committed no
error in holding that the claim of the Manila Motor Co., Inc.,
was inferior in preference to those of the appellees in this case.
This appellant's assignments of error are overulled.
In view of the foregoing the following portion of the dispositive
part of the decision of the trial court is affirmed.
"Por estas consideraciones, se ordena y se decreta (a) que del
saldo de P8,219.54, que pertenece a Sonja Maria LIllius y que
se halla depositado en la Escribana del Juzgado, se pague po
el Escribano al Dr. W. H. Waterous la suma de mil quinientos
pesos (P1,500), a Laura L. Shuman, seiscientos sesenta y un
pesos con trece centavos (P661.13, y al St. Paul's Hospital,
quinientos diez y ocho pesos con diez y ocho centavos
(P518.18), y el remanente de cinco mil cuatrocientos setenta y
siete pesos con veinticuatro centavos (P5,477.24), a Sonja
Maria Lililus, o su apoderado; (b) que del saldo de P4,109.28
que pretence a Brita Marianne Lilius y que se halla deposito en
la Escribania del Juzgado, se pague por el Escribano a Laura
Shuman, la suma de seicientos sesenta y un pesos con trece
centavos (P661.13); y al St. Paul's Hospital, quinientos diez y
ocho pesos con diez y ocho centavos (P518.18)y, y el sado de
dos mil ochocientos sesenta y siete pesos con noventa y siete
centavos (P2,867.97), a Brita Marianne Lilius, por conducto de
su tutor;".
The remaining portion of the dispositive part of the decision of
the trial court is modified as follows:
"That from the sum of P13,181.33 pertaining to Aleko E. Lilius,
which is deposited with the clerk of the trial court, the following
claims shall first be paid:
Dr. W.H. Waterous
P1,500.00
Dr. M. Marfori
250.00
Laura Lindley Shuman
661.13
John R. McFie, Jr.
500.00
10
and the balance of the sum pertaining to Aleko E. Lilius shall
be divided among the following entities in proportion to their
respective claims:

Amount of claim

Erlanger & Galinger, Inc.

P3,672.76

Philippine Education Co., Inc.

3,695.20

Hamilton-Brown Shoe Co.

2045.00

Estrella del Norte

2,014.45

Eastern and Philippine Shipping Agencies, Ltd.

470.38

So ordered without special pronouncement as to costs.

11
[G.R. No. 107554. February 13, 1997]
CEBU INTERNATIONAL FINANCE CORPORATION,
petitioner, vs. COURT OF APPEALS, ROBERT ONG and ANG
TAY, respondents.
DECISION
KAPUNAN, J.:
In this petition for review on certiorari under Rule 45 of the
Revised Rules of Court, petitioner seeks to set aside the
decision of the Court of Appeals in CA-G.R. C.V. No. 26257
dated 2 July 1992 which affirmed the decision of the Regional
Trial Court in Civil Case No. CEB-6919, declaring the chattel
mortgage void and ordering petitioner and private respondent
Robert Ong to pay damages to private respondent Ang Tay.
The Court of Appeals' resolution dated 30 September 1992 is
similarly impugned for denying petitioner's motion for
reconsideration.
Gleaned from the records are the following facts:
On 4 March 1987, Jacinto Dy executed a Special Power of
Attorney[1] in favor of private respondent Ang Tay, authorizing
the latter to sell the cargo vessel owned by Dy and christened
LCT "Asiatic."
On 28 April 1987, through a Deed of Absolute Sale,[2] Ang Tay
sold the subject vessel to private respondent Robert Ong (Ong)
for P900,000.00. Ong paid the purchase price by issuing three
(3) checks in the following amounts: P150,000.00,
P600,000.00 and P150,000.00. However, since the payment
was not made in cash, it was specifically stipulated in the deed
of sale that the "LCT Asiatic shall not be registered or
transferred to Robert Ong until complete payment."[3]
Thereafter, Ong obtained possession of the subject vessel so
he could begin deriving economic benefits therefrom. He,
likewise, obtained copies of the unnotarized deed of sale
allegedly to be shown to the banks to enable him to acquire a
loan to replenish his (Ong's) capital. The aforequoted
condition, however, which was handwritten on the original deed
of sale does not appear on Ong's copies.
Contrary to the aforementioned agreements and without the
knowledge of Ang Tay, Ong had his copies of the deed of sale
(on which the aforementioned prohibition does not appear)
notarized on 18 May 1987.[4] Ong presented the notarized
deed to the Philippine Coast Guard which subsequently issued
him a Certificate of Ownership[5] and a Certificate of Philippine
Register[6] over the subject vessel on 27 May 1987. Ong also
succeeded in having the name of the vessel changed to LCT
"Orient Hope." Scslx
On 29 October 1987, Ong acquired a loan from petitioner in the
amount of P496,008.00 to be paid in installments as evidenced
by a promissory note of even date.[7]
As security for the loan, Ong executed a chattel mortgage over
the subject vessel,[8] which mortgage was registered with the
Philippine Coast Guard and annotated on the Certificate of
Ownership.[9] In paragraph 3 of the Deed of Chattel Mortgage,
it was stated that:
3. The said sum of FOUR HUNDRED NINETY SIX
THOUSAND EIGHT ONLY Pesos (P496 008.00) represents
the balance due on the purchase price of the above-described
property purchased by the MORTGAGOR(S) from the
MORTGAGEE and is payable in the office of the
MORTGAGEE at Cebu City or in the office of the latter's
assignee, in case the rights and interests of the MORTGAGEE
in the foregoing mortgage are assigned to a third person, under
the terms of said promissory note, as follows: (a) TWENTY
THOUSAND SIX HUNDRED SIXTY SEVEN ONLY** Pesos
(P20,667.00) on or before . . . and (b) the balance in Twenty
Four (24) equal successive monthly installments on the . . . day
of each and every succeeding month thereafter until the
amount is fully paid. The interest on the foregoing installments
shall be paid on the same date that the installments become
payable and additional interest at the rate of fourteen (14%)
per cent per annum will be charged on all amounts, principal
and interest, not paid on due date.[10] (Underscoring ours.)
Ong defaulted in the payment of the monthly installments.
Consequently, on 11 May 1988, petitioner sent him a letter[11]
demanding delivery of the mortgaged vessel for foreclosure or
in the alternative to pay the balance of P437,802.00 pursuant
to paragraph 11 of the deed of chattel mortgage.[12]
Meanwhile, the two checks (worth P600,000.00 and
P150,000.00) paid by Ong to Ang Tay for the Purchase of the
subject vessel bounced. Ang Tay's search for the elusive Ong
and all attempts to confer with him proved to be futile. A
subsequent investigation and inquiry with the Office of the
Coast Guard revealed that the subject vessel was already in
the name of Ong, in violation of the express undertaking
contained in the original deed of sale.
As a result thereof, on 13 January 1988, Ang Tay and Jacinto
Dy filed a civil case for rescission and replevin with damages
against Ong and his wife (docketed as Civil Case No. CEB-
6565) with the Regional Trial Court of Cebu City, Branch 10.
The trial court issued a writ of replevin and the subject vessel
was seized and subsequently delivered to Ang Tay.
On 9 March 1988, petitioner filed a motion for intervention but
withdrew the same on 29 April 1988. Instead, on 26 May 1988,
petitioner filed a separate case for replevin and damages
against Ong and "John Doe" (Ang Tay) with the same trial
court, docketed as Civil Case No. CEB-6919.
The trial court granted petitioner's prayer for replevin. The
vessel was seized and placed in the custody of the trial court.
However, Ang Tay posted a counterbond and the vessel was
returned to his possession.
On 3 October 1990 in CEB-6565, the trial court rendered a
decision in favor of Ang Tay and Jacinto Dy. The sale of the
subject vessel was rescinded, the registration of the vessel
with the Office of the Coast Guard and other government
agencies in Ong's name nullified and the vessel's registration
in Dy's name revived. Ong was, likewise, ordered to pay
Jacinto Dy and Ang Tay actual damages for lost income, moral
damages, attorney's fees and litigation expenses.[13]
The Court of Appeals affirmed the trial court's decision and
Ong's petition for review before this Court was dismissed for
lack of merit in a resolution dated 15 March 1993.
On the other hand, in CEB-6919, the subject of the present
appeal, the trial court in a decision dated 14 February 1990,
declared the chattel mortgage on the subject vessel null and
void and ordered petitioner and Ong to pay Ang Tay damages.
The dispositive portion states, thus:
WHEREFORE, in view of all the foregoing, the chattel
mortgage on the vessel LCT ORIENT HOPE is declared null
and void, rendering its annotation and registration at the back
12
of the Certificate of Ownership and Certificate of Philippine
Registry respectively, to be of no force and effect.
Plaintiff CIFC and defendant Robert Ong are hereby ordered to
pay jointly and severally to defendant Ang Tay the following
amounts: P50,000.00 as unrealized income during the five-day
period when the vessel was taken from Ang Tay's possession;
P100,000.00, representing the premiums Ang Tay paid for the
redelivery of the vessel to him and other expenses; P10,000.00
as actual expenses for the recovery of the vessel; P100,000.00
as moral damages; P50,000.00 as exemplary damages;
P40,000.00 as actual expenses in attending trials and litigation
expenses; and P30,000.00 as attorney's fees.
SO ORDERED.[14]
On 2 July 1992, the Court of Appeals affirmed in toto the
abovementioned decision.[15] Hence, the present petition for
review on certiorari.
Petitioner enumerates the alleged errors of the Court of
Appeals as follows:
I dispute then that it was Dy who was the seller and Ong the
THE COURT OF APPEALS ERRED IN BASING ITS
DECISION ON SPECULATION, CONJECTURE, AND
SURMISE, WHEN IT DECLARED THAT THE CONTRACT
BETWEEN CIFC AND ROBERT ONG WAS ONE OF SALE,
AND NOT LOAN (MUTUUM) WITH MORTGAGE.
II
THE RULING OF THE COURT OF APPEALS IS CONTRARY
TO EXISTING AND WELL-SETTLED JURISPRUDENCE
THAT A MORTGAGEE HAS THE RIGHT TO RELY ON WHAT
APPEARS IN THE CERTIFICATE OF OWNERSHIP (TITLE).
III
THE DECISION OF THE COURT OF APPEALS IS
REPUGNANT TO THE CLEAR RULING OF THE
HONORABLE COURT THAT BETWEEN TWO INNOCENT
PERSONS, THE ONE WHO MADE THE DAMAGE POSSIBLE
BY HIS ACT OF CONFIDENCE MUST BEAR THE LOSS.[16]
We grant the petition.
In upholding the nullity of the chattel mortgage on the subject
vessel, the Court of Appeals declared thus:
In Par. 3 of the Chattel Mortgage Contract executed between
appellants CIFC and Robert Ong, it was made to appear that
the subject vessel was sold by the plaintiff Cebu International
Finance Corporation to Robert Ong on installment. However,
there is no showing that appellant CIFC acquired the vessel in
question from either Jacinto Dy or Ang Tay, the owner of such
vessel. Since, CIFC appears to have sold the vessel in
question to Ong on installment basis, the said contract is null
and void, because CIFC was never the owner of the vessel.
Moreover, Robert Ong, CIFC's mortgagor, did not acquire
ownership of the vessel because of an express stipulation in
the Deed of Sale that the vessel "shall not be registered or
transferred to Robert Ong until complete payment." (Exh. "7-C-
1".) Since Ong clearly was not the owner of the vessel at the
time of the execution of the mortgage, the said mortgage is null
and void on that ground.
Furthermore, the evidence on record shows the chattel
mortgage in question did not comply with the requirements of
P.D. 1521, The Ship Mortgage Decree of 1978 . . . [17]
The Court of Appeals nullified the chattel mortgage contract
between petitioner and Ong because paragraph 3 of the said
contract (where it appeared that petitioner sold the subject
vessel to Ong on installment basis and that the amount
supposedly loaned to Ong represented the balance due on the
purchase price) seemed to indicate that the owner of the
vessel mortgaged was petitioner although it had been duly
established that another party (Jacinto Dy) was the true owner
thereof.[18]
We disagree with the aforequoted ruling of the Court of
Appeals. The chattel mortgage contract should not be viewed
in such a myopic context. The key lies in the certificate of
ownership issued in Ong's name (which, along with the deed of
sale, he submitted to petitioner as proof that he is the owner of
the ship he gave as security for his loan). It was plainly stated
therein that the ship LCT "Orient Hope" ex "Asiatic," by means
of a Deed of Absolute Sale dated 28 April 1987, was "sold and
transferred by Jacinto Dy to Robert Ong."[19] There can be no
buyer of the subject vessel. Coupled with the fact that there is
no evidence of any transaction between Jacinto Dy or Ang Tay
and petitioner, it follows, therefore, that petitioner's role in the
picture is properly and logically that of a creditor-mortgagee
and not owner-seller. It is paragraph 2 of the mortgage
contract[20] which accurately expresses the true nature of the
transaction between petitioner and Ong -- that it is a simple
loan with chattel mortgage. The amount petitioner loaned to
Ong does not represent the balance of any purchase price
since, as we have previously discussed, the aforementioned
documents state that Ong is already the absolute owner of the
subject vessel. Obviously, therefore, paragraph 3 of the said
contract was filled up by mistake. Considering that petitioner
used a form contract, it is not improbable that such an
oversight may have been committed -- negligently but
unintentionally and without malice. As testified to by Mr.
Benjamin C. Alfaro, petitioner's Senior Vice President for
Operations they only use one form for several kinds of
transaction:
ATTY. UY: (TO WITNESS)
Q: Mr. Alfaro, as a financing institution, Cebu International
Finance Corporation, how many kinds of lending transaction do
you have in a firm? Do you have financing, leasing, discounting
or whatever? Can you explain briefly to the Honorable Court?
WITNESS:
A: We have direct loan transaction. We have financing
transaction and we have leasing transaction. Now, in the
leasing transaction, the document will show that we are the
owner of the equipment and we leased it out. In the financing
transaction, where we used the same Chattel Mortgage
instrument, there are three parties involved, the seller of the
equipment. And then, the seller of the equipment would sell or
assign the contract with the financing company. That is the
financing transaction. And in the simple loan transaction, there
appears only two parties involved, the borrower and the lender.
ATTY. UY: (TO WITNESS)
Q: Now, Mr. Alfaro, the same document, Chattel Mortgage will
apply also to financing transaction, leasing transaction and
simple loan transaction?
13

WITNESS:
A: Simple loan and financing transactions.
ATTY. UY: (TO WITNESS)
Q: Now, Mr. Alfaro, this paragraph 2 of Chattel Mortgage, can
this apply to a financing transaction?
WITNESS:
A: No, the paragraph 3 will be the one that is applicable to a
financing transaction. (Witness reading the document and after
reading continued) Paragraph 2 applies to both financing and
simple loan transaction.Scslx
ATTY. UY:
Q: And paragraph 3?
WITNESS:
A: Paragraph 3 applies to both financing and lending
transactions but paragraph 3 does not apply to simple lending
transaction.
xxx [21]
ATTY. LOGRONIO: (TO WITNESS)
Q: You do not affirm the assertion made by your counsel that
paragraph 3 arise only in case that your rights to a mortgage
were assigned by you to a third person, do you agree that
also?
WITNESS:
A: This form of chattel mortgage, in fact, you will notice that the
portion for mortgagor and mortgagee are all blank because this
is the same form which is used by the company, used for the
parties when there is a dealer involved, when there is
installment buyer involved and when we come in as third party
purchaser of the document because as practiced by the
different dealer, this is the same form used between the buyer
and the dealer of the motor vehicle. After this is being
consummated already, it is assigned to a finance company and
these are the same documents used. Now, in this particular
case, this becomes already . . . this is a direct transaction
between the finance company and the borrower. We, the
finance company becomes the direct lender and Mr. Ong
became the direct borrower. As I explained earlier, this
document is also the form used between a dealer of a motor
vehicle and an installment buyer wherein after paying the down
payment, the unpaid balance which is secured by the chattel
mortgage, the promissory note, and the disclosure statement
and this document is sold to a third party and that is the finance
company by the dealer.Scslx
ATTY. LOGRONIO:
Q: Up to this point, when you had the transaction with Mr. Ong,
this form that you executed, the Chattel Mortgage was in what
kind of form that was already used by the company?
WITNESS:
A: These are forms available to us.
ATTY. LOGRONIO:
Q: This is a form used when there is a buyer and a . . .
WITNESS:
A: Third party or direct borrowing lender.
ATTY. LOGRONIO:
Q: And this refers to a direct borrower or lending transaction?
WITNESS:
A: Yes.
ATTY. LOGRONIO:
Q: No third party assignment has been involved so far?
WITNESS:
A: No.
xxx [22]
Accordingly, the chattel mortgage contract between petitioner
and Ong is valid and subsisting.
The next issue for our determination is whether or not
petitioner is a mortgagee in good faith whose lien over the
mortgaged vessel should be respected.
The prevailing jurisprudence is that a mortgagee has a right to
rely in good faith on the certificate of title of the mortgagor to
the property given as security and in the absence of any sign
that might arouse suspicion, has no obligation to undertake
further investigation. Hence, even if the mortgagor is not the
rightful owner of or does not have a valid title to the mortgaged
property, the mortgagee or transferee in good faith is
nonetheless entitled to protection.[23] Although this rule
generally pertains to real property, particularly registered land,
it may also be applied by analogy to personal property, in this
case specifically, since shipowners are, likewise, required by
law to register their vessels with the Philippine Coast Guard.
Private respondent Ang Tay, however, contends that the
aforementioned rule does not apply in the case at bar in the
face of the numerous "badges of bad faith" on the part of
petitioner.
Capitalizing on paragraph 3 of the chattel mortgage contract,
Ang Tay argues as follows:
. . . The fraud and conspiracy by Robert Ong and some
responsible employees of CIFC against Jacinto Dy and Ang
Tay are thus brought to the open by this stipulation. Since
CIFC appears in the registered chattel mortgage to have sold
the vessel in question to Robert Ong, the said contract is null
and void because CIFC never for a second or a moment
became the owner of the vessel. CIFC was the one who
prepared the chattel mortgage and the one who registered the
same without contemporaneous or subsequent correction or
modification; it cannot, after it notified the public by means of
registration that it acquired the vessel and became its owner,
now shy away from a stipulation which is the heart and nerve-
center of the contract and which it made and registered. This is
both the essence and consequence of estoppel. Applicable is
Article 1459 of the Civil Code which provides inter alia: ". . . the
14
vendor must have a right to transfer the ownership thereof (the
thing sold) at the time it is delivered."
2. Robert Ong, CIFC's mortgagor, did not acquire ownership of
the vessel because of an express stipulation which he signed
that the vessel "shall not be registered or transferred to Robert
Ong until complete payment." (Exh. "7-C-1".) This stipulation is
expressly covered by Article 1478 of the Civil Code: "The
parties may stipulate that ownership in the thing shall not pass
to the purchaser until he has fully paid the price." Since Ong
clearly was not the owner of the vessel at the time of the
execution of the mortgage, the said mortgage is null and void
on that ground.[24] Scslx
Ang Tay's contentions are unmeritorious. As previously
discussed, paragraph 3 of the chattel mortgage contract was
erroneously but unintentionally filled up. The failure of
petitioner to exercise due care in filling up the necessary
provisions in the chattel mortgage contract does not, however,
amount to bad faith. It was a mere oversight and not a
deliberate and malicious act.
Petitioner's bad faith is further demonstrated, Ang Tay avers,
by its failure to comply with the following requirements of P.D.
No. 1521 or the Ship Mortgage Decree of 1978:
1) The loan secured by the mortgaged vessel was not for any
of purposes specified in Sec. 2 of P.D. No. 1521, i.e.,
"financing the construction, acquisition, purchase of vessels or
initial operation of vessels"[25] and that petitioner failed to
furnish the Central Bank a copy of the mortgage;[26]
2) The special affidavit of good faith required in Sec. 4 of P.D.
No. 1521 was lacking; and
3) Ong failed to disclose his creditors and lienors as provided
in Sec. 6 of P.D. No. 1521.
There is no merit in private respondent's allegations. In the 9
November 1989 hearing, Ang Tay confirmed his statement in
his affidavit, executed in Civil Case No. CEB-6565, that Ong
wanted to obtain a loan to replenish his capital because he had
used up his money in the purchase of the subject vessel[27]
and that the ship was delivered to Ong so that he could begin
deriving economic benefits therefrom.[28] Mr. Randolph
Veloso, petitioner's collector, processing clerk, credit
investigator and appraiser, further testified as follows:
xxx
Q: Do you know the purpose for that loan
A: Yes.
Q: What was his purpose?
A: He was going to mortgage the vessel to us.
Q: What was the purpose of the loan?
A: We don't usually ask our client what they will do with it.
Q: You don't ask the purpose?
A: It is understood that whenever a client approach the
institution he usually has a purpose for the money.
Q: Did not the corporation was what need has he for the
money?
A: He is going to use it for his business in the boat.
Q: And that is his only statement? What was his specific
statement?
ATTY. UY:
Already answered. He will use it in the business of his boat.
ATTY. LOGRONIO:
What was the purpose.
ATTY. UY:
Already answered Your Honor and besides it is immaterial.
ATTY. LOGRONIO:
Very material and it is important Your Honor as there is a
violation of the law. I am entitled to insist for the answer.
COURT:
Witness may answer, if he knows.
(TO WITNESS)
Q: Did he tell you what was the purpose?
A: For the business of the boat.
ATTY. LOGRONIO: (TO WITNESS)
Q: That's all, that he is going to use the money for the business
of the boat?
A: Yes.
xxx [29]
From the foregoing, therefore, it can be readily deduced that
the loan was for the initial operation of the subject vessel and
thus falls under the purposes laid down in the Ship Mortgage
Decree.
The special affidavit of good faith, on the other hand, is
required only for the purpose of transforming an already valid
mortgage into a "preferred mortgage."[30] Thus, the
abovementioned affidavit is not necessary for the validity of the
chattel mortgage itself but only to give it a preferred status.
As to the disclosure requirement in Sec. 6 of the Ship
Mortgage Decree,[31] it was intentional on Ong's part not to
inform petitioner that he had yet to pay in full the purchase
price of the subject vessel. Ong presented himself to petitioner
as the absolute owner of the LCT "Orient Hope" ex "Asiatic."
The Certificate of Ownership in Ong's name showed that the
ship was conveyed to him by means of a Deed of Absolute
Sale which gave the idea that the purchase price had been
fully paid and the sale completed.
Petitioner had every right to rely on the Certificate of
Ownership and Certificate of Philippine Register duly issued by
the Philippine Coast Guard in Ong's name. Petitioner had no
reason to doubt Ong's ownership over the subject vessel. The
documents presented by Ong, upon petitioner's insistence
15
before accepting the said vessel as loan security, were all in
order and properly issued by the duly constituted authorities. Mark it.
There was no circumstance that might have aroused
petitioner's suspicion or alerted it to any infirmity committed by ATTY. LOGRONIO: (TO WITNESS)
Ong. It had no participation in and was not privy to the sale
transaction between Jacinto Dy (through Ang Tay) and Ong. Q: So, at the time that the vessel was submitted to you as
Petitioner, thus, had no obligation to undertake further collateral for the loan, the condition of the vessel was as it is
investigation since it had the necessary documents to prove reflected in this exhibit? (Cross-examiner referring to the
Ong's ownership. In addition, petitioner even took pains to picture).
inspect the subject vessel which was in Ong's possession. Mr.
Benjamin C. Alfaro testified thus: WITNESS:

xxx A: Yes.

ATTY. LOGRONIO: xxx [32]

Q: In your credit investigation of Mr. Robert Ong, did you have Anent the last issue, although Ang Tay may also be an
a chance yourself or any of your employees to verify the innocent person, a similar victim of Ong's fraudulent
condition and the location of the vessel at the very time? machinations, it was his act of confidence which led to the
present fiasco. Ang Tay readily agreed to execute a deed of
WITNESS: absolute sale in Ong's favor even though Ong had yet to make
a complete payment of the purchase price. It is true that in the
A: Yes. copy of the said deed submitted in evidence by Ang Tay there
was an undertaking that ownership will not vest in Ong until full
ATTY. LOGRONIO: payment.[33] However, Ong was able to obtain several copies
of the deed[34] with Ang Tay's signature and had these
Q: Will you tell the Court where was the vessel at the time that notarized without the aforementioned undertaking, as
he applied for a loan with your bank? evidenced by the copy of the deed of sale presented by
petitioner.[35] The Deed of Absolute Sale consisted of two (2)
WITNESS: pages. The signatures of Ang Tay and Ong appeared only on
the first page of the deed. The second page contained the
A: It was under finishing touches in the drydock in . . . I think in continuation of the acknowledgment and the undertaking. Ong
Lapulapu or Mandaue. could have easily reproduced the second page without the
undertaking since this page was not signed by the contracting
ATTY. LOGRONIO: parties. To complete the deception, Ang Tay unwittingly
allowed Ong to have possession of the ship. Hence, in
Q: So, more or less, you are sure that at the time that he consonance with our ruling that:
applied for a loan and you approved the same, this vessel was
still at the drydock? . . . as between two innocent persons, the mortgagee and the
owner of the mortgaged property, one of whom must suffer the
WITNESS: consequence of a breach of trust, the one who made it
possible by his act of confidence must bear the loss.[36]
A: Yes, finishing touches. In fact, it had pictures to support the
application. I don't know if we have it now. it is Ang Tay and his principal Jacinto Dy, who must,
unfortunately, suffer the consequences thereof. They are
ATTY. UY: considered bound by the chattel mortgage on the subject
vessel.
We have. (Counsel producing a picture of a vessel and
handing it to the witness). WHEREFORE, this Court GRANTS the Petition for Review and
REVERSES the questioned decision and resolution of the
WITNESS: (Cont.) Court of Appeals. The validity of the chattel mortgage on the
vessel LCT ORIENT HOPE is hereby upheld without prejudice
This is the picture of the vessel because we required him to to whatever legal remedies private respondent Ang Tay may
submit. have against private respondent Robert Ong in the premises.

ATTY. LOGRONIO SO ORDERED.

Q: You are referring to the picture which you asked the Court
to mark as Exhibit . . .

ATTY. UY:

No, we are requesting now Your Honor. This has not been
marked yet. We asked that the picture showing the back
portion of the vessel, Orient Hope be marked as Exhibit 'I' and
the picture showing the front portion of the vessel as Exhibit 'I-
1"

COURT: (TO INTERPRETER)

16
G.R. No. L-68010 May 30, 1986
FILIPINAS MABLE CORPORATION, petitioner,
vs.
THE HONORABLE INTERMEDIATE APPELLATE COURT,
THE HONORABLE CANDIDO VILLANUEVA, Presiding Judge
of Br. 144, RTC, Makati, DEVELOPMENT BANK OF THE
PHILIPPINES (DBP), BANCOM SYSTEMS CONTROL, INC.
(Bancom), DON FERRY, CASIMERO TANEDO, EUGENIO
PALILEO, ALVARO TORIO, JOSE T. PARDO, ROLANDO
ATIENZA, SIMON A. MENDOZA, Sheriff NORVELL R. LIM,
respondents.
Vicente Millora for petitioner.
Jesus A. Avencena and Bonifacio M. Abad for respondents.
GUTIERREZ, JR., J.:
This petition for review seeks to annul the decision and
resolution of the appellate court which upheld the trial court's
decision denying the petitioner's prayer to enjoin the
respondent from foreclosing on its properties.
On January 19, 1983, petitioner Filipinas Marble Corporation
filed an action for nullification of deeds and damages with
prayer for a restraining order and a writ of preliminary
injunction against the private respondents. In its complaint, the
petitioner alleged in substance that it applied for a loan in the
amount of $5,000,000.00 with respondent Development Bank
of the Philippines (DBP) in its desire to develop the fun
potentials of its mining claims and deposits; that DBP granted
the loan subject, however, to sixty onerous conditions, among
which are: (a) petitioner shall have to enter into a management
contract with respondent Bancom Systems Control, Inc.
[Bancom]; (b) DBP shall be represented by no less than six (6)
regular directors, three (3) to be nominated by Bancom and
three (3) by DBP, in Filipinos Marble's board, one of whom
shall continue to be the chairman of the board; (c) the key
officers/executives [the President and the officers for finance,
marketing and purchasing] to be chosen by Bancom for the
corporation shall be appointed only with DBP's prior approval
and all these officers are to be made directly responsible to
DBP; DBP shall immediately designate Mr. Alvaro Torio,
Assistant Manager of DBP's Accounting Department as DBP's
Comptroller in the firm whose compensation shall be borne by
Filipinas Marble; and (d) the $5 Million loan shall be secured
by: 1) a final mortgage on the following assets with a total
approved value of P48,630,756.00 ... ; 2) the joint and several
signatures with Filipinas Marble of Mr. Pelagio M. Villegas, Sr.,
Trinidad Villegas, and Jose E. Montelibano and 3) assignment
to DBP of the borrower firm's right over its mining claims; that
pursuant to these above- mentioned and other "take it or leave
it" conditions, the petitioner entered into a management
contract with Bancom whereby the latter agreed to manage the
plaintiff company for a period of three years; that under the
management agreement, the affairs of the petitioner were
placed under the complete control of DBP and Bancom
including the disposition and disbursement of the $5,000,000
or P37,600,000 loan; that the respondents and their
directors/officers mismanaged and misspent the loan, after
which Bancom resigned with the approval of DBP even before
the expiration date of the management contract, leaving
petitioner desolate and devastated; that among the acts and
omissions of the respondents are the following. (a) failure to
purchase all the necessary machinery and equipment needed
by the petitioner's project for which the approved loan was
intended; (b) failure to construct a processing plant; (c)
abandonment of imported machinery and equipment at the
pier, (d) purchase of unsuitable lot for the processing plant at
Binan; (e) failure to develop even a square meter of the
quarries in Romblon or Cebu; and (f) nearly causing the loss of
petitioner's rights over its Cebu claims; and that instead of
helping petitioner get back on its feet, DBP completely
abandoned the petitioner's project and proceeded to foreclose
the properties mortgaged to it by petitioner without previous
demand or notice.
In essence, the petitioner in its complaint seeks the annulment
of the deeds of mortgage and deed of assignment which it
executed in favor of DBP in order to secure the $5,000,000.00
loan because it is petitioner's contention that there was no loan
at all to secure since what DBP "lent" to petitioner with its right
hand, it also got back with its left hand; and that, there was
failure of consideration with regard to the execution of said
deeds as the loan was never delivered to the petitioner. The
petitioner further prayed that pending the trial on the merits of
the case, the trial court immediately issue a restraining order
and then a writ of preliminary injunction against the sheriffs to
enjoin the latter from proceeding with the foreclosure and sale
of the petitioner's properties in Metro Manila and in Romblon.
Respondent DBP opposed the issuance of a writ of preliminary
injunction stating that under Presidential Decree No. 385,
DBP's right to foreclose is mandatory as the arrearages of
petitioner had already amounted to P123,801,265.82 as
against its total obligation of P151,957,641.72; that under the
same decree, no court can issue any restraining order or
injunction against it to stop the foreclosure since Filipinas
Marble's arrearages had already reached at least twenty
percent of its total obligations; that the alleged non-receipt of
the loan proceeds by the petitioner could, at best, be accepted
only in a technical sense because the money was received by
the officers of the petitioner acting in such capacity and,
therefore, irrespective of whoever is responsible for placing
them in their positions, their receipt of the money was receipt
by the petitioner corporation and that the complaint does not
raise any substantial controversy as to the amount due under
the mortgage as the issues raised therein refer to the propriety
of the manner by which the proceeds of the loan were
expended by the petitioner's management, the allegedly
precipitate manner with which DBP proceeded with the
foreclosure, and the capacity of the DBP to be an assignee of
the mining lease rights.
After a hearing on the preliminary injunction, the trial court
issued an order stating:
The Court has carefully gone over the evidence presented by
both parties, and while it sympathizes with the plight of the
plaintiff and of the pitiful condition it now has found itself, it
cannot but adhere to the mandatory provisions of P.D. 385.
While the evidence so far presented by the plaintiff corporation
appears to be persuasive, the same may be considered
material and relevant to the case. Hence, despite the
impressive testimony of the plaintiff's witnesses, the Court
believes that it cannot enjoin the defendant Development Bank
of the Philippines from complying with the mandatory
provisions of the said Presidential Decree. It having been
shown that plaintiff's outstanding obligation as of December 31,
1982 amounted to P151,957,641.72 and with arrearages
reaching up to 81 % against said total obligation, the Court
finds the provisions of P.D. 385 applicable to the instant case.
It is a settled rule that when the statute is clear and
unambiguous, there is no room for interpretation, and all that it
has to do is to apply the same.
On appeal, the Intermediate Appellate Court upheld the trial
court's decision and held:
17

While petitioner concedes 'that Presidential Decree No. 385
applies only where it is clear that there was a loan or where the
loan is not denied' (p. 14-petition), it disclaims receipt of the $5
million loan nor benefits derived therefrom and bewails the
onerous conditions imposed by DBP Resolution No. 385 dated
December 7, 1977, which allegedly placed the petitioner under
the complete control of the private respondents DBP and
Bancom Systems Control Inc. (Bancom, for short). The
plausibility of petitioner's statement that it did Dot receive the
$5 million loan is more apparent than real. At the hearing for
injunction before the counsel for DBP stressed that
$2,625,316.83 of the $5 million loan was earmarked to finance
the acquisition of machinery, equipment and spare parts for
petitioner's Diamond gangsaw which machineries were actually
imported by petitioner Filipinas Marble Corporation and arrived
in the Philippines. Indeed, a summary of releases to petitioner
covering the period June 1978 to October 1979 (Exh. 2,
Injunction) showed disbursements amounting to millions of
pesos for working capital and opening of letter of credits for the
acquisition of its machineries and equipment. Petitioner does
not dispute that releases were made for the purchase of
machineries and equipment but claims that such imported
machineries were left to the mercy of the elements as they
were never delivered to it.
xxx xxxxxx
Apart from the foregoing, petitioner is patently not entitled to a
writ of preliminary injunction for it has not demonstrated that at
least 20% of its outstanding arrearages has been paid after the
foreclosure proceedings were initiated. Nowhere in the record
is it shown or alleged that petitioner has paid in order that it
may fall within the exception prescribed on Section 2,
Presidential Decree No. 385.
Dissatisfied with the appellate court's decision, the petitioner
filed this instant petition with the following assignments of
errors:
1. There being 'persuasive' evidence that the $5 million
proceeds of the loan were not received and did not benefit the
petitioner per finding of the lower court which should not be
disturbed unless there is grave abuse of discretion, it must
follow that PD 385 does not and cannot apply;
2. If there was no valid loan contract for failure of
consideration, the mortgage cannot exist or stand by itself
being a mere accessory contract. Additionally, the chattel
mortgage has not been registered. Therefore, the same is null
and void under Article 2125 of the New Civil Code; and
3. PD 385 is unconstitutional as a 'class legislation', and
violative of the due process clause.
With regard to the first assignment of error, the petitioner
maintains that since the trial court found "persuasive evidence"
that there might have been a failure of consideration on the
contract of loan due to the manner in which the amount of $5
million was spent, said court committed grave abuse of
discretion in holding that it had no recourse but to apply P.D.
385 because the application of this decree requires the
existence of a valid loan which, however, is not present in
petitioner's case. It likewise faults the appellate court for
upholding the applicability of the said decree.
Sections 1 and 2 of P.D. No. 385 respectively provide:
Section 1. It shall be mandatory for government financial
institutions after the lapse of sixty (60) days from the issuance
of this Decree, to foreclose the collaterals and/or securities for
any loan, credit accommodation, and/or guarantees granted by
them whenever the arrearages on such account, including
accrued interest and other charges, amount to at least twenty
(20%) of the total outstanding obligations, including interest
and other charges, as appearing in the book of accounts
and/or related records of the financial institution concerned.
This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies
available to them under their respective contracts with their
debtors, including the right to foreclose on loans, credits,
accommodations, and/or guarantees on which the arrearages
are less than twenty percent (20%).
Section 2. No restraining order, temporary or permanent
injunction shall be issued by the court against any government
financial institution in any action taken by such institution in
compliance with the mandatory foreclosure provided in Section
1 hereof, whether such restraining order, temporary or
permanent injunction is sought by the borrower(s) or any third
party or parties, except after due hearing in which it is
established by the borrower, and admitted by the government
financial institution concerned that twenty percent (20%) of the
outstanding arrearages has been paid after the filing of
foreclosure proceedings.
Presidential Decree No. 385 was issued primarily to see to it
that government financial institutions are not denied substantial
cash inflows, which are necessary to finance development
projects all over the country, by large borrowers who, when
they become delinquent, resort to court actions in order to
prevent or delay the government's collection of their debts and
loans.
The government, however, is bound by basic principles of
fairness and decency under the due process clause of the Bill
of Rights. P.D. 385 was never meant to protect officials of
government lending institutions who take over the
management of a borrower corporation, lead that corporation
to bankruptcy through mismanagement or misappropriation of
its funds, and who, after ruining it, use the mandatory
provisions of the decree to avoid the consequences of their
misdeeds.
The designated officers of the government financing institution
cannot simply walk away and then state that since the loans
were obtained in the corporation's name, then P.D. 385 must
be peremptorily applied and that there is no way the borrower
corporation can prevent the automatic foreclosure of the
mortgage on its properties once the arrearages reach twenty
percent (20%) of the total obligation no matter who was
responsible.
In the case at bar, the respondents try to impress upon this
Court that the $5,000,000.00 loan was actually granted and
released to the petitioner corporation and whatever the
composition of the management which received the loan is of
no moment because this management was acting in behalf of
the corporation. The respondents also argue that since the
loan was extended to the corporation, the releases had to be
made to the then officers of that borrower corporation.
Precisely, what the petitioner is trying to point out is that the
DBP and Bancom people who managed Filipinas Marble
misspent the proceeds of the loan by taking advantage of the
positions that they were occupying in the corporation which
resulted in the latter's devastation instead of its rehabilitation.
18
The petitioner does not question the authority under which the
loan was delivered but stresses that it is precisely this authority
which enabled the DBP and Bancom people to misspend and
misappropriate the proceeds of the loan thereby defeating its
very purpose, that is, to develop the projects of the corporation.
Therefore, it is as if the loan was never delivered to it and thus,
there was failure on the part of the respondent DBP to deliver
the consideration for which the mortgage and the assignment
of deed were executed.
We cannot, at this point, conclude that respondent DBP
together with the Bancom people actually misappropriated and
misspent the $5 million loan in whole or in part although the
trial court found that there is "persuasive" evidence that such
acts were committed by the respondent. This matter should
rightfully be litigated below in the main action. Pending the
outcome of such litigation, P.D. 385 cannot automatically be
applied for if it is really proven that respondent DBP is
responsible for the misappropriation of the loan, even if only in
part, then the foreclosure of the petitioner's properties under
the provisions of P.D. 385 to satisfy the whole amount of the
loan would be a gross mistake. It would unduly prejudice the
petitioner, its employees and their families.
Only after trial on the merits of the main case can the true
amount of the loan which was applied wisely or not, for the
benefit of the petitioner be determined. Consequently, the
extent of the loan where there was no failure of consideration
and which may be properly satisfied by foreclosure
proceedings under P.D. 385 will have to await the presentation
of evidence in a trial on the merits. As we have ruled in the
case of Central Bank of the Philippines vs. Court of Appeals, (1
39 SCRA 46, 5253; 56):
When Island Savings Bank and Sulpicio M. Tolentino entered
into an P80,000.00 loan agreement on April 28, 1965, they
undertook reciprocal obligations, the obligation or promise of
each party is the consideration for that of the othe. (Penacio vs.
Ruaya, 110 SCRA 46 [1981]; ...
xxxxxxxxx
The fact that when Sulpicio M. Tolentino executed his real
estate mortgage, no consideration was then in existence, as
there was no debt yet because Island Savings Bank had not
made any release on the loan, does not make the real estate
mortgage void for lack of consideration. It is not necessary that
any consideration should pass at the time of the execution of
the contract of real mortgage (Bonnevie vs. Court of Appeals,
125 SCRA 122 [1983]. It may either be a prior or subsequent
matter. But when the consideration is subsequent to the
mortgage, the mortgage can take effect only when the debt
secured by it is created as a binding contract to pay (Parks vs.
Sherman, Vol. 2, pp. 5-6). And, when there is partial failure of
consideration, the mortgage becomes unenforceable to the
extent of such failure (Dow, et al. vs. Poore Vol. 172 N.E. p. 82,
cited in Vol. 59, 1974 ed. C.J.S. p. 138). ...
Under the admitted circumstances of this petition, we,
therefore, hold that until the trial on the merits of the main case,
P.D. 385 cannot be applied and thus, this Court can restrain
the respondents from foreclosing on petitioner's properties
pending such litigation.
The respondents, in addition, assert that even if the $5 million
loan were not existing, the mortgage on the properties sought
to be foreclosed was made to secure previous loans of the
petitioner with respondent and therefore, the foreclosure is still
justified.
This contention is untenable. Two of the conditions imposed by
respondent DBP for the release of the $5 million loan
embodied in its letter to petitioner dated December 21, 1977
state:
A. The interim loan of $289,917.32 plus interest due thereon
which was used for the importation of one Savage Diamond
Gangsaw shall be liquidated out of the proceeds of this $5
million loan. In addition, FMC shall also pay DBP, out of the
proceeds of above foreign currency loan, the past due amounts
on obligation with DBP.
xxxxxxxxx
B. Conversion into preferred shares of P 2 million of FMCs total
obligations with DBP as of the date the legal documents for this
refinancing shall have been exempted or not later than 90 days
from date of advice of approval of this accommodation.
The above conditions lend credence to the petitioner's
contention that the "original loan had been converted into
'equity shares', or preferred shares; therefore, to all intents and
purposes, the only 'loan' which is the subject of the foreclosure
proceedings is the $5 million loan in 1978. "
As regards the second assignment of error, we agree with the
petitioner that a mortgage is a mere accessory contract and,
thus, its validity would depend on the validity of the loan
secured by it. We, however, reject the petitioner's argument
that since the chattel mortgage involved was not registered, the
same is null and void. Article 2125 of the Civil Code clearly
provides that the non-registration of the mortgage does not
affect the immediate parties. It states:
Art. 2125. In addition to the requisites stated in article
2085, it is indispensable, in order that a mortgage may be
validly constituted that the document in which it appears be
recorded in the Registry of Property. If the instrument is not
recorded, the mortgage is nevertheless binding between the
parties.
xxx xxxxxx
The petitioner cannot invoke the above provision to nullify the
chattel mortgage it executed in favor of respondent DBP.
We find no need to pass upon the constitutional issue raised in
the third assignment of error. We follow the rule started in Alger
Electric, Inc. vs. Court of Appeals, (135 SCRA 37, 45).
We see no necessity of passing upon the constitutional issues
raised by respondent Northern. This Court does not decide
questions of a constitutional nature unless absolutely
necessary to a decision of a case. If there exists some other
grounds of construction, we decide the case on a non-
constitutional determination. (See Burton vs. United States,
196 U.S. 283; Siler vs. Luisville & Nashville R. Co., 123 U.S.
175; Berta College vs. Kentucky, 211 U.S. 45).
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is
GRANTED. The orders of the Intermediate Appellate Court
dated April 17, 1984 and July 3, 1984 are hereby ANNULLED
and SET ASIDE. The trial court is ordered to proceed with the
trial on the merits of the main case. In the meantime, the
temporary restraining order issued by this Court on July 23,
1984 shall remain in force until the merits of the main case are
resolved.
SO ORDERED.
19
G.R. No. 194642, April 06, 2015
NUNELON R. MARQUEZ, Petitioner, v. ELISAN CREDIT
CORPORATION, Respondents.
DECISION
BRION, J.:
We resolve the present petition for review on certiorari1
assailing the May 17, 2010 decision2 and the November 25,
2010 resolution3 of the Court of Appeals (CA) in CA-G.R. SP
No. 102144.4redarclaw
The Factual Antecedents
On December 16, 1991, Nunelon R. Marquez (petitioner)
obtained a (first loan) from Elisan Credit Corporation
(respondent) for fifty-three thousand pesos (Php 53,000.00)
payable in one-hundred eighty (180) days.5redarclaw
The petitioner signed a promissory note which provided that it
is payable in weekly installments and subject to twenty-six
percent (26%) annual interest. In case of non-payment, the
petitioner agreed to pay ten percent (10%) monthly penalty
based on the total amount unpaid and another twenty-five
percent (25%) of such amount for attorney's fees exclusive of
costs, and judicial and extrajudicial expenses.6redarclaw
To further secure payment of the loan, the petitioner executed
a chattel mortgage7 over a motor vehicle. The contract of
chattel mortgage provided among others, that the motor
vehicle shall stand as a security for the first loan and "all other
obligations of every kind already incurred or which may
hereafter be incurred."8redarclaw
Both the petitioner and respondent acknowledged the full
payment of the first loan.9redarclaw
Subsequently, the petitioner obtained another loan (second
loan) from the respondent for fifty-five thousand pesos
(P55,000.00) evidenced by a promissory note10 and a cash
voucher11 both dated June 15, 1992.
The promissory note covering the second loan contained
exactly the same terms and conditions as the first promissory
note.
When the second loan matured on December 15, 1992, the
petitioner had only paid twenty-nine thousand nine hundred
sixty pesos (P29,960.00), leaving an unpaid balance of twenty
five thousand forty pesos (P25,040.00).12redarclaw
Due to liquidity problems, the petitioner asked the respondent if
he could pay in daily installments (daily payments) until the
second loan is paid. The respondent granted the petitioner's
request. Thus, as of September 1994 or twenty-one (21)
months after the second loan's maturity, the petitioner had
already paid a total of fifty-six thousand four-hundred forty
pesos (P56,440.00), an amount greater than the
principal.13redarclaw
Despite the receipt of more than the amount of the principal,
the respondent filed a complaint for judicial foreclosure of the
chattel mortgage because the petitioner allegedly failed to
settle the balance of the second loan despite
demand.14redarclaw
The respondent further alleged that pursuant to the terms of
the promissory note, the petitioner's failure to fully pay upon
maturity triggered the imposition of the ten percent (10%)
monthly penalty and twenty-five percent (25%) attorney's fees.
The respondent prayed that the petitioner be ordered to pay
the balance of the second loan plus accrued penalties and
interest.15redarclaw
Before the petitioner could file an answer, the respondent
applied for the issuance of a writ of replevin. The MTC issued
the writ and by virtue of which, the motor vehicle covered by
the chattel mortgage was seized from the petitioner and
delivered to the respondent.16redarclaw
Trial on the merits thereafter ensued.
The MTC Ruling17
The MTC found for the petitioner and held that the second loan
was fully extinguished as of September 1994.
It held that when an obligee accepts the performance or
payment of an obligation, knowing its incompleteness or
irregularity and without expressing any protest or objection, the
obligation is deemed fully complied with.18 The MTC noted
that the respondent accepted the daily payments made by the
petitioner without protest. The second loan having been fully
extinguished, the MTC ruled that respondent's claim for
interests and penalties plus the alleged unpaid portion of the
principal is without legal basis.
The MTC ordered:LawlibraryofCRAlaw
"the plaintiff Elisan Credit Corporation to return/deliver the
seized motor vehicle with Plate No. UV-TDF-193 to the
possession of the defendant and in the event its delivery is no
longer possible, to pay the defendant the amount of
P30,000.00 corresponding to the value of the said vehicle;"
"the bonding company People's Trans-East Asia Insurance
Corporation to pay the defendant the amounts of P20,000.00
and P5,000.00 representing the damages and attorney's fees
under P.T.E.A.LC Bond No. JCL (13)-00984;"
"the plaintiff is likewise directed to surrender to the defendant
the originals of the documents evidencing indebtedness in this
case so as to prevent further use of the same in another
proceeding."
The RTC Ruling19
Except for the MTC's order directed to the bonding company,
the RTC initially affirmed the ruling of the MTC.
Acting on the respondent's motion for reconsideration, the RTC
reversed itself. Citing Article 1253 of the Civil Code, it held that
"if the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
covered." It also sustained the contention of the respondent
that the chattel mortgage was revived when the petitioner
executed the promissory note covering the second loan.
The RTC ordered:LawlibraryofCRAlaw
"the defendant to pay the plaintiff the following: a) P25,040.00,
plus interest thereon at the rate of 26% per annum and
penalties of 10% per month thereon from due date of the
second promissory note until fully paid, b) 25% of the
defendant's outstanding obligation as and for attorney's fees, c)
costs of this suit;"
20
"the foreclosure of the chattel mortgage dated December 16,
1991 and the sale of the mortgaged property at a public
auction, with the proceeds thereof to be applied as and in
payment of the amounts awarded in a and b above."
The CA Ruling20
The CA affirmed the RTC's ruling with modification.
The CA observed that the disparity in the amount loaned and
the amount paid by the petitioner supports the respondent's
view that the daily payments were properly applied first for the
payment of interests and not for the principal.
According to the CA, if the respondent truly condoned the
payment of interests as claimed by the petitioner, the latter did
not have to pay an amount in excess of the principal. The CA
believed the petitioner knew his payments were first applied to
the interests due.
The CA held that Article 1253 of the Civil Code is clear that if
debt produces interest, payment of the principal shall not be
deemed made until the interests have been covered. It ruled
that even if the official receipts issued by the respondent did
not mention that the payments were for the interests, the
omission is irrelevant as it is deemed by law to be for the
payment of interests first, if any, and then for the payment of
the principal amount.
The CA, however, reduced the monthly penalty from ten
percent (10%) to two percent (2%) pursuant to Article 1229 of
the Civil Code which gives the courts the power to decrease
the penalty when the principal obligation has been partly or
irregularly complied with by the debtor.
The dispositive portion of the CA decision
provides:LawlibraryofCRAlaw
"WHEREFORE, premises considered, the Petition is hereby
DENIED for lack of merit. The Order dated 07 May 2007 of the
Regional Trial Court, Branch 222, Quezon City is hereby
AFFIRMED with MODIFICATION that the penalty charge
should only be two (2%) per month until fully paid."
The CA denied the petitioner's Motion for Reconsideration
dated May 17, 2010 on November 25, 2010 for failing to raise
new matters. Hence, this present petition.
The Petition
The petitioner seeks the reversal of the CA's decision and
resolution. He argues that he has fully paid his obligation.
Thus, the respondent has no right to foreclose the chattel
mortgage.
The petitioner insists that his daily payments should be
deemed to have been credited against the principal, as the
official receipts issued by the respondent were silent with
respect to the payment of interest and penalties. He cites
Article 1176 of the Civil Code which ordains that [t]he receipt of
the principal by the creditor without reservation with respect to
the interest, shall give rise to the presumption that the interest
has been paid. The petitioner invokes Article 1235 of the Civil
Code which states that "[w]hen the obligee accepts the
performance of an obligation, knowing its incompleteness or
irregularity, and without expressing any protest or objection,
the obligation is deemed fully complied with."
The petitioner denies having stipulated upon and consented to
the twenty-six per cent (26%) per annum interest charge, ten
percent (10%) monthly penalty and twenty-five percent (25%)
attorney's fees. According to the petitioner, he signed the
promissory note in blank.
The petitioner likewise disclaims receiving any demand letter
from the respondent for the alleged balance of the second loan
after he had paid fifty-six thousand four-hundred forty pesos
(Php56,440.00) as of September 1994, and further argues that
the chattel mortgage could not cover the second loan as it was
annulled and voided upon full payment of the first loan.
The Respondent's Case21
The respondent claims that the daily payments were properly
credited against the interest and not against the principal
because the petitioner incurred delay in the full payment of the
second loan.
It argues that pursuant to the terms and conditions of the
promissory note, the interest and penalties became due and
demandable when the petitioner failed to pay in full upon
maturity. The respondent relies on Article 1253 of the Civil
Code which provides that if the debt produces interest,
payment of the principal shall not be deemed to have been
made until the interests have been covered.
The respondent likewise maintains that the chattel mortgage
could validly secure the second loan invoking its provision
which provided that it covers "obligations...which may hereafter
be incurred."
Issues
The petitioner raises the following issues for our
resolution:LawlibraryofCRAlaw
"WHETHER THE HONORABLE COURT OF APPEALS
ERRED IN AFFIRMING THE DECISION OF THE REGIONAL
TRIAL COURT ORDERING THE PETITIONER TO PAY THE
RESPONDENT THE AMOUNT OF PHP24,040.00 PLUS
INTEREST AND PENALTY FROM DUE DATE UNTIL FULLY
PAID; AND
"WHETHER THE HONORABLE COURT OF APPEALS
ERRED IN AFFIRMING THE DECISION OF THE REGIONAL
TRIAL COURT ORDERING THE FORECLOSURE AND SALE
OF THE MORTGAGED PROPERTY."22
In simpler terms, did the respondent act lawfully when it
credited the daily payments against the interest instead of the
principal? Could the chattel mortgage cover the second loan?
The Court's Ruling
We find the petition partly meritorious.
We rule that: (1) the respondent acted pursuant to law and
jurisprudence when it credited the daily payments against the
interest instead of the principal; and (2) the chattel mortgage
could not cover the second loan.
Rebuttable presumptions; Article 1176 vis-a-vis Article 1253
There is a need to analyze and harmonize Article 1176 and
Article 1253 of the Civil Code to determine whether the daily
payments made after the second loan's maturity should be
credited against the interest or against the principal.
Article 1176 provides that:LawlibraryofCRAlaw
"The receipt of the principal by the creditor, without reservation
with respect to the interest, shall give rise to the presumption
that said interest has been paid.
21

xxx."
On the other hand, Article 1253 states:LawlibraryofCRAlaw
"If the debt produces interest, payment of the principal shall not
be deemed to have been made until the interests have been
covered."
The above provisions appear to be contradictory but they in
fact support, and are in conformity with, each other. Both
provisions are also presumptions and, as such, lose their legal
efficacy in the face of proof or evidence to the contrary.
Thus, the settlement of the first issue depends on which of
these presumptions prevails under the given facts of the case.
There are two undisputed facts crucial in resolving the first
issue: (1) the petitioner failed to pay the full amount of the
second loan upon maturity; and (2) the second loan was
subject to interest, and in case of default, to penalty and
attorney's fees.
But before proceeding any further, we first tackle the
petitioner's denial of the genuineness and due execution of the
second promissory note. He denies that he stipulated upon and
consented to the interest, penalty and attorney's fees because
he purportedly signed the promissory note in
blank.23redarclaw
This allegation deserves scant consideration. It is self-serving
and unsupported by evidence.
As aptly observed by the RTC and the CA, the promissory
notes securing the first and second loan contained exactly the
same terms and conditions. They were mirror-image of each
other except for the date and amount of principal Thus, we see
sufficient basis to believe that the petitioner knew or was aware
of such terms and conditions even assuming that the entries on
the interest and penalty charges were in blank when he signed
the promissory note.
Moreover, we find it significant that the petitioner does not deny
the genuineness and due execution of the first promissory
note. Only when he failed to pay the second loan did he
impugn the validity of the interest, penalty and attorney's fees.
The CA and the RTC also noted that the petitioner is a
schooled individual, an engineer by profession, who, because
of these credentials, will not just sign a document in blank
without appreciating the import of his action.24redarclaw
These considerations strongly militate against the petitioner's
claim that he did not consent to and stipulated on the interest
and penalty charges of the second loan. Thus, he did not only
fail to fully pay the second loan upon maturity; the loan was
also subject to interest, penalty and attorney's fees.
Article 1176 in relation to Article 1253
Article 1176 falls under Chapter I (Nature and Effect of
Obligations) while Article 1253 falls under Subsection I
(Application of Payments), Chapter IV (Extinguishment of
Obligations) of Book IV (Obligations and Contracts) of the Civil
Code.
The structuring of these provisions, properly taken into
account, means that Article 1176 should be treated as a
general presumption subject to the more specific presumption
under Article 1253. Article 1176 is relevant on questions
pertaining to the effects and nature of obligations in general,
while Article 1253 is specifically pertinent on questions
involving application of payments and extinguishment of
obligations.
A textual analysis of the above provisions yields the results we
discuss at length below:LawlibraryofCRAlaw
The presumption under Article 1176 does not resolve the
question of whether the amount received by the creditor is a
payment for the principal or interest. Under this article the
amount received by the creditor is the payment for the
principal, but a doubt arises on whether or not the interest is
waived because the creditor accepts the payment for the
principal without reservation with respect to the interest. Article
1176 resolves this doubt by presuming that the creditor waives
the payment of interest because he accepts payment for the
principal without any reservation.
On the other hand, the presumption under Article 1253
resolves doubts involving payment of interest-bearing debts. It
is a given under this Article that the debt produces interest. The
doubt pertains to the application of payment; the uncertainty is
on whether the amount received by the creditor is payment for
the principal or the interest. Article 1253 resolves this doubt by
providing a hierarchy: payments shall first be applied to the
interest; payment shall then be applied to the principal only
after the interest has been fully-paid.
Correlating the two provisions, the rule under Article 1253 that
payments shall first be applied to the interest and not to the
principal shall govern if two facts exist: (1) the debt produces
interest (e.g., the payment of interest is expressly stipulated)
and (2) the principal remains unpaid.
The exception is a situation covered under Article 1176, i.e.,
when the creditor waives payment of the interest despite the
presence of (1) and (2) above. In such case, the payments
shall obviously be credited to the principal.
Since the doubt in the present case pertains to the application
of the daily payments, Article 1253 shall apply. Only when
there is a waiver of interest shall Article 1176 become relevant.
Under this analysis, we rule that the respondent properly
credited the daily payments to the interest and not to the
principal because: (1) the debt produces interest, i.e., the
promissory note securing the second loan provided for
payment of interest; (2) a portion of the second loan remained
unpaid upon maturity; and (3) the respondent did not waive the
payment of interest.
There was no waiver of interest
The fact that the official receipts did not indicate whether the
payments were made for the principal or the interest does not
prove that the respondent waived the interest.
We reiterate that the petitioner made the daily payments after
the second loan had already matured and a portion of the
principal remained unpaid. As stipulated, the principal is
subject to 26% annual interest.
All these show that the petitioner was already in default of the
principal when he started making the daily payments. The
stipulations providing for the 10% monthly penalty and the
additional 25% attorney's fees on the unpaid amount also
became effective as a result of the petitioner's failure to pay in
full upon maturity.
22
In other words, the so-called interest for default25 (as
distinguished from the stipulated monetary interest of 26% per
annum) in the form of the 10% monthly penalty accrued and
became due and demandable. Thus, when the petitioner
started making the daily payments, two types of interest were
at the same time accruing, the 26% stipulated monetary
interest and the interest for default in the form of the 10%
monthly penalty.
Article 1253 covers both types of interest. As noted by learned
civilist, Arturo M. Tolentino, no distinction should be made
because the law makes no such distinction. He
explained:LawlibraryofCRAlaw
"Furthermore, the interest for default arises because of non-
performance by the debtor, and to allow him to apply payment
to the capital without first satisfying such interest, would be to
place him in a better position than a debtor who has not
incurred in delay. The delay should worsen, not improve, the
position of a debtor."26 [Emphasis supplied.]
The petitioner failed to specify which of the two types of
interest the respondent allegedly waived. The respondent
waived neither.
In Swagman Hotels and Travel Inc. v. Court of Appeals,27 we
applied Article 1253 of the Civil Code in resolving whether the
debtor has waived the payments of interest when he issued
receipts describing the payments as "capital repayment." We
held that,
"Under Article 1253 of the Civil Code, if the debt produces
interest, payment of the principal shall not be deemed to have
been made until the interest has been covered. In this case,
the private respondent would not have signed the receipts
describing the payments made by the petitioner as "capital
repayment" if the obligation to pay the interest was still
subsisting.
"There was therefore a novation of the terms of the three
promissory notes in that the interest was waived..."28
[Emphasis supplied.]
The same ruling was made in an older case29 where the
creditor issued a receipt which specifically identified the
payment as referring to the principal. We held that the interest
allegedly due cannot be recovered, in conformity with Article
1110 of the Old Civil Code, a receipt from the creditor for the
principal, that contains no stipulation regarding interest,
extinguishes the obligation of the debtor with regard thereto
when the receipt issued by the creditor showed that no
reservation whatever was made with respect to the interest.
In both of these cases, it was clearly established that the
creditors accepted the payment of the principal. The creditors
were deemed to have waived the payment of interest because
they issued receipts expressly referring to the payment of the
principal without any reservation with respect to the interest. As
a result, the interests due were deemed waived. It was
immaterial whether the creditors intended to waive the interest
or not. The law presumed such waiver because the creditors
accepted the payment of the principal without reservation with
respect to the interest.
In the present case, it was not proven that the respondent
accepted the payment of the principal. The silence of the
receipts on whether the daily payments were credited against
the unpaid balance of the principal or the accrued interest does
not mean that the respondent waived the payment of interest.
There is no presumption of waiver of interest without any
evidence showing that the respondent accepted the daily
installments as payments for the principal.
Ideally, the respondent could have been more specific by
indicating on the receipts that the daily payments were being
credited against the interest. Its failure to do so, however,
should not be taken against it. The respondent had the right to
credit the daily payments against the interest applying Article
1253.
It bears stressing that the petitioner was already in default.
Under the promissory note, the petitioner waived demand in
case of non-payment upon due date.30 The stipulated interest
and interest for default have both accrued. The only logical
result, following Article 1253 of the Civil Code, is that the daily
payments were first applied against either or both the
stipulated interest and interest for default.
Moreover, Article 1253 is viewed as having an obligatory
character and not merely suppletory. It cannot be dispensed
with except by mutual agreement. The creditor may oppose an
application of payment made by the debtor contrary to this
rule.31redarclaw
In any case, the promissory note provided that "interest not
paid when due shall be added to, and become part of the
principal and shall likewise bear interest at the same rate,
compounded monthly."32redarclaw
Hence, even if we assume that the daily payments were
applied against the principal, the principal had also increased
by the amount of unpaid interest and the interest on such
unpaid interest. Even under this assumption, it is doubtful
whether the petitioner had indeed fully paid the second loan.
Excessive interest, penalty and attorney's fees
Notwithstanding the foregoing, we find the stipulated rates of
interest, penalty and attorney's fees to be exorbitant, iniquitous,
unconscionable and excessive. The courts can and should
reduce such astronomical rates as reason and equity demand.
Article 1229 of the Civil Code provides:LawlibraryofCRAlaw
"The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or
unconscionable."
Article 2227 of the Civil Code ordains:LawlibraryofCRAlaw
"Liquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
More importantly, Article 1306 of the Civil Code is
emphatic:LawlibraryofCRAlaw
"The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs,
public order, or public policy."
Thus, stipulations imposing excessive rates of interest and
penalty are void for being contrary to morals, if not against the
law.33redarclaw
Further, we have repeatedly held that while Central Bank
Circular No. 905-82, which took effect on January 1, 1983,
effectively removed the ceiling on interest rates for both
secured and unsecured loans, regardless of maturity, nothing
in the said circular could possibly be read as granting carte
blanche authority to lenders to raise interest rates to levels that
would be unduly burdensome, to the point of oppression on
their borrowers.34redarclaw
23
In exercising this power to determine what is iniquitous and
unconscionable, courts must consider the circumstances of
each case since what may be iniquitous and unconscionable in
one may be totally just and equitable in another.35redarclaw
In the recent case of MCMP Construction Corp. v. Monark
Equipment Corp.,36 we reduced the interest rate of twenty-four
percent (24%) per annum to twelve percent (12%) per annum;
the penalty and collection charge of three percent (3%) per
month, or thirty-six percent (36%) per annum, to six percent
(6%) per annum; and the amount of attorney's fees from
twenty-five percent (25%) of the total amount due to five
percent (5%).
Applying the foregoing principles, we hereby reduce the
stipulated rates as follows: the interest of twenty-six percent
(26%) per annum is reduced to two percent (2%) per annum;
the penalty charge of ten percent (10%) per month, or one-
hundred twenty percent (120%) per annum is reduced to two
percent (2%) per annum; and the amount of attorney's fees
from twenty-five percent (25%) of the total amount due to two
percent (2%) of the total amount due.
We believe the markedly reduced rates are reasonable,
equitable and just under the circumstances.
It is not entirely the petitioner's fault that he honestly, albeit
wrongly, believed that the second loan had been fully paid. The
respondent is partly to blame for issuing receipts not indicating
that the daily payments were being applied against the interest.
Moreover, the reduction of the rates is justified in the context of
its computation period. In Trade & Investment Dev't Corp. of
the Phil. v. Roblett Industrial Construction Corp.,37 we
equitably reduced the interest rate because the case was
decided with finality sixteen years after the filing of the
complaint. We noted that the amount of the loan swelled to a
considerably disproportionate sum, far exceeding the principal
debt.
It is the same in the present case where the complaint was
filed almost twenty-years ago.38redarclaw
The Chattel Mortgage could not cover the second loan.
The chattel mortgage could not validly cover the second loan.
The order for foreclosure was without legal and factual basis.
In Acme Shoe, Rubber and Plastic Corp. v. Court of
Appeals,39 the debtor executed a chattel mortgage, which had
a provision to this effect:LawlibraryofCRAlaw
"In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind
of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note
or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the
same force and effect as if the said promissory note or notes
and/or accommodations were existing on the date thereof."40
[Emphasis supplied.]
In due time, the debtor settled the loan covered by the chattel
mortgage. Subsequently, the debtor again borrowed from the
creditor. Due to financial constraints, the subsequent loan was
not settled at maturity.
On the issue whether the chattel mortgage could be foreclosed
due to the debtor's failure to settle the subsequent loan, we
held that,
"[c]ontracts of security are either personal or real, x x x In
contracts of real security, such as a pledge, a mortgage or an
antichresis, that fulfillment is secured by an encumbrance of
property — in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form
prescribed by law; x x x — upon the essential condition that if
the principal obligation becomes due and the debtor defaults,
then the property encumbered can be alienated for the
payment of the obligation, but that should the obligation be duly
paid, then the contract is automatically extinguished
proceeding from the accessory character of the agreement. As
the law so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and
void."41redarclaw
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described, a chattel mortgage,
however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law. Refusal on the
part of the borrower to execute the agreement so as to cover
the after-incurred obligation can constitute an act of default on
the part of the borrower of the financing agreement whereon
the promise is written but, of course, the remedy of foreclosure
can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be
foreclosed."42 [Emphasis supplied.]
We noted that the Chattel Mortgage Law43 requires the parties
to the contract to attach an affidavit of good faith and execute
an oath that -
" x x x (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purposes, and that the same is a just and valid obligation, and
one not entered into for the purposes of fraud."44
It is obvious therefore that the debt referred in the law is a
current, not an obligation that is yet merely contemplated.45
"x x x in consideration of the credit accommodation granted by
the MORTGAGEE to the MORTGAGOR(S) in the amount of
FIFTY-THREE THOUSAND ONLY PESOS (P53,000.00) xxx
and all other obligations of every kind already incurred or which
may hereafter be incurred, for or accommodation of the
MORTGAGOR(S), as well as the faithful performance of the
terms and conditions of this mortgage x x x."46 [Emphasis
supplied.]
The only obligation specified in the chattel mortgage contract
was the first loan which the petitioner later fully paid. By virtue
of Section 3 of the Chattel Mortgage Law,47 the payment of
the obligation automatically rendered the chattel mortgage
terminated; the chattel mortgage had ceased to exist upon full
payment of the first loan. Being merely an accessory in nature,
it cannot exist independently of the principal obligation.
The parties did not execute a fresh chattel mortgage nor did
they amend the chattel mortgage to comply with the Chattel
Mortgage Law which requires that the obligation must be
specified in the affidavit of good faith. Simply put, there no
longer was any chattel mortgage that could cover the second
24
loan upon full payment of the first loan. The order to foreclose
the motor vehicle therefore had no legal basis.

WHEREFORE, in view of the foregoing findings and legal

premises, we PARTIALLY GRANT the petition. We MODIFY
the May 17, 2010 Decision and the November 25, 2010
Resolution of the Court of Appeals in CA G.R. SP No. 102144.

ACCORDINGLY, petitioner Nunelon R. Marquez is ORDERED

to pay:LawlibraryofCRAlaw
Twenty-five thousand forty pesos (P25,040.00) representing
the amount of the unpaid balance of the second
loan;chanRoblesvirtualLawlibrary

Interest of two percent (2%) per annum on the unpaid balance

to be computed from December 15, 199248 until full payment;
Penalty of two percent (2%) per annum on the unpaid balance
to be computed from December 15,
1992;chanRoblesvirtualLawlibrary

Attorney's Fees of two percent (2%) of the total amount to be

recovered.
The total amount to be recovered shall further be subject to the
legal interest rate of six percent (6 %) per annum from the
finality of this Decision until fully paid.49redarclaw

Respondent Elisan Credit Corporation, on the other hand, is

ORDERED to return/deliver the seized motor vehicle with Plate
No. UV-TDF-193, subject of the chattel mortgage, to the
possession of the petitioner; in the event its delivery is no
longer possible, to pay the petitioner the amount of P30,000.00
corresponding to the value of the said vehicle.

No pronouncement as to costs.

SO ORDERED.cralawlawlibrary

25
[G.R. No. 103576. August 22, 1996]
ACME SHOE, RUBBER & PLASTIC CORPORATION and
CHUA PAC, petitioners, vs. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES and REGIONAL
SHERIFF OF CALOOCAN CITY, respondents.
DECISION
VITUG, J.:
Would it be valid and effective to have a clause in a chattel
mortgage that purports to likewise extend its coverage to
obligations yet to be contracted or incurred? This question is
the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-
petitioner "Acme Shoe, Rubber & Plastic Corporation,"
executed on 27 June 1978, for and in behalf of the company, a
chattel mortgage in favor of private respondent Producers
Bank of the Philippines. The mortgage stood by way of security
for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect -
"(c) If the MORTGAGOR, his heirs, executors or administrators
shall well and truly perform the full obligation or obligations
above-stated according to the terms thereof, then this
mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind
of accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc., this mortgage shall also
stand as security for the payment of the said promissory note
or notes and/or accommodations without the necessity of
executing a new contract and this mortgage shall have the
same force and effect as if the said promissory note or notes
and/or accommodations were existing on the date thereof. This
mortgage shall also stand as security for said obligations and
any and all other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the
constitution of this mortgage."[1]
In due time, the loan of P3,000,000.00 was paid by petitioner
corporation. Subsequently, in 1981, it obtained from
respondent bank additional financial accommodations totalling
P2,700,000.00.[2] These borrowings were on due date also
fully paid.
On 10 and 11 January 1984, the bank yet again extended to
petitioner corporation a loan of one million pesos
(P1,000,000.00) covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was
not settled at maturity.[3] Respondent bank thereupon applied
for an extrajudicial foreclosure of the chattel mortgage,
hereinbefore cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction,
with damages and a prayer for a writ of preliminary injunction,
before the Regional Trial Court of Caloocan City (Civil Case
No. C-12081). Ultimately, the court dismissed the complaint
and ordered the foreclosure of the chattel mortgage. It held
petitioner corporation bound by the stipulations, aforequoted, of
the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals[4]
which, on 14 August 1991, affirmed, "in all respects," the
decision of the court a quo. The motion for reconsideration was
denied on 24 January 1992.
The instant petition interposed by petitioner corporation was
initially denied on 04 March 1992 by this Court for having been
insufficient in form and substance. Private respondent filed a
motion to dismiss the petition while petitioner corporation filed
a compliance and an opposition to private respondent's motion
to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring
private respondent to comment thereon.[5]
Except in criminal cases where the penalty of reclusion
perpetua or death is imposed[6] which the Court so reviews as
a matter of course, an appeal from judgments of lower courts is
not a matter of right but of sound judicial discretion. The
circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious
petitions that can unnecessarily clog the docket and needlessly
consume the time of the Court. These technical and procedural
rules, however, are intended to help secure, not suppress,
substantial justice. A deviation from the rigid enforcement of
the rules may thus be allowed to attain the prime objective for,
after all, the dispensation of justice is the core reason for the
existence of courts. In this instance, once again, the Court is
constrained to relax the rules in order to give way to and
uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of
personal security, such as a guaranty or a suretyship, the
faithful performance of the obligation by the principal debtor is
secured by the personal commitment of another (the guarantor
or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an
encumbrance of property - in pledge, the placing of movable
property in the possession of the creditor; in chattel mortgage,
by the execution of the corresponding deed substantially in the
form prescribed by law; in real estate mortgage, by the
execution of a public instrument encumbering the real property
covered thereby; and in antichresis, by a written instrument
granting to the creditor the right to receive the fruits of an
immovable property with the obligation to apply such fruits to
the payment of interest, if owing, and thereafter to the principal
of his credit - upon the essential condition that if the principal
obligation becomes due and the debtor defaults, then the
property encumbered can be alienated for the payment of the
obligation,[7] but that should the obligation be duly paid, then
the contract is automatically extinguished proceeding from the
accessory character[8] of the agreement. As the law so puts it,
once the obligation is complied with, then the contract of
security becomes, ipso facto, null and void.[9]
While a pledge, real estate mortgage, or antichresis may
exceptionally secure after-incurred obligations so long as these
future debts are accurately described,[10] a chattel mortgage,
however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted
can be a binding commitment that can be compelled upon, the
security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the
form prescribed by the Chattel Mortgage Law.[11] Refusal on
the part of the borrower to execute the agreement so as to
cover the after-incurred obligation can constitute an act of
26
default on the part of the borrower of the financing agreement
whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought
to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply
substantially with the form prescribed by the Chattel Mortgage
Law itself. One of the requisites, under Section 5 thereof, is an
affidavit of good faith. While it is not doubted that if such an
affidavit is not appended to the agreement, the chattel
mortgage would still be valid between the parties (not against
third persons acting in good faith[12]), the fact, however, that
the statute has provided that the parties to the contract must
execute an oath that -
"In simply quoting in toto the patently erroneous decision of the
trial court, respondent Court of Appeals should be required to
justify its decision which completely disregarded the basic laws
on obligations and contracts, as well as the clear provisions of
the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of
appellate jurisdiction."[21] (Italics supplied.)
The statement is not called for. The Court invites counsel's
attention to the admonition in Guerrero vs. Villamor;[22] thus:

"x x x (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and
one not entered into for the purpose of fraud."[13]
makes it obvious that the debt referred to in the law is a
current, not an obligation that is yet merely contemplated. In
the chattel mortgage here involved, the only obligation
specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully paid.
By virtue of Section 3 of the Chattel Mortgage Law, the
payment of the obligation automatically rendered the chattel
mortgage void or terminated. In Belgian Catholic Missionaries,
Inc., vs. Magallanes Press, Inc., et al.,[14] the Court said -
"x x x A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date the
same are made and not from the date of the mortgage."[15]
"(L)awyers x x x should bear in mind their basic duty `to
observe and maintain the respect due to the courts of justice
and judicial officers and x x x (to) insist on similar conduct by
others.' This respectful attitude towards the court is to be
observed, `not for the sake of the temporary incumbent of the
judicial office, but for the maintenance of its supreme
importance.' And it is `through a scrupulous preference for
respectful language that a lawyer best demonstrates his
observance of the respect due to the courts and judicial officers
x x x.'"[23]
The virtues of humility and of respect and concern for others
must still live on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court
and the lower court are set aside without prejudice to the
appropriate legal recourse by private respondent as may still
be warranted as an unsecured creditor. No costs.

The significance of the ruling to the instant problem would be
that since the 1978 chattel mortgage had ceased to exist
coincidentally with the full payment of the P3,000,000.00
loan,[16] there no longer was any chattel mortgage that could
cover the new loans that were concluded thereafter.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished
to be circumspect in dealing with the courts.
SO ORDERED.

We find no merit in petitioner corporation's other prayer that the

case should be remanded to the trial court for a specific finding
on the amount of damages it has sustained "as a result of the
unlawful action taken by respondent bank against it."[17] This
prayer is not reflected in its complaint which has merely asked
for the amount of P3,000,000.00 by way of moral damages.[18]
In LBC Express, Inc. vs. Court of Appeals,[19] we have said:

"Moral damages are granted in recompense for physical

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

While Chua Pac is included in the case, the complaint,

however, clearly states that he has merely been so named as a
party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his

zeal in pursuing his client's cause. It instead turned out to be,
however, a source of disappointment for this Court to read in
petitioner's reply to private respondent's comment on the
petition his so-called "One Final Word;" viz:

27
G.R. No. L-26860 July 30, 1969
ALBERTA B. CABRAL and RENATO CABRAL, plaintiffs-
appellees,
vs.
TEODORA EVANGELISTA, and JUAN N. EVANGELISTA,
defendants-appellants,
and GEORGE L. TUNAYA, defendant.
Emilio D. Castellanes for plaintiffs-appellees.
Manuel E. Reyes for defendants-appellants.
TEEHANKEE, J.:
In this appeal from a decision of the Court of First Instance,
and certified by the Court of Appeals to this Court upon
agreement of the parties as involving only questions of law, we
reaffirm the well settled principle that the rights of a mortgage
creditor over the mortgaged properties are superior to those of
a subsequent attaching creditor.
On December 12, 1959, defendant George L. Tunaya had
executed in favor of plaintiffs-appellees a chattel mortgage
covering a "MORRISON" English piano, made in England,
Concert model, Serial No. 6079 and a Frigidaire General
Motors Electric Stove with four burners and double oven
bearing Serial No. 21009298, as security for payment to the
plaintiffs-mortgagees of a promissory note in the sum of
P1,000.00 executed on the same date by said defendant
Tunaya with his wife, Esperanza N. Angeles. The chattel
mortgage deed was duly inscribed in the Chattel Mortgage
Register of Rizal province on December 14, 1959. The
promissory note, which provided for payment of 12% interest
per annum and of an additional 15% of the total amount due for
attorney's fees and cost of collection was not paid within the
two-month maturity period therein provided.
Meanwhile, defendants-appellants, the Evangelista spouses,
obtained on January 4, 1960, a final money judgment against
defendant Tunaya in Civil Case No. 5550 of the Court of First
Instance of Rizal. They caused the levy in execution on
personal properties of said defendant Tunaya, including the
piano and stove mortgaged to plaintiffs. The said mortgaged
chattels, together with other personal properties of the
judgment debtor, were sold at public auction on June 24, 1960,
after the corresponding notice of sheriff's sale, to the
defendants-appellants as the highest bidders for the total sum
of P2,373.00. The judgment credit of defendants-appellants, as
judgment creditors in said Civil Case No. 5550, was considered
paid up to the said amount and the Sheriff of Rizal issued the
corresponding certificate of sale in their favor.
Subsequently, on October 11, 1960, or 8 months after the
maturity of Tunaya's promissory note and his having defaulted
in the payment thereof, plaintiffs filed their complaint in the City
Court of Manila against Tunaya and the Evangelista spouses,
alleging the above facts and that the Evangelista spouses had
refused their demands to pay the amount due on Tunaya's
promissory note or to exercise their right of redemption and
praying for judgment, ordering the defendants, jointly and
solidarity, to pay them the amounts stipulated on the note, and
in case of the failure to make such payment, to order
defendants to deliver to the Sheriff of Manila the mortgaged
chattels for sale at public auction to satisfy their mortgage
credit.
The City Court, on November 29, 1960, rendered judgment in
favor of plaintiffs against the mortgage debtor, Tunaya, on
confession of the latter, but granted the motion to dismiss of
the defendants Evangelista spouses on the ground of failure to
state a cause of action and dismissed the complaint as against
said spouses.
On appeal from the City Court's adverse decision, the court a
quo upheld the superior rights of plaintiffs-appellees as
mortgage creditors to the personal properties in question,
holding that defendants-appellants, "being subsequent
judgment creditors in another case, have only the right of
redemption." 1 It therefore rendered the following judgment:
(1) Ordering defendant George L. Tunaya and spouses
Teodora Evangelista and Juan Evangelista, jointly and
solidarily, to pay to plaintiff Alberta B. Cabral and Renato
Cabral the sum of P1,000.00, with interest at 12% per annum,
plus the costs of suit and attorney's fees at 15% of the whole
amount due conformably to the provisions of the chattel
mortgage deed; and
(2) In the event of their failure to pay, ordering defendants to
deliver to the Sheriff of Manila the properties mortgaged to
plaintiffs, for the sheriff to sell the same at public auction to
satisfy the judgment debt.
The counterclaim 2 of defendant Teodora Evangelista and
Juan Evangelista is dismissed.31äwphï1.ñët
It should be noted that the lower Court rendered its above-
quoted judgment only on February 22, 1965, since defendants-
appellants, after the lower court denied their motion to affirm
the judgment of the City Court and to dismiss plaintiffs' appeal
therefrom, moved further for the remand of the case to the City
Court and contested the lower court's jurisdiction to try the
case as in contravention of Rule 40, section 10, of the Rules of
Court. Upon denial by the lower court of their motion for the
remand of the case, defendants-appellants filed a petition for
certiorari and prohibition with this Court, docketed as Case L-
20416, which writs this Court denied in its decision of January
30, 1964, holding that "once (defendants-appellants) had
assented to the exercise of the court's jurisdiction, (they) are
not permitted thereafter to alter the position thus voluntarily
chosen, and to insist once that the case be returned to the
Municipal Court. Any other rule would allow the parties to
confuse and delay at will the course of litigation." 4
Defendants-appellants' appeal from the lower courts above-
quoted judgment is now before us. In their first four
assignments of error, defendants-appellants claim that their
right over the mortgaged chattels as purchasers at the public
sale in execution of their judgment against their debtor,
defendant Tunaya, should not be held subordinate to the
mortgage lien of plaintiffs-appellees as mortgagees, by virtue
of prescription and laches on the part of said mortgagees as
well as of their having purchased the chattels at a public
sheriffs sale. We find no merit in these contentions. Appellants'
contention of prescription is based on a patent reading of the
provisions of section 14 of the Chattel Mortgage Law (Act No.
1508) that "the mortgagee ... may after thirty days from the
time of condition broken, cause the mortgaged property, or any
part thereof, to be sold at public auction." It does not follow
from this provision, as wrongly contended by appellants, that
failure on the part of plaintiff to immediately foreclose their
chattel mortgage within the 30-day period from February 12,
1960 (when the promisory note matured) to March 12, 1960,
resulted in the prescription of plaintiff's mortgage right and
action. This thirty-day period is the minimum period after
violation of the mortgage condition for the mortgage creditor to
cause the sale at public auction of the mortgaged chattels, with
at least ten days notice to the mortgagor and posting of public
28
notice of the time, place and purpose of such sale, and is a
period of grace for the mortgagor, who has no right of
redemption after the sale is held, to discharge the mortgage
obligation. 5 The prescription period for recovery of movables
for foreclosure purposes such as in the present case is eight
years as provided in Article 1140 of the Civil Code, 6 and here
plaintiffs had timely filed their action within 8 months from the
mortgage debtor's default. By the same token, neither could
laches properly be imputed against plaintiffs, who filed their
action promptly after they had been advised by their debtor,
defendant Tunaya, of the public auction sale on June 24, 1960
of the chattels at the instance of defendants-appellants as his
judgment creditors. 7
Defendants-appellants' purchase of the mortgaged chattels at
the public sheriff's sale and the delivery of the chattels to them
with a certificate of sale did not give them a superior right to the
chattels as against plaintiffs-mortgagees. Rule 39, section 22
of the old Rules of Court (now Rule 39, section 25 of the
Revised Rules), cited by appellants precisely provides that "the
sale conveys to the purchaser all the right which the debtor had
in such property on the day the execution or attachment was
levied." It has long been settled by this Court that "The right of
those who so acquire said properties should not and cannot be
superior to that of the creditor who has in his favor an
instrument of mortgage executed with the formalities of the law,
in good faith, and without the least indication of fraud. This is
all the more true in the present case, because, when the
plaintiff purchased the automobile in question on August 22,
1933, he knew, or at least, it is presumed that he knew, by the
mere fact that the instrument of mortgage, Exhibit 2, was
registered in the office of the register of deeds of Manila, that
said automobile was subject to a mortgage lien. In purchasing
it, with full knowledge that such circumstances existed, it
should be presumed that he did so, very much willing to
respect the lien existing thereon, since he should not have
expected that with the purchase, he would acquire a better
right than that which the vendor then had." 8 In another case
between two mortgagees, we held that "As between the first
and second mortgagees, therefore, the second mortgagee has
at most only he right to redeem, and even when the second
mortgagee goes through the formality of an extrajudicial
foreclosure, the purchaser acquires no more than the right of
redemption from the first mortgagee." 9 The superiority of the
mortgagee's lien over that of a subsequent judgment creditor is
now expressly provided in Rule 39, section 16 of the Revised
Rules of Court, which states with regard to the effect of levy on
execution as to third persons that "The levy on execution shall
create a lien in favor of the judgment creditor over the right, title
and interest of the judgment debtor in such property at the time
of the levy, subject to liens or incumbrances then existing."
absolute ownership, in complete derogation of plaintiffs'
superior mortgage lien and in disregard of plaintiffs' demands
to them prior to the filing of their complaint on October 11,
1960, to pay or exercise their right of redemption. Appellants
by their act of disposition of the mortgaged chattels, whose
value were admittedly more than adequate to secure Tunaya's
mortgage obligation, have thus practically nullified plaintiffs'
superior right to foreclose the mortgage and collect the amount
due them. Considering the long period that has elapsed since
October 11, 1960 when plaintiffs tried to enforce their claim
and defendants-appellants' adamant resistance thereof and
unjust refusal to recognize plaintiffs' clearly superior right to the
chattels, which appellants admittedly disposed of without lawful
right to other unknown persons obviously to defeat plaintiffs'
right over the same, we are satisfied that justice and equity
justify the lower court's judgment holding the defendants-
appellants solidarily liable for the amount due plaintiffs-
appellees.
WHEREFORE, the lower Court's judgment ordering defendant
Tunaya and the defendants-appellants Teodora Evangelista,
jointly and solidarity, to pay plaintiffs the sum of P1,000.00 with
interest at 12% per annum, plus the costs of suit and attorney's
fees at 15% of the whole amount due, conformably to the
provisions of the chattel mortgage deed, modified so as to
expressly provide that the interest accrues from the date of the
execution of the promissory note on December 12, 1959, is
hereby affirmed. As the chattels have been disposed of to
unknown persons, Paragraph 2 of the dispositive part of the
judgment providing for the delivery to the Sheriff of the
mortgaged chattels in the event of defendants' failure to pay
the judgment is eliminated. No pronouncement as to costs.

In the fifth assignment of error, appellants contend that the

lower court erred in ordering them to pay solidarity with
defendant Tunaya the amount due on Tunaya's note in favor of
plaintiffs, and in the event of their failure to pay, to deliver the
chattels to the Sheriff for sale at public auction. Article 559 of
the Civil Code providing that "If the possessor of a movable
lost or of which the owner has been unlawfully deprived, has
acquired it in good faith at a public sale, the owner cannot
obtain its return without reimbursing the price paid therefor..."
cited by appellants has no application in the present case, for
as pointed above, they acquired the chattels subject to the
existing mortgage lien of plaintiffs thereon. Appellants state in
their brief that they paid for the chattels the amount of
P2,373.00. 10 As pointed out by appellees, the record shows
that defendants-appellants had disposed of the mortgaged
chattels "to other persons at a discounted rate" 11 and had,
therefore, appropriated the same as if the chattels were of their

29
G.R. No. L-40018 December 15, 1975
NORTHERN MOTORS, INC., petitioner,
vs.
HON. JORGE R. COQUIA, etc., et al., respondents,
FILINVEST CREDIT CORPORATION, intervenor.
RESOLUTION
AQUINO, J.:
Respondent Honesto Ong and City Sheriff of Manila filed a
motion for the reconsideration of this Court's resolution of
August 29, 1975. In that resolution, it was held that the lien of
Northern Motors, Inc., as chattel mortgagee, over certain
taxicabs is superior to the levy made on the said cabs by
Honesto Ong, the assignee of the unsecured judgment creditor
of the chattel mortgagor, Manila Yellow Taxicab Co., Inc.
On the other hand, Northern Motors, Inc. in its motion for the
partial reconsideration of the same August 29 resolution,
prayed for the reversal of the lower court's orders cancelling
the bond filed by Filwriters Guaranty Assurance Corporation.
Northern Motors, Inc. further prayed that the sheriff should be
required to deliver to it the proceeds of the execution sale of
the mortgaged taxicabs without deducting the expenses of
execution.
1. Respondents' motion for reconsideration. — Honesto
Ong in his motion invokes his supposed "legal and equity
status" vis-a-vis the mortgaged taxicabs. He contends that his
only recourse was to levy upon the taxicabs which were in the
possession of the judgment debtor, Manila Yellow Taxicab Co.
Inc., whereas, Northern Motors, Inc., as unpaid seller and
mortgagee, "has still an independent legal remedy" against the
mortgagor for the recovery of the unpaid balance of the price.
That contention is not a justification for setting aside the
holding that Ong had no right to levy upon the mortgaged
taxicabs and that he could have levied only upon the
mortgagor's equity of redemption. The essence of the chattel
mortgage is that the mortgaged chattels should answer for the
mortgage credit and not for the judgment credit of the
mortgagor's unsecured creditor. The mortgagee is not
obligated to file an "independent action" for the enforcement of
his credit. To require him to do so would be a nullification of his
lien and would defeat the purpose of the chattel mortgage
which is to give him preference over the mortgaged chattels for
the satisfaction of his credit. (See art. 2087, Civil Code).
It is relevant to note that intervenor Filinvest Credit
Corporation, the assignee of a portion of the chattel mortgage
credit, realized that to vindicate its claim by independent action
would be illusory. For that pragmatic reason, it was constrained
to enter into a compromise with Honesto Ong by agreeing to
pay him P145,000. That amount was characterized by
Northern Motors, Inc. as the "ransom" for the taxicabs levied
upon by the sheriff at the behest of Honesto Ong.
Honesto Ong's theory that Manila Yellow Taxicab's breach of
the chattel mortgage should not affect him because he is not
privy of such contract is untenable. The registration of the
chattel mortgage is an effective and binding notice to him of its
existence (Ong Liong Tiak vs. Luneta Motor Company, 66 Phil
459). The mortgage creates a real right (derecho real, jus in re
or jus ad rem, XI Enciclopedia Juridica Española 294) or a lien
which, being recorded, follows the chattel wherever it goes.
Honesto Ong's contention that Northern Motors, Inc., was
negligent because it did not sue the sheriff within the 120-day
period provided for in section 17, Rule 39 of the Rules of Court
is not correct. Such action was filed on April 14, 1975 in the
Court of First Instance of Rizal, Pasig Branch XIII, in Civil Case
No. 21065 entitled "Northern Motors, Inc. vs. Filwriters
Guaranty Assurance Corporation, et al.". However, instead of
Honesto Ong, his assignor, Tropical Commercial Corporation,
was impleaded as a defendant therein. That might explain his
unawareness of the pendency of such action.
The other arguments of Honesto Ong in his motion may be
boiled down to the proposition that the levy made by
mortgagor's judgment creditor against the chattel mortgagor
should prevail over the chattel mortgage credit. That
proposition is devoid of any legal sanction and is glaringly
contrary to the nature of a chattel mortgage. To uphold that
contention is to destroy the essence of chattel mortgage as a
paramount encumbrance on the mortgaged chattel.
Respondent Ong admits "that the mortgagee's right to the
mortgaged property is superior to that of the judgment
creditor". But he contends that the rights of the purchasers of
the cars at the execution sale should be respected. He reasons
out they were not parties to the mortgage and that they
acquired the cars prior to the mortgagee's assertion of its rights
thereto.
That contention is not well-taken. The third-party claim filed by
Northern Motors, Inc. should have alerted the purchasers to
the risk which they were taking when they took part in the
auction sale. Moreover, at an execution sale the buyers
acquire only the right of the judgment debtor which in this case
was a mere right or equity of redemption. The sale did not
extinguish the pre-existing mortgage lien (See sec. 25, Rule
39, Rules of Court; Potenciano vs. Dineros and Provincial
Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil. 951;
Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8
SCRA 103).
Some arguments adduced by Honesto Ong in his motion were
intended to protect the interests of the mortgagor, Manila
Yellow Taxicab Co., Inc., which he erroneously characterized
as a "respondent" (it is not a respondent in this case). Ong
argues that the proceeds of the execution sale, which was held
on December 18, 1974, should be delivered to Northern
Motors, Inc. "only to such extent as has exceeded the amount
paid by respondent Manila Yellow Taxicab to" Northern Motors,
Inc. That argument is not clear. Ong probably means that the
installments already paid by Manila Yellow Taxicab Co., Inc. to
Northern Motors, Inc. should be deducted from the proceeds of
the execution sale. If that is the point which Ong is trying to put
across, and it is something which does not directly affect him,
then, that matter should be raised by Manila Yellow Taxicab
Co., Inc. in the replevin case, Civil Case No. 20536 of the
Court of First Instance of Rizal, Pasig Branch VI, entitled
"Northern Motors, Inc. versus Manila Yellow Taxicab Co., Inc.
et al."
Ong's contention, that the writ of execution, which was
enforced against the seven taxicabs (whose sale at public
auction was stopped) should have precedence over the
mortgage lien, cannot be sustained. Those cabs cannot be
sold at an execution sale because, as explained in the
resolution under reconsideration, the levy thereon was
wrongful.
The motion for reconsideration of Ong and the sheriff should
be denied.
30

2. Petitioners motion for partial reconsideration. — The
lower court in its order of January 3, 1975 cancelled the
indemnity bonds for P480,000 filed on December 18, 1975 by
Filwriters Guaranty Assurance Corporation for Tropical
Commercial Co., Inc. The bonds were cancelled without notice
to Northern Motors, Inc. as third-party claimant.
We already held that the cancellation of the bonds constituted
a grave abuse of discretion but we previously denied
petitioner's prayer for the reinstatement of the bonds because
Northern Motors Inc. had given the impression that it had not
filed any action for damages against the sheriff within the one
hundred twenty-day period contemplated in Section 17, Rule
39 of the Rules of Court.
granted. The resolution of August 29, 1975 is modified in the
sense that the lower court's orders of January 3 and 6, 1975,
cancelling the indemnity bond for P240,000 (as reaffirmed in its
order of January 17, 1975), are set aside. The said indemnity
bond for P240,000 is regarded as in full force and Respondent
Sheriff of Manila is further directed to deliver to Northern
Motors, Inc. the entire proceeds of the execution sale held on
December 18, 1974 for the eight taxicabs which were
mortgaged to that firm.
SO ORDERED.

As already noted above, the truth is that such an action for

damages was filed on April 14, 1975 against the surety, the
sheriff and the judgment creditor in Civil Case No. 21065 of the
Court of First Instance of Rizal, Pasig Branch XIII. The action
involves the indemnity bond for P240,000 (No. 0032 posted on
December 18, 1974).

It may also be noted that in a prior case, Civil Case No. 20536
of the Court of First Instance of Rizal at Pasig, entitled
"Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et
al.", a replevin case (where an amended complaint dated
January 15, 1975 was filed), the surety, Filwriters Guaranty
Assurance Corporation, was impleaded as a defendant by
reason of its bond for P240,000. Northern Motors, Inc. in that
case prayed that the surety be ordered to pay to it damages in
the event that the eight taxicabs could not be surrendered to
the mortgagee.

Northern Motors, Inc., in its instant motion for partial

reconsideration, reiterates its petition for the reinstatement of
the bond filed by Filwriters Guaranty Assurance Corporation. If
the said bond is not reinstated or if the lower court's orders
cancelling it are allowed to stand, the aforementioned Civil
Cases Nos. 20536 and 21065 would be baseless or futile
actions against the surety. That injustice should be corrected.
Hence, our resolution of August 29, 1975, insofar as it did not
disturb the lower court's orders cancelling the indemnity bonds,
should be reconsidered.

Northern Motors. Inc. further prays for the reconsideration of

that portion of our resolution allowing the sheriff to deduct
expenses from the proceeds of the execution sale for the eight
taxicabs which sale was held on December 18, 1974. It argues
that Honesto Ong or Manila Yellow Taxicab Co., Inc. should
shoulder such expenses of execution.

We already held that the execution was not justified and that
Northern Motors, Inc., as mortgagee, was entitled to the
possession of the eight taxicabs. Those cabs should not have
been levied upon and sold at public auction to satisfy the
judgment credit which was inferior to the chattel mortgage.
Since the cabs could no longer be recovered because
apparently they had been transferred to persons whose
addresses are unknown (see par. 12, page 4, Annex B of
motion), the proceeds of the execution sale may be regarded
as a partial substitute for the unrecovarable cabs (See arts.
1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River
Plantation Co., 26 Phil. 632). Northern Motors, Inc. is entitled to
the entire proceeds without deduction of the expenses of
execution.

WHEREFORE, private respondents' motion for reconsideration

is denied and petitioner's motion for partial reconsideration is

31
[G.R. No. 106435. July 14, 1999]
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G.
TEVES, VICTORIA V. TEVES and HIRAM DIDAY R. PULIDO,
petitioners, vs. HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.
DECISION
GONZAGA-REYES, J.:
Before Us for review on certiorari is the decision of the
respondent Court of Appeals in CA G.R. CV No. 27861,
promulgated on April 23, 1992,[1] affirming in toto the decision
of the Regional Trial Court of Makati[2] to award respondent
banks deficiency claim, arising from a loan secured by chattel
mortgage.
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant,
Inc. (PAMECA) obtained a loan of US$267,881.67, or the
equivalent of P2,000,000.00 from respondent Bank. By virtue
of this loan, petitioner PAMECA, through its President,
petitioner Herminio C. Teves, executed a promissory note for
the said amount, promising to pay the loan by installment. As
security for the said loan, a chattel mortgage was also
executed over PAMECAs properties in Dumaguete City,
consisting of inventories, furniture and equipment, to cover the
whole value of the loan.
On January 18, 1984, and upon petitioner PAMECAs failure to
pay, respondent bank extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public auction, purchased
the foreclosed properties for a sum of P322,350.00. On June
29, 1984, respondent bank filed a complaint for the collection
of the balance of P4,366,332.46[3] with Branch 132 of the
Regional Trial Court of Makati City against petitioner PAMECA
and private petitioners herein, as solidary debtors with
PAMECA under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision
on the case, the dispositive portion of which we reproduce as
follows:
WHEREFORE, judgment is hereby rendered ordering the
defendants to pay jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the deficiency claim of the latter as
of March 31, 1984, plus 21% interest per annum and other
charges from April 1, 1984 until the whole amount is fully paid
and (2) the costs of the suit. SO ORDERED.[4]
The Court of Appeals affirmed the RTC decision. Hence, this
Petition.
The petition raises the following grounds:
1. Respondent appellate court gravely erred in not reversing
the decision of the trial court, and in not holding that the public
auction sale of petitioner PAMECAs chattels were tainted with
fraud, as the chattels of the said petitioner were bought by
private respondent as sole bidder in only 1/6 of the market
value of the property, hence unconscionable and inequitable,
and therefore null and void.
2. Respondent appellate court gravely erred in not applying by
analogy Article 1484 and Article 2115 of the Civil Code by
reading the spirit of the law, and taking into consideration the
fact that the contract of loan was a contract of adhesion.
3. The appellate court gravely erred in holding the petitioners
Herminio Teves, Victoria Teves and Hiram Diday R. Pulido
solidarily liable with PAMECA Wood Treatment Plant, Inc.
when the intention of the parties was that the loan is only for
the corporations benefit.
Relative to the first ground, petitioners contend that the amount
of P322,350.00 at which respondent bank bid for and
purchased the mortgaged properties was unconscionable and
inequitable considering that, at the time of the public sale, the
mortgaged properties had a total value of more than
P2,000,000.00. According to petitioners, this is evident from an
inventory dated March 31, 1980[5], which valued the properties
at P2,518,621.00, in accordance with the terms of the chattel
mortgage contract[6] between the parties that required that the
inventories be maintained at a level no less than P2 million.
Petitioners argue that respondent banks act of bidding and
purchasing the mortgaged properties for P322,350.00 or only
about 1/6 of their actual value in a public sale in which it was
the sole bidder was fraudulent, unconscionable and
inequitable, and constitutes sufficient ground for the annulment
of the auction sale.
To this, respondent bank contends that the above-cited
inventory and chattel mortgage contract were not in fact
submitted as evidence before the RTC of Makati, and that
these documents were first produced by petitioners only when
the case was brought to the Court of Appeals.[7] The Court of
Appeals, in turn, disregarded these documents for petitioners
failure to present them in evidence, or to even allude to them in
their testimonies before the lower court.[8] Instead, respondent
court declared that it is not at all unlikely for the chattels to
have sufficiently deteriorated as to have fetched such a low
price at the time of the auction sale.[9] Neither did respondent
court find anything irregular or fraudulent in the circumstance
that respondent bank was the sole bidder in the sale, as all the
legal procedures for the conduct of a foreclosure sale have
been complied with, thus giving rise to the presumption of
regularity in the performance of public duties.[10]
Petitioners also question the ruling of respondent court,
affirming the RTC, to hold private petitioners, officers and
stockholders of petitioner PAMECA, liable with PAMECA for
the obligation under the loan obtained from respondent bank,
contrary to the doctrine of separate and distinct corporate
personality.[11] Private petitioners contend that they became
signatories to the promissory note only as a matter of practice
by the respondent bank, that the promissory note was in the
nature of a contract of adhesion, and that the loan was for the
benefit of the corporation, PAMECA, alone.[12]
Lastly, invoking the equity jurisdiction of the Supreme Court,
petitioners submit that Articles 1484[13] and 2115[14] of the
Civil Code be applied in analogy to the instant case to preclude
the recovery of a deficiency claim.[15]
Petitioners are not the first to posit the theory of the
applicability of Article 2115 to foreclosures of chattel mortgage.
In the leading case of Ablaza vs. Ignacio[16], the lower court
dismissed the complaint for collection of deficiency judgment in
view of Article 2141 of the Civil Code, which provides that the
provisions of the Civil Code on pledge shall also apply to
chattel mortgages, insofar as they are not in conflict with the
Chattel Mortgage Law. It was the lower courts opinion that, by
virtue of Article 2141, the provisions of Article 2115 which deny
the creditor-pledgee the right to recover deficiency in case the
proceeds of the foreclosure sale are less than the amount of
the principal obligation, will apply.
32

This Court reversed the ruling of the lower court and held that
the provisions of the Chattel Mortgage Law regarding the
effects of foreclosure of chattel mortgage, being contrary to the
provisions of Article 2115, Article 2115 in relation to Article
2141, may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel
Mortgage Law, states:
xxx
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the Registry of Deeds where the mortgage is
recorded, and the Register of Deeds shall record the same.
The fees of the officer for selling the property shall be the same
as the case of sale on execution as provided in Act Numbered
One Hundred and Ninety, and the amendments thereto, and
the fees of the Register of Deeds for registering the officers
return shall be taxed as a part of the costs of sale, which the
officer shall pay to the Register of Deeds. The return shall
particularly describe the articles sold, and state the amount
received for each article, and shall operate as a discharge of
the lien thereon created by the mortgage. The proceeds of
such sale shall be applied to the payment, first, of the costs
and expenses of keeping and sale, and then to the payment of
the demand or obligation secured by such mortgage, and the
residue shall be paid to persons holding subsequent
mortgages in their order, and the balance, after paying the
mortgage, shall be paid to the mortgagor or persons holding
under him on demand. (Emphasis supplied)
It is clear from the above provision that the effects of
foreclosure under the Chattel Mortgage Law run inconsistent
with those of pledge under Article 2115. Whereas, in pledge,
the sale of the thing pledged extinguishes the entire principal
obligation, such that the pledgor may no longer recover
proceeds of the sale in excess of the amount of the principal
obligation, Section 14 of the Chattel Mortgage Law expressly
entitles the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs.
Since the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds there is a
corollary obligation on the part of the debtor-mortgagee to pay
the deficiency in case of a reduction in the price at public
auction. As explained in Manila Trading and Supply Co. vs.
Tamaraw Plantation Co.[17], cited in Ablaza vs. Ignacio, supra:
While it is true that section 3 of Act No. 1508 provides that a
chattel mortgage is a conditional sale, it further provides that it
is a conditional sale of personal property as security for the
payment of a debt, or for the performance of some other
obligation specified therein. The lower court overlooked the fact
that the chattels included in the chattel mortgage are only given
as security and not as a payment of the debt, in case of a
failure of payment.
The theory of the lower court would lead to the absurd
conclusion that if the chattels mentioned in the mortgage, given
as security, should sell for more than the amount of the
indebtedness secured, that the creditor would be entitled to the
full amount for which it might be sold, even though that amount
was greatly in excess of the indebtedness. Such a result
certainly was not contemplated by the legislature when it
adopted Act No. 1508. There seems to be no reason
supporting that theory under the provision of the law. The value
of the chattels changes greatly from time to time, and
sometimes very rapidly. If, for example, the chattels should
greatly increase in value and a sale under that condition should
result in largely overpaying the indebtedness, and if the
creditor is not permitted to retain the excess, then the same
token would require the debtor to pay the deficiency in case of
a reduction in the price of the chattels between the date of the
contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as
well as other authors on the question of chattel mortgages,
have said, that in case of a sale under a foreclosure of a
chattel mortgage, there is no question that the mortgagee or
creditor may maintain an action for the deficiency, if any should
occur. And the fact that Act No. 1508 permits a private sale,
such sale is not, in fact, a satisfaction of the debt, to any
greater extent than the value of the property at the time of the
sale. The amount received at the time of the sale, of course,
always requiring good faith and honesty in the sale, is only a
payment, pro tanto, and an action may be maintained for a
deficiency in the debt.
We find no reason to disturb the ruling in Ablaza vs. Ignacio,
and the cases reiterating it[18]
Neither do We find tenable the application by analogy of Article
1484 of the Civil Code to the instant case. As correctly pointed
out by the trial court, the said article applies clearly and solely
to the sale of personal property the price of which is payable in
installments. Although Article 1484, paragraph (3) expressly
bars any further action against the purchaser to recover an
unpaid balance of the price, where the vendor opts to foreclose
the chattel mortgage on the thing sold, should the vendees
failure to pay cover two or more installments, this provision is
specifically applicable to a sale on installments.
To accommodate petitioners prayer even on the basis of equity
would be to expand the application of the provisions of Article
1484 to situations beyond its specific purview, and ignore the
language and intent of the Chattel Mortgage Law. Equity,
which has been aptly described as justice outside legality, is
applied only in the absence of, and never against, statutory law
or judicial rules of procedure.[19]
We are also unable to find merit in petitioners submission that
the public auction sale is void on grounds of fraud and
inadequacy of price. Petitioners never assailed the validity of
the sale in the RTC, and only in the Court of Appeals did they
attempt to prove inadequacy of price through the documents,
i.e., the Open-End Mortgage on Inventory and inventory dated
March 31, 1980, likewise attached to their Petition before this
Court. Basic is the rule that parties may not bring on appeal
issues that were not raised on trial.
Having nonetheless examined the inventory and chattel
mortgage document as part of the records, We are not
convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on
January 18, 1984, the date of the foreclosure sale. At best, the
chattel mortgage contract only indicates the obligation of the
mortgagor to maintain the inventory at a value of at least
P2,000,000.00, but does not evidence compliance therewith.
The inventory, in turn, was as of March 31, 1980, or even prior
to April 17, 1980, the date when the parties entered into the
contracts of loan and chattel mortgage, and is far from being
an accurate estimate of the market value of the properties at
the time of the foreclosure sale four years thereafter. Thus,
even assuming that the inventory and chattel mortgage
contract were duly submitted as evidence before the trial court,
33
it is clear that they cannot suffice to substantiate petitioners
allegation of inadequacy of price.
Furthermore, the mere fact that respondent bank was the sole
bidder for the mortgaged properties in the public sale does not
warrant the conclusion that the transaction was attended with
fraud. Fraud is a serious allegation that requires full and
convincing evidence,[20] and may not be inferred from the lone
circumstance that it was only respondent bank that bid in the
sale of the foreclosed properties. The sparseness of petitioners
evidence in this regard leaves Us no discretion but to uphold
the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners joint and several liability
with petitioner corporation in the loan. As found by the trial
court and the Court of Appeals, the terms of the promissory
note unmistakably set forth the solidary nature of private
petitioners commitment. Thus:
On or before May 12, 1980, for value received, PAMECA
WOOD TREATMENT PLANT, INC., a corporation organized
and existing under the laws of the Philippines, with principal
office at 304 El Hogar Filipina Building, San Juan, Manila,
promise to pay to the order of DEVELOPMENT BANK OF THE
PHILIPPINES at its office located at corner Buendia and
Makati Avenues, Makati, Metro Manila, the principal sum of
TWO HUNDRED SIXTY SEVEN THOUSAND EIGHT
HUNDRED AND EIGHTY ONE & 67/100 US DOLLARS (US$
267,881.67) with interest at the rate of three per cent (3%) per
annum over DBPs borrowing rate for these funds. Before the
date of maturity, we hereby bind ourselves, jointly and
severally, to make partial payments as follows:
The promissory note was signed by private petitioners in the
following manner:
PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES
(For himself & as President of above-named corporation)
(Sgd) HIRAM DIDAY PULIDO
(Sgd) VICTORIA V. TEVES[22]
From the foregoing, it is clear that private petitioners intended
to bind themselves solidarily with petitioner PAMECA in the
loan. As correctly submitted by respondent bank, private
petitioners are not made to answer for the corporate act of
petitioner PAMECA, but are made liable because they made
themselves co-makers with PAMECA under the promissory
note.
IN VIEW OF THE FOREGOING, the Petition is DENIED and
the Decision of the Court of Appeals dated April 23, 1992 in CA
G.R. CV No. 27861 is hereby AFFIRMED. Costs against
petitioners.
SO ORDERED.

xxx

In case of default in the payment of any installment above, we

bind ourselves to pay DBP for advances xxx

xxx

We further bind ourselves to pay additional interest and penalty

charges on loan amortizations or portion thereof in arrears as
follows:

xxx

"In addition to the above, we also bind ourselves to pay for

bank advances for insurance premiums, taxes xxx

xxx

"We further bind ourselves to reimburse DBP on a pro-rata

basis for all costs incurred by DBP on the foreign currency
borrowings from where the loan shall be drawn xxx

xxx

In case of non-payment of the amount of this note or any

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

34