Antichresis

A)Definition and characteristics

B) Obligations of antichretic creditor
Case:
Diego v. Fernando, G.R. No. L-15128, August 25, 1960, 109 Phil 143.

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

Appeal by defendant Segundo Fernando from the judgment of the
Court of First Instance of Nueva Ecija in its Civil Case No. 1694 for
foreclosure of mortgage. The appeal was originally brought to the
Court of Appeals, but was certified to us by that tribunal because it
raises only questions of law.
The facts are not disputed. On May 26, 1950, the defendant
Segundo Fernando executed a deed of mortgage in favor of plaintiff
Cecilio Diego over two parcels of land registered in his name, to
secure a loan of P2,000, without interest, payable within four years
from the date of the mortgage (Exhibit "A"). After the execution of
the deed, possession of the mortgaged properties were turned over
to the mortgagee.
The debtor having failed to pay the loan after four years, the
mortgagee Diego made several demands upon him for payment;
and as the demands were unheeded, Diego filed this action for
foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction
between him and plaintiff was one of antichresis and not of
mortgage; and that as plaintiff had allegedly received a total of 120
cavans of palay from the properties given as security, which, at the
rate of P10 a cavan, represented a value of P5,200, his debt had
already been paid, with plaintiff still owing him a refund of some
P2,720.00.
The Court below, however, found that there was nothing in the
deed of mortgage Exhibit "A" to show that it was not a true
contract of mortgage, and that the fact that possession of the
mortgaged properties were turned over to the mortgagee did not
alter the transaction; that the parties must have intended that the
mortgagee would collect the fruits of the mortgaged properties as
interest on his loan, which agreement is not uncommon; and that
the evidence showed that plaintiff had already received 65 cavans
of palay from the properties during the period of his possession.
Whereupon, judgment was rendered for plaintiff in the amount of
P2,000, the loan he gave the defendant, with legal interest from
the filing of the action until full payment, plus P500 as attorney's
fees and the costs; and in case of default in payment, for the
foreclosure of the mortgage. From this judgment, defendant took
the present appeal.
The main issue raised is whether the contract between the parties
is one of mortgage or of antichresis. Appellant, while admitting
that the contract Exhibit "A" shows a deed of mortgage, contends
that the admitted fact that the loan was without interest, coupled
with the transfer of the possession of the properties mortgaged to
the mortgagee, reveals that the true transaction between him and
appellee was one of antichresis. As correctly pointed out by
appellee and the lower court, however, it is not an essential
requisite of a mortgage that possession of the mortgaged premises
be retained by the mortgagor (Legaspi and Salcedo vs. Celestial, 66
Phil., 372). To be antichresis, it must be expressly agreed between
creditor and debtor that the former, having been given possession
of the properties given as security, is to apply their fruits to the
payment of the interest, if owing, and thereafter to the principal of
his credit (Art. 2132, Civil Code, Barretto vs. Barretto, 37 Phil.,
234; Diaz vs. De Mendezona, 48 Phil., 666); so that if a contract of
loan with security does not stipulate the payment of interest but
provides for the delivery to the creditor by the debtor of the
property given as security, in order that the latter may gather its
fruits, without stating that said fruits are to be applied to the
payment of interest, if any, and afterwards that of the principal, the
contract is a mortgage and not antichresis (Legaspi vs. Celestial,
supra). The court below, therefore, did not err in holding that the
contract Exhibit "A" is a true mortgage and not an antichresis.
The above conclusion does not mean, however, that appellee,
having received the fruits of the properties mortgaged, will be
allowed to appropriate them for himself and not be required to
account for them to the appellant. For the contract of mortgage
Exhibit "A" clearly provides that fee loan of P2,000 was "without
interest within four (4) years from date of this instrument"; and
there being no evidence to show that the parties had intended to
supersede such stipulation when the possession of the mortgaged
properties, were turned over to the appellee by another allowing
the latter to collect, the fruits thereof as interest on the loan, the
trial court is not authorized to infer from this transfer of
possession alone that the parties had verbally modified their
written agreement that the loan was to be without interest for four
years, and substituted another giving appellee the right to receive
the fruits of the mortgaged properties as interests.
The true position of appellee herein under his contract with
appellant is a "mortgage in possession" as that term is understood
in American equity jurisprudence; that is, "one who has lawfully
acquired actual or constructive possession of the premises
mortgaged to him, standing upon his rights as mortgagee and not
claiming under another title, for the purpose of enforcing his
security upon such property or making its income help to pay his
debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48 Phil., 666).
As such mortgagee in possession, his rights and obligations are, as
pointed out by this Court in Macapinlac vs. Gutierrez Repide (43
Phil., 770), similar to those of an antichretic creditor:
"The respective rights and obligations of the parties to
a contract of antichresis, under the Civil Code, appear
to be similar and in many respects identical with those
recognized in the equity jurisprudence of England and
America as incident to the position of a mortgagee in
possession, in reference to which the following
propositions may be taken to be established, namely,
that if the mortgagee acquires possession in any lawful
manner, he is entitled to retain such possession until
the indebtedness is satisfied and the property
redeemed; that the non-payment of the debt within the
term agreed does not vest the ownership of the
property in the creditor; that the general duty of the
mortgagee in possession towards the premises is that
of the ordinary prudent owner; that the mortgagee
must account for the rents and profits of the land, or its
value for purposes of use and occupation, any amount
thus realized going towards the discharge on the
mortgage debt; that if the mortgagee remains in
possession after the mortgage debt has been satisfied,
he becomes a trustee for the mortgagor as to the excess
of the rents and profits over such debt; and lastly, that
the mortgagor can only enforce his rights to the land by
an equitable action for an account and to redeem. (3
Pom. Eq. Jur. secs. 1215-1218)"
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled
that a creditor with a lien on real property who took possession
thereof with the consent of the debtor, held it as an "antichretic
creditor with the right to collect the credit with interest from the
fruits, returning to the antichretic debtor the balance, if any, after
deducting the expenses", because the fact that the debtor
consented and asked the creditor to take charge of managing his
property "does not entitle the latter to appropriate to itself the
fruits thereof unless the former has expressly waived his right
thereto".
In the present case, the parties having agreed that the loan was to
be without interest, and the appellant not having expressly waived
his right to the fruits of the properties mortgaged during the time
they were in appellee's possession, the latter, like an antichretic
creditor, must account for the value of the fruits received by him,
and deduct it from the loan obtained by appellant. According to the
findings of the trial court, appellee had received a net share of 55
cavans of palay out of the mortgaged properties up to the time he
filed the present action; at the rate of P9.00 per cavan (a rate
admitted by the parties), the total value of the fruits received by
appellee is P495.00. Deducting this amount from the loan of
P2,000 received by appellant from appellee, the former has only
P1,505.00 left to pay the latter.
Appellant also claims that the lower court erred in ordering him to
pay legal interest on his indebtedness to plaintiff from the filing of
the action, since the latter is, up to the present, still in the
possession of the properties mortgaged and still enjoying its fruits.
The court did not err in so holding, since at the time the action was
filed and up to the present, appellant has not discharged his
indebtedness to appellee, and the law allows the latter, in the
absence of stipulation as to payment of interest, legal interest from
the time of the debtor's default (Art. 2209, New Civil Code, Art.
1108, old). However, appellee should be made to account for the
fruits he received from the properties mortgaged from the time of
the filing of this action until full payment by appellant, which fruits
should be deducted from the total amount due him from appellant
under this judgment.
Wherefore, the judgment of the court below is modified in the
sense that the amount of appellee's principal recovery is reduced to
P1,505, with an obligation on the part of appellee to render an
accounting of all the fruits received by him from the properties in
question from the time of the filing of this action until full
payment, or in case of appellant's failure to pay, until foreclosure of
the mortgage thereon, the value of which fruits shall be deducted
from the total amount of his recovery. No costs in this instance.
I. Chattel Mortgage
A. Definition and characteristics
B. Registration
Cases:
PCI Leasing & Finance, Inc. v. Trojan Metal Industries Inc., et al., G.R.
No. 176381,
December 15, 2010, 638 SCRA 615.
CARPIO, J.:

The Case

This is a petition for review1 with application for the immediate issuance of a temporary
restraining order and writ of preliminary injunction assailing the 5 October 2006
Decision2 and the 23 January 2007 Resolution 3 of the Court of Appeals in CA-G.R. CV
No. 75855. The 5 October 2006 Decision set aside the 23 July 2002 Decision 4 of the
Regional Trial Court (Branch 79) of Quezon City in Civil Case No. Q-99-37559, which
granted petitioner’s complaint for recovery of sum of money and personal property with
prayer for the issuance of a writ of replevin. The 23 January 2007 Resolution denied
petitioner’s motion for reconsideration.

The Facts

Sometime in 1997, respondent Trojan Metal Industries, Inc. (TMI) came to petitioner PCI
Leasing and Finance, Inc. (PCILF) to seek a loan. Instead of extending a loan, PCILF
offered to buy various equipment TMI owned, namely: a Verson double action hydraulic
press with cushion, a Hinohara powerpress 75-tons capacity, a USI-clearing powerpress
60-tons capacity, a Watanabe powerpress 60-tons capacity, a YMGP powerpress 30-
tons capacity, a YMGP powerpress 15-tons capacity, a lathe machine, a vertical milling
machine, and a radial drill. Hard-pressed for money, TMI agreed. PCILF and TMI
immediately executed deeds of sale 5 evidencing TMI’s sale to PCILF of the various
equipment in consideration of the total amount of ₱ 2,865,070.00.

PCILF and TMI then entered into a lease agreement, 6 dated 8 April 1997, whereby the
latter leased from the former the various equipment it previously owned. Pursuant to the
lease agreement, TMI issued postdated checks representing 24 monthly installments.
The monthly rental for the Verson double action hydraulic press with cushion was in the
amount of ₱62,328.00; for the Hinohara powerpress 75-tons capacity, the USI-clearing
powerpress 60-tons capacity, the Watanabe powerpress 60-tons capacity, the YMGP
powerpress 30-tons capacity, and the YMGP powerpress 15-tons capacity, the monthly
rental was in the amount of ₱49,259.00; and for the lathe machine, the vertical milling
machine, and the radial drill, the monthly rental was in the amount of ₱22,205.00.

The lease agreement required TMI to give PCILF a guaranty deposit of

₱1,030,350.00,7 which would serve as security for the timely performance of TMI’s
obligations under the lease agreement, to be automatically forfeited should TMI return
the leased equipment before the expiration of the lease agreement.

Further, spouses Walfrido and Elizabeth Dizon, as TMI’s President and Vice-President,
respectively executed in favor of PCILF a Continuing Guaranty of Lease
Obligations.8 Under the continuing guaranty, the Dizon spouses agreed to immediately
pay whatever obligations would be due PCILF in case TMI failed to meet its obligations
under the lease agreement.

To obtain additional loan from another financing company, 9 TMI used the leased
equipment as temporary collateral. 10 PCILF considered the second mortgage a violation
of the lease agreement. At this time, TMI’s partial payments had reached
₱1,717,091.00.11 On 8 December 1998, PCILF sent TMI a demand letter 12 for the
payment of the latter’s outstanding obligation. PCILF’s demand remained unheeded.

On 7 May 1999, PCILF filed in the Regional Trial Court (Branch 79) of Quezon City a
complaint13 against TMI, spouses Dizon, and John Doe (collectively referred to as
"respondents" hereon) for recovery of sum of money and personal property with prayer
for the issuance of a writ of replevin, docketed as Civil Case No. Q-99-37559.

On 7 September 1999, the RTC issued the writ of replevin 14 PCILF prayed for, directing
the sheriff to take custody of the leased equipment. Not long after, PCILF sold the leased
equipment to a third party and collected the proceeds amounting to ₱1,025,000.00. 15

In their answer,16 respondents claimed that the sale with lease agreement was a mere
scheme to facilitate the financial lease between PCILF and TMI. Respondents explained
that in a simulated financial lease, property of the debtor would be sold to the creditor to
be repaid through rentals; at the end of the lease period, the property sold would revert
back to the debtor. Respondents prayed that they be allowed to reform the lease
agreement to show the true agreement between the parties, which was a loan secured
by a chattel mortgage.

The Ruling of the RTC

In its 23 July 2002 Decision, the RTC granted the prayer of PCILF in its complaint. The
RTC ruled that the lease agreement must be presumed valid as the law between the
parties even if some of its provisions constituted unjust enrichment on the part of PCILF.
The dispositive portion of its Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff-PCI Leasing and

Finance, Inc. and against defendants Trojan Metal, Walfrido Dizon, and Elizabeth Dizon,
as follows:

1. Ordering the plaintiff to be entitled to the possession of herein machineries.

2. Ordering the defendants to pay the remaining rental obligation in the amount of Php
888,434.48 plus legal interest from the date of filing of the complaint;

3. Ordering defendant to pay an attorneys fees in the amount of Php 50,000.00;

4. Ordering the defendant to pay the cost of suit.

SO ORDERED.17

Respondents appealed to the Court of Appeals alleging that the RTC erred in ruling that
PCILF was entitled to the possession of TMI’s equipment and that respondents still owed
PCILF the balance of ₱888,423.48.

The Ruling of the Court of Appeals

The Court of Appeals ruled that the sale with lease agreement was in fact a loan secured
by chattel mortgage. The Court of Appeals held that since PCILF sold the equipment to a
third party for ₱1,025,000.00 and TMI paid PCILF a guaranty deposit of ₱1,030,000.00,
PCILF had in its hands the sum of ₱2,055,250.00, as against TMI’s remaining obligation
of ₱888,423.48, or an excess of ₱1,166,826.52, which should be returned to TMI in
accordance with Section 14 of the Chattel Mortgage Law.

Thus, in its 5 October 2006 Decision, the Court of Appeals set aside the Decision of the
RTC. The Court of Appeals entered a new one dismissing PCILF’s complaint and
directing PCILF to pay TMI, by way of refund, the amount of ₱1,166,826.52. The decretal
part of its Decision reads:

WHEREFORE, premises considered, the July 23, 2002 Decision of the Regional Trial
Court of Quezon City, Branch 79, in Civil Case No. Q-99-37559, is hereby REVERSED
and SET ASIDE, and a new one entered DISMISSING the complaint and DIRECTING
the plaintiff-appellee PCI Leasing and Finance, Inc. to PAY, by way of REFUND, to the
defendant-appellant Trojan Metal Industries, Inc., the net amount of Php 1,166,826.52.

SO ORDERED.18

The Issues

The issues for resolution are (1) whether the sale with lease agreement the parties
entered into was a financial lease or a loan secured by chattel mortgage; and (2) whether
PCILF should pay TMI, by way of refund, the amount of ₱1,166,826.52.

The Court’s Ruling

The petition lacks merit.

PCILF contends that the transaction between the parties was a sale and leaseback
financing arrangement where the client sells movable property to a financing company,
which then leases the same back to the client. PCILF insists the transaction is not
financial leasing, which contemplates extension of credit to assist a buyer in acquiring
movable property which the buyer can use and eventually own. PCILF claims that the
sale and leaseback financing arrangement is not contrary to law, morals, good customs,
public order, or public policy. PCILF stresses that the guaranty deposit should be
forfeited in its favor, as provided in the lease agreement. PCILF points out that this case
does not involve mere failure to pay rentals, it deals with a flagrant violation of the lease
agreement.

Respondents counter that from the very beginning, transfer to PCILF of ownership over
the subject equipment was never the intention of the parties. Respondents claim that
under the lease agreement, the guaranty deposit would be forfeited if TMI returned the
leased equipment to PCILF before the expiration of the lease agreement; thus, since TMI
never returned the leased equipment voluntarily, but through a writ of replevin ordered by
the RTC, the guaranty deposit should not be forfeited.

Since the lease agreement in this case was executed on 8 April 1997, Republic Act No.
5980 (RA 5980), otherwise known as the Financing Company Act, governs as to what
constitutes financial leasing. Section 1, paragraph (j) of the New Rules and Regulations
to Implement RA 598019 defines financial leasing as follows:

LEASING shall refer to financial leasing which is a mode of extending credit through a
non-cancelable contract under which the lessor purchases or acquires at the instance of
the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business
and office machines, and other movable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of
the purchase price or acquisition cost, including any incidental expenses and a margin of
profit, over the lease period. The contract shall extend over an obligatory period during
which the lessee has the right to hold and use the leased property and shall bear the cost
of repairs, maintenance, insurance, and preservation thereof, but with no obligation or
option on the part of the lessee to purchase the leased property at the end of the lease
contract.

The above definition of financial leasing gained statutory recognition with the enactment
of Republic Act No. 8556 (RA 8556), otherwise known as the Financing Company Act of
1998.20 Section 3(d) of RA 8556 defines financial leasing as:

a mode of extending credit through a non-cancelable lease contract under which the
lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor
vehicles, appliances, business and office machines, and other movable or immovable
property in consideration of the periodic payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy (70%) of the purchase price or acquisition
cost, including any incidental expenses and a margin of profit over an obligatory period of
not less than two (2) years during which the lessee has the right to hold and use the
leased property with the right to expense the lease rentals paid to the lessor and bears
the cost of repairs, maintenance, insurance and preservation thereof, but with no
obligation or option on his part to purchase the leased property from the owner-lessor at
the end of the lease contract.

Thus, in a true financial leasing, whether under RA 5980 or RA 8556, a finance company
purchases on behalf of a cash-strapped lessee the equipment the latter wants to buy but,
due to financial limitations, is incapable of doing so. The finance company then leases
the equipment to the lessee in exchange for the latter’s periodic payment of a fixed
amount of rental.

In this case, however, TMI already owned the subject equipment before it transacted with
PCILF. Therefore, the transaction between the parties in this case cannot be deemed to
be in the nature of a financial leasing as defined by law.

The facts in the instant case are analogous to those in Cebu Contractors Consortium Co.
v. Court of Appeals.21 There, Cebu Contractors Consortium Co. (CCCC) approached
Makati Leasing and Finance Corporation (MLFC) to obtain a loan. MLFC agreed to
extend financial assistance to CCCC but, instead of a loan with collateral, MLFC induced
CCCC to adopt a sale and leaseback scheme. Under the scheme, several of CCCC’s
equipment were made to appear as sold to MLFC and then leased back to CCCC, which
in turn paid lease rentals to MLFC. The rentals were treated as installment payments to
repurchase the equipment.

The Court held in Cebu Contractors Consortium Co. v. Court of Appeals 22 that the
transaction between CCCC and MLFC was not one of financial leasing as defined by law,
but simply a loan secured by a chattel mortgage over CCCC’s equipment. The Court
went on to explain that where the client already owned the equipment but needed
additional working capital and the finance company purchased such equipment with the
intention of leasing it back to him, the lease agreement was simulated to disguise the true
transaction that was a loan with security. In that instance, continued the Court, the
intention of the parties was not to enable the client to acquire and use the equipment, but
to extend to him a loan.
Similarly, in Investors Finance Corporation v. Court of Appeals,23 a borrower came to
Investors Finance Corporation (IFC) to secure a loan with his heavy equipment and
machinery as collateral. The parties executed documents where IFC was made to appear
as the owner of the equipment and the borrower as the lessee. As consideration for the
lease, the borrower-lessee was to pay monthly amortizations over a period of 36 months.
The parties executed a lease agreement covering various equipment described in the
lease schedules attached to the lease agreement. As security, the borrower-lessee also
executed a continuing guaranty.

The Court in Investors Finance Corporation v. Court of Appeals 24 held that the transaction
between the parties was not a true financial leasing because the intention of the parties
was not to enable the borrower-lessee to acquire and use the heavy equipment and
machinery, which already belonged to him, but to extend to him a loan to use as capital
for his construction and logging businesses. The Court held that the lease agreement
was simulated to disguise the true transaction between the parties, which was a simple
loan secured by heavy equipment and machinery owned by the borrower-lessee. The
Court differentiated between a true financial leasing and a loan with mortgage in the
guise of a lease. The Court said that financial leasing contemplates the extension of
credit to assist a buyer in acquiring movable property which he can use and eventually
own. If the movable property already belonged to the borrower-lessee, the transaction
between the parties, according to the Court, was a loan with mortgage in the guise of a
lease.

In the present case, since the transaction between PCILF and TMI involved equipment
already owned by TMI, it cannot be considered as one of financial leasing, as defined by
law, but simply a loan secured by the various equipment owned by TMI.

Articles 1359 and 1362 of the Civil Code provide:

Art. 1359. When, there having been a meeting of the minds of the parties to a contract,
their true intention is not expressed in the instrument purporting to embody the
agreement, by reason of mistake, fraud, inequitable conduct, or accident, one of the
parties may ask for the reformation of the instrument to the end that such true intention
may be expressed.

Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in
such a way that the instrument does not show their true intention, the former may ask for
the reformation of the instrument.

Under Article 1144 of the Civil Code, the prescriptive period for actions based upon a
written contract and for reformation of an instrument is ten years. 25 The right of action for
reformation accrued from the date of execution of the lease agreement on 8 April 1997.
TMI timely exercised its right of action when it filed an answer 26 on 14 February 2000
asking for the reformation of the lease agreement.

Hence, had the true transaction between the parties been expressed in a proper
instrument, it would have been a simple loan secured by a chattel mortgage, instead of a
simulated financial leasing. Thus, upon TMI’s default, PCILF was entitled to seize the
mortgaged equipment, not as owner but as creditor-mortgagee for the purpose of
foreclosing the chattel mortgage. PCILF’s sale to a third party of the mortgaged
equipment and collection of the proceeds of the sale can be deemed in the exercise of its
right to foreclose the chattel mortgage as creditor-mortgagee.

The Court of Appeals correctly ruled that the transaction between the parties was simply
a loan secured by a chattel mortgage. However, in reckoning the amount of the principal
obligation, the Court of Appeals should have taken into account the proceeds of the sale
to PCILF less the guaranty deposit paid by TMI. After deducting payments made by TMI
to PCILF, the balance plus applicable interest should then be applied against the
aggregate cash already in PCILF’s hands.

Records show that PCILF paid TMI ₱2,865,070.00 27 as consideration for acquiring the
mortgaged equipment. In turn, TMI gave PCILF a guaranty deposit of
₱1,030,350.00.28 Thus, the amount of the principal loan was ₱1,834,720.00, which
was the net amount actually received by TMI (proceeds of the sale of the
equipment to PCILF minus the guaranty deposit). Against the principal loan of
₱1,834,720.00 plus the applicable interest should be deducted loan payments, totaling
₱1,717,091.00.29 Since PCILF sold the mortgaged equipment to a third party for
₱1,025,000.00,30 the proceeds of the said sale should be applied to offset the remaining
balance on the principal loan plus applicable interest.

However, the exact date of the sale of the mortgaged equipment, which is needed to
compute the interest on the remaining balance of the principal loan, cannot be gleaned
from the facts on record. We thus remand the case to the RTC for the computation of the
total amount due from the date of demand on 8 December 1998 until the date of sale of
the mortgaged equipment to a third party, which amount due shall be offset against the
proceeds of the sale.

In the absence of stipulation, the applicable interest due on the remaining balance of the
loan is the legal rate of 12% per annum, computed from the date PCILF sent a demand
letter to TMI on 8 December 1998. No interest can be charged prior to this date because
TMI was not yet in default prior to 8 December 1998. The interest due shall also earn
legal interest from the time it is judicially demanded, pursuant to Article 2212 of the Civil
Code, which provides:

Art. 2212. Interest due shall earn legal interest from the time it is judicially
demanded, although the obligation may be silent upon this point.

The foregoing provision has been incorporated in the comprehensive summary of

existing rules on the computation of legal interest laid down by the Court
in Eastern Shipping Lines, Inc. v. Court of Appeals,31 to wit:

1. When an obligation is breached, and it consists in the payment of a

sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is
made (at which time the quantification of damages may be deemed to
 have been reasonably ascertained). The actual base for the computation
of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money

becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
(Emphasis supplied)

Applying the rules in the computation of interest, the remaining balance of the principal
loan subject of the chattel mortgage must earn the legal interest of 12% per annum,
which interest, as long as unpaid, also earns legal interest of 12% per annum, computed
from the filing of the complaint on 7 May 1999.

In accordance with the rules laid down in Eastern Shipping Lines, Inc. v. Court of
Appeals,32 we derive the following formula for the RTC’s guidance:

TOTAL AMOUNT DUE = [principal – partial payments made] + [interest + interest on

interest], where

Interest = remaining balance x 12% per annum x no. of years from due date (8
December 1998 when demand was made) until date of sale to a third party

Interest on interest = interest computed as of the filing of the complaint on 7 May 1999 x
12% x no. of years until date of sale to a third party

From the computed total amount should be deducted ₱1,025,000.00 representing the
proceeds of the sale already in PCILF’s hands. The difference represents overpayment
by TMI, which the law requires PCILF to refund to TMI. 1avvphi1

Section 14 of Act No. 1508, otherwise known as the Chattel Mortgage Law, provides:

Section 14. Sale of property at public auction; officer’s return; fees; disposition of

proceeds. x x x 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 mortgages, shall
be paid to the mortgagor or person holding under him on demand.

Section 14 of the Chattel Mortgage Law expressly entitles the debtor-mortgagor to the
balance of the proceeds, upon satisfaction of the principal loan and costs. Prevailing
jurisprudence33 also holds that the Chattel Mortgage Law bars the creditor-mortgagee
from retaining the excess of the sale proceeds.

TMI’s right to the refund accrued from the time PCILF received the proceeds of the sale
of the mortgaged equipment. However, since TMI never made a counterclaim or demand
for refund due on the resulting overpayment after offsetting the proceeds of the sale
against the remaining balance on the principal loan plus applicable interest, no interest
applies on the amount of refund due. Nonetheless, in accord with prevailing
jurisprudence,34 the excess amount PCILF must refund to TMI is subject to interest at
12% per annum from finality of this Decision until fully paid.

WHEREFORE, we DENY the petition. We AFFIRM with MODIFICATION the 5 October

2006 Decision and the 23 January 2007 Resolution of the Court of Appeals in CA-G.R.
CV No. 75855. Petitioner PCI Leasing and Finance, Inc. is
hereby ORDERED to PAY respondent Trojan Metal Industries, Inc., by way of refund, the
excess amount to be computed by the Regional Trial Court based on the formula
specified above, with interest at 12% per annum from finality of this Decision until fully
paid.

Costs against petitioner.

SO ORDERED.

ACME Shoe, Rubber & Plastic Corporation v. Court of Appeals, G.R. No.
103576, August
22, 1996, 260 SCRA 714.
VITUG, J.:p

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. . . .

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.   These borrowings were on due date also fully paid.
2

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.   Respondent 3

bank thereupon applied for an extra judicial foreclosure of the chattel mortgage, herein
before 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   which, on 14 August 1991,

4

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 dinied 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   which the Court so reviews as a matter of course, an appeal from judgments of
6

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 debt
or 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 obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation,   but that should the
7

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
8

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,   a chattel
10

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
11

the agreement so as to cover the after-incurred obligation can constitute an act of default
on the part of the borrower of the financing agreement whereon the promise is written
but, of course, the remedy of foreclosure can only cover the debts extant at the time of
constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5
thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not
appended to the agreement, the chattel mortgage would still be valid between the parties
(not against third persons acting in good faith  ), the fact, however, that the statute has
12

provided that the parties to the contract must execute an oath that —

. . . (the) mortgage is made for the purpose of securing the obligation specified in the
conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud.  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.,   the Court
14

said —

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

The significance of the ruling to the instant problem would be that since the 1978 chattel
mortgage had ceased to exist coincidentally with the full payment of the P3,000,000.00
loan,   there no longer was any chattel mortgage that could cover the new loans that
16

were concluded thereafter.

We find no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a specific finding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against it."  7 This
1

prayer is not reflected in its complaint which has merely asked for the amount of
P3,000,000.00 by way of moral damages.   In LBC Express, Inc. vs. Court of
18

Appeals,   we have said:

19

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

While Chua Pac is included in the case, the complaint, however, clearly states that he
has merely been so named as a party in representation of petitioner corporation.

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

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

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

(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect
due to the courts of justice and judicial officers and . . . (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 . . . 
23

The virtues of humility and of respect and concern for others must still live on even in an
age of materialism.

WHEREFORE, the questioned decisions of the appellate court and the lower court are
set aside without prejudice to the appropriate legal recourse by private respondent as
may still be warranted as an unsecured creditor. No costs.

Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in

dealing with the courts.

SO ORDERED.

Makati Leasing & Finance Corporation v. Wearever Textile Mills, Inc. &
Court of Appeals,
G. R. No. L-58469, May 16, 1983, 122 SCRA 296.
DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate
Appellate Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting
aside certain Orders later specified herein, of Judge Ricardo J. Francisco, as Presiding
Judge of the Court of First instance of Rizal Branch VI, issued in Civil Case No. 36040,
as wen as the resolution dated September 22, 1981 of the said appellate court, denying
petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati
Leasing and Finance Corporation, the private respondent Wearever Textile Mills, Inc.,
discounted and assigned several receivables with the former under a Receivable
Purchase Agreement. To secure the collection of the receivables assigned, private
respondent executed a Chattel Mortgage over certain raw materials inventory as well as
a machinery described as an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of
the properties mortgage to it. However, the Deputy Sheriff assigned to implement the
foreclosure failed to gain entry into private respondent's premises and was not able to
effect the seizure of the aforedescribed machinery. Petitioner thereafter filed a complaint
for judicial foreclosure with the Court of First Instance of Rizal, Branch VI, docketed as
Civil Case No. 36040, the case before the lower court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's
filing of a motion for reconsideration. After several incidents, the lower court finally issued
on February 11, 1981, an order lifting the restraining order for the enforcement of the writ
of seizure and an order to break open the premises of private respondent to enforce said
writ. The lower court reaffirmed its stand upon private respondent's filing of a further
motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by

herein private respondent, set aside the Orders of the lower court and ordered the return
of the drive motor seized by the sheriff pursuant to said Orders, after ruling that the
machinery in suit cannot be the subject of replevin, much less of a chattel mortgage,
because it is a real property pursuant to Article 415 of the new Civil Code, the same
being attached to the ground by means of bolts and the only way to remove it from
respondent's plant would be to drill out or destroy the concrete floor, the reason why all
that the sheriff could do to enfore the writ was to take the main drive motor of said
machinery. The appellate court rejected petitioner's argument that private respondent is
estopped from claiming that the machine is real property by constituting a chattel
mortgage thereon.

A motion for reconsideration of this decision of the Court of Appeals having been denied,
petitioner has brought the case to this Court for review by writ of certiorari. It is contended
by private respondent, however, that the instant petition was rendered moot and
academic by petitioner's act of returning the subject motor drive of respondent's
machinery after the Court of Appeals' decision was promulgated.

The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown by
the receipt duly signed by respondent's representative.   Considering that petitioner has
1

reserved its right to question the propriety of the Court of Appeals' decision, the
contention of private respondent that this petition has been mooted by such return may
not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the
machinery in suit is real or personal property from the point of view of the parties, with
petitioner arguing that it is a personality, while the respondent claiming the contrary, and
was sustained by the appellate court, which accordingly held that the chattel mortgage
constituted thereon is null and void, as contended by said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where
this Court, speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal

property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they should not now be allowed to make an
inconsistent stand by claiming otherwise. Moreover, the subject house stood on a rented
lot to which defendants-appellants merely had a temporary right as lessee, and although
this can not in itself alone determine the status of the property, it does so when combined
with other factors to sustain the interpretation that the parties, particularly the mortgagors,
intended to treat the house as personality. Finally, unlike in the Iya cases,  Lopez vs.
Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong Machinery &
Williamson, wherein third persons assailed the validity of the chattel mortgage, it is the
defendants-appellants themselves, as debtors-mortgagors, who are attacking the validity
of the chattel mortgage in this case. The doctrine of estoppel therefore applies to the
herein defendants-appellants, having treated the subject house as personality.

Examining the records of the instant case, We find no logical justification to exclude the
rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved in
the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree and
no innocent third party will be prejudiced thereby, there is absolutely no reason why a
machinery, which is movable in its nature and becomes immobilized only by destination
or purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of
Appeals lays stress on the fact that the house involved therein was built on a land that
did not belong to the owner of such house. But the law makes no distinction with respect
to the ownership of the land on which the house is built and We should not lay down
distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the
private respondent is indicative of intention and impresses upon the property the
character determined by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by agreement
treat as personal property that which by nature would be real property, as long as no
interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never
represented nor agreed that the machinery in suit be considered as personal property but
was merely required and dictated on by herein petitioner to sign a printed form of chattel
mortgage which was in a blank form at the time of signing. This contention lacks
persuasiveness. As aptly pointed out by petitioner and not denied by the respondent, the
status of the subject machinery as movable or immovable was never placed in issue
before the lower court and the Court of Appeals except in a supplemental memorandum
in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be a
ground for rendering said contract voidable, or annullable pursuant to Article 1390 of the
new Civil Code, by a proper action in court. There is nothing on record to show that the
mortgage has been annulled. Neither is it disclosed that steps were taken to nullify the
same. On the other hand, as pointed out by petitioner and again not refuted by
respondent, the latter has indubitably benefited from said contract. Equity dictates that
one should not benefit at the expense of another. Private respondent could not now
therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited
therefrom,

From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent. Moreover,
the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied
upon by said court is not applicable to the case at bar, the nature of the machinery and
equipment involved therein as real properties never having been disputed nor in issue,
and they were not the subject of a Chattel Mortgage. Undoubtedly, the Tumalad case
bears more nearly perfect parity with the instant case to be the more controlling
jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are
hereby reversed and set aside, and the Orders of the lower court are hereby reinstated,
with costs against the private respondent.

SO ORDERED.

Dy v. Court of Appeals, G.R. No. 92989, July 8, 1991, 198 SCRA 826.
GUTIERREZ, JR., J.:

This is a petition for review on certiorari seeking the reversal of the March 23, 1990
decision of the Court of Appeals which ruled that the petitioner's purchase of a farm
tractor was not validly consummated and ordered a complaint for its recovery dismissed.

The facts as established by the records are as follows:

The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy
purchased a truck and a farm tractor through financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as
security for the loan.

The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote
a letter to Libra requesting that he be allowed to purchase from Wilfredo Dy the said
tractor and assume the mortgage debt of the latter.

In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the
petitioner's request.

Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of

the petitioner over the tractor in question.

At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo
Dy's failure to pay the amortizations.

Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate
release could not be effected because Wilfredo Dy had obtained financing not only for
said tractor but also for a truck and Libra insisted on full payment for both.

The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so
that full payment could be made for both. On November 22, 1979, a PNB check was
issued in the amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness
of Wilfredo Dy with the financing firm. Payment having been effected through an out-of-
town check, Libra insisted that it be cleared first before Libra could release the chattels in
question.

Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a
collection case to recover the sum of P12,269.80 was pending in another court in Cebu.

On the strength of an alias writ of execution issued on December 27, 1979, the provincial
sheriff was able to seize and levy on the tractor which was in the premises of Libra in
Carmen, Cebu. The tractor was subsequently sold at public auction where Gelac Trading
was the lone bidder. Later, Gelac sold the tractor to one of its stockholders, Antonio
Gonzales.

It was only when the check was cleared on January 17, 1980 that the petitioner learned
about GELAC having already taken custody of the subject tractor. Consequently, the
petitioner filed an action to recover the subject tractor against GELAC Trading with the
Regional Trial Court of Cebu City.

On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive
portion of the decision reads as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant, pronouncing that the plaintiff is the owner of the tractor, subject matter of this
case, and directing the defendants Gelac Trading Corporation and Antonio Gonzales to
return the same to the plaintiff herein; directing the defendants jointly and severally to pay
to the plaintiff the amount of P1,541.00 as expenses for hiring a tractor; P50,000 for
moral damages; P50,000 for exemplary damages; and to pay the cost. (Rollo, pp. 35-36)

On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the
complaint with costs against the petitioner. The Court of Appeals held that the tractor in
question still belonged to Wilfredo Dy when it was seized and levied by the sheriff by
virtue of the alias writ of execution issued in Civil Case No. R-16646.

The petitioner now comes to the Court raising the following questions:

A.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED

THE FACTS AND ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT
OWNERSHIP OF THE FARM TRACTOR HAD ALREADY PASSED TO HEREIN
PETITIONER WHEN SAID TRACTOR WAS LEVIED ON BY THE SHERIFF PURSUANT
TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN FAVOR OF
RESPONDENT GELAC TRADING INC.

B.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE

CONJECTURE AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID
TRACTOR TO PETITIONER WAS DONE IN FRAUD OF WILFREDO DY'S
CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD AS FOUND BY THE
TRIAL COURT.

C.

WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED

THE FACTS AND ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT
THAT THE SALE OF THE TRACTOR BY RESPONDENT GELAC TRADING TO ITS
CO-RESPONDENT ANTONIO V. GONZALES ON AUGUST 2, 1980 AT WHICH TIME
BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF THE INSTANT CASE
WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL CODE
AND RENDERED THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES
SLAPPED AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)
The respondents claim that at the time of the execution of the deed of sale, no
constructive delivery was effected since the consummation of the sale depended upon
the clearance and encashment of the check which was issued in payment of the subject
tractor.

In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA
80 [1989]), we stated that:

x x x           x x x          x x x

The rule is settled that the chattel mortgagor continues to be the owner of the property,
and therefore, has the power to alienate the same; however, he is obliged under pain of
penal liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr.,
Revised Rules of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the
instruments of mortgage are binding, while they subsist, not only upon the parties
executing them but also upon those who later, by purchase or otherwise, acquire the
properties referred to therein.

The absence of the written consent of the mortgagee to the sale of the mortgaged
property in favor of a third person, therefore, affects not the validity of the sale but only
the penal liability of the mortgagor under the Revised Penal Code and the binding effect
of such sale on the mortgagee under the Deed of Chattel Mortgage.

x x x           x x x          x x x

The mortgagor who gave the property as security under a chattel mortgage did not part
with the ownership over the same. He had the right to sell it although he was under the
obligation to secure the written consent of the mortgagee or he lays himself open to
criminal prosecution under the provision of Article 319 par. 2 of the Revised Penal Code.
And even if no consent was obtained from the mortgagee, the validity of the sale would
still not be affected.

Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the
subject tractor. There is no dispute that the consent of Libra Finance was obtained in the
instant case. In a letter dated August 27, 1979, Libra allowed the petitioner to purchase
the tractor and assume the mortgage debt of his brother. The sale between the brothers
was therefore valid and binding as between them and to the mortgagee, as well.

Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by
the vendee from the moment it is delivered to him in any of the ways specified in Articles
1497 to 1501 or in any other manner signing an agreement that the possession is
transferred from the vendor to the vendee. We agree with the petitioner that Articles 1498
and 1499 are applicable in the case at bar.

Article 1498 states:

Art. 1498. When the sale is made through a public instrument, the execution thereof shall
be equivalent to the delivery of the thing which is the object of the contract, if from the
deed the contrary does not appear or cannot clearly be inferred.

x x x           x x x          x x x

Article 1499 provides:

Article 1499. The delivery of movable property may likewise be made by the mere
consent or agreement of the contracting parties, if the thing sold cannot be transferred to
the possession of the vendee at the time of the sale, or if the latter already had it in his
possession for any other reason. (1463a)

In the instant case, actual delivery of the subject tractor could not be made. However,
there was constructive delivery already upon the execution of the public instrument
pursuant to Article 1498 and upon the consent or agreement of the parties when the thing
sold cannot be immediately transferred to the possession of the vendee. (Art. 1499)

The respondent court avers that the vendor must first have control and possession of the
thing before he could transfer ownership by constructive delivery. Here, it was Libra
Finance which was in possession of the subject tractor due to Wilfredo's failure to pay the
amortization as a preliminary step to foreclosure. As mortgagee, he has the right of
foreclosure upon default by the mortgagor in the performance of the conditions
mentioned in the contract of mortgage. The law implies that the mortgagee is entitled to
possess the mortgaged property because possession is necessary in order to enable him
to have the property sold.

While it is true that Wilfredo Dy was not in actual possession and control of the subject
tractor, his right of ownership was not divested from him upon his default. Neither could it
be said that Libra was the owner of the subject tractor because the mortgagee can not
become the owner of or convert and appropriate to himself the property mortgaged.
(Article 2088, Civil Code) Said property continues to belong to the mortgagor. The only
remedy given to the mortgagee is to have said property sold at public auction and the
proceeds of the sale applied to the payment of the obligation secured by the mortgagee.
(See Martinez v. PNB, 93 Phil. 765, 767 [1953]) There is no showing that Libra Finance
has already foreclosed the mortgage and that it was the new owner of the subject tractor.
Undeniably, Libra gave its consent to the sale of the subject tractor to the petitioner. It
was aware of the transfer of rights to the petitioner.

Where a third person purchases the mortgaged property, he automatically steps into the
shoes of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521
[1989]). His right of ownership shall be subject to the mortgage of the thing sold to him. In
the case at bar, the petitioner was fully aware of the existing mortgage of the subject
tractor to Libra. In fact, when he was obtaining Libra's consent to the sale, he volunteered
to assume the remaining balance of the mortgage debt of Wilfredo Dy which Libra
undeniably agreed to.

The payment of the check was actually intended to extinguish the mortgage obligation so
that the tractor could be released to the petitioner. It was never intended nor could it be
considered as payment of the purchase price because the relationship between Libra
and the petitioner is not one of sale but still a mortgage. The clearing or encashment of
the check which produced the effect of payment determined the full payment of the
money obligation and the release of the chattel mortgage. It was not determinative of the
consummation of the sale. The transaction between the brothers is distinct and apart
from the transaction between Libra and the petitioner. The contention, therefore, that the
consummation of the sale depended upon the encashment of the check is untenable.

The sale of the subject tractor was consummated upon the execution of the public
instrument on September 4, 1979. At this time constructive delivery was already effected.
Hence, the subject tractor was no longer owned by Wilfredo Dy when it was levied upon
by the sheriff in December, 1979. Well settled is the rule that only properties
unquestionably owned by the judgment debtor and which are not exempt by law from
execution should be levied upon or sought to be levied upon. For the power of the court
in the execution of its judgment extends only over properties belonging to the judgment
debtor. (Consolidated Bank and Trust Corp. v. Court of Appeals, G.R. No. 78771,
January 23, 1991).

The respondents further claim that at that time the sheriff levied on the tractor and took
legal custody thereof no one ever protested or filed a third party claim.

It is inconsequential whether a third party claim has been filed or not by the petitioner
during the time the sheriff levied on the subject tractor. A person other than the judgment
debtor who claims ownership or right over levied properties is not precluded, however,
from taking other legal remedies to prosecute his claim. (Consolidated Bank and Trust
Corp. v. Court of Appeals, supra) This is precisely what the petitioner did when he filed
the action for replevin with the RTC.

Anent the second and third issues raised, the Court accords great respect and weight to
the findings of fact of the trial court.  There is no sufficient evidence to show that the sale
1âwphi1

of the tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and
Perfecto are brothers, this fact alone does not give rise to the presumption that the sale
was fraudulent. Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663
[1963]). Moreover, fraud can not be presumed; it must be established by clear convincing
evidence.

We agree with the trial court's findings that the actuations of GELAC Trading were indeed
violative of the provisions on human relations. As found by the trial court, GELAC knew
very well of the transfer of the property to the petitioners on July 14, 1980 when it
received summons based on the complaint for replevin filed with the RTC by the
petitioner. Notwithstanding said summons, it continued to sell the subject tractor to one of
its stockholders on August 2, 1980.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals
promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial
Court dated April 8, 1988 is REINSTATED.

SO ORDERED.

Rizal Commercial Banking Corporation v. Royal Cargo Corporation, G.R.

No.
179756, October 2, 2009, 602 SCRA 545.
CARPIO MORALES, J.:

Terrymanila, Inc.1 (Terrymanila) filed a petition for voluntary insolvency with the Regional

Trial Court (RTC) of Bataan  on February 13, 1991.2 One of its creditors was Rizal
Commercial Banking Corporation (petitioner) with which it had an obligation of ₱3 Million
that was secured by a chattel mortgage executed on February 16, 1989. The chattel
mortgage was duly recorded in the notarial register of Amado Castano, a notary public
for and in the Province of Bataan.3

Royal Cargo Corporation (respondent), another creditor of Terrymanila, filed an action

before the RTC of Manila for collection of sum of money and preliminarily attached
"some" of Terrymanila’s personal properties on March 5, 1991 to secure the satisfaction
of a judgment award of ₱296,662.16, exclusive of interests and attorney’s fees. 4

On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.

On June 11, 1991,5 the Manila RTC, by Decision of even date, rendered judgment in the
collection case in favor of respondent.

In the meantime, petitioner sought in the insolvency proceedings at the Bataan RTC
permission to extrajudicially foreclose the chattel mortgage which was granted by Order
of February 3, 1992.6 It appears that respondent, together with its employees’ union,
moved to have this Order reconsidered but the motion was denied by Order of March 20,
1992 Order.7

The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction
sale of the mortgaged personal properties at the Municipal Building of Mariveles, Bataan.
At the auction sale, petitioner, the sole bidder of the properties, purchased them for ₱1.5
Million. Eventually, petitioner sold the properties to Domingo Bondoc and Victoriano See. 8

Respondent later filed on July 30, 1992 a petition before the RTC of Manila, docketed as
Civil Case No. 92-62106, against the Provincial Sheriff of the RTC Bataan and petitioner,
for annulment of the auction sale (annulment of sale case). Apart from questioning the
inclusion in the auction sale 9 of some of the properties which it had attached, respondent
questioned the failure to duly notify it of the sale at least 10 days before the sale, citing
Section 14 of Act No. 1508 or the Chattel Mortgage Law which reads:

Sec. 14. The mortgagee, his executor, administrator or assign, may, after thirty days,
from the time of condition broken, cause the mortgaged property, or any part thereof, to
be sold at public auction by a public officer at a public place in the municipality where the
mortgagor resides, or where the property is situated, provided at least ten days notice of
the time, place, and purpose of such sale has been posted at two or more public places
in such municipality, and the mortgagee, his executor, administrator or assignee
shall notify the mortgagor or person holding under him and the persons holding
subsequent mortgages of the time and place of sale, either by notice in writing directed to
him or left at his abode, if within the municipality, or sent by mail if he does not reside in
such municipality, at least ten days previous to the date. (Emphasis and underscoring
supplied),

it claiming that its counsel received a notice only on the day of the sale. 10

Petitioner, alleging that the annulment of sale case filed by respondent stated no cause
of action, filed on December 3, 1992 a Motion to Dismiss 11 which was, however, denied
by Branch 16 of the Manila RTC.12

Petitioner appealed the denial of the Motion to Dismiss via certiorari to the Court of
Appeals, docketed as CA-G.R. SP No. 31125. The appellate court dismissed the petition,
by Decision of February 21, 1994, it holding that respondent’s petition for
annulment "prima facie states a sufficient cause of action  and that the [trial court] in
denying [herein petitioner RCBC’s] motion to dismiss, had acted advisedly  and well within
its powers and authority."13

Petitioner thereupon filed before the Manila RTC its Answer Ex Abundante Cautelam 14 in
the annulment of sale case in which it lodged a Compulsory Counterclaim by seeking ₱1
Million for moral damages, ₱500,000 for exemplary damages, and ₱250,000 for
attorney’s fees. It thereafter elevated the case to this Court via petition for review
on certiorari, docketed as G.R. 115662. This Court by minute Resolution of November 7,
1994,15 denied the petition for failure to show that a reversible error was committed by the
appellate court.16
Trial on the merits of the annulment of sale case thereupon ensued. By Decision 17 of
October 15, 1997, Branch 16 of the Manila RTC rendered judgment in favor of
respondent, disposing as follows:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:

1. ORDERING . . . RCBC to pay plaintiff [heein respondent Royal Cargo] the amount of
₱296,662.16 and ₱8,000.00 as reasonable attorney’s fees.

2. No pronouncement as to costs.

3. DISMISSING the petition as to respondents Provincial Sheriff of Balanga, Bataan

RTC;

SO ORDERED.

Both parties appealed to the Court of Appeals which, by Decision 18 of April 17, 2007,
denied herein petitioner’s appeal and partly granted herein respondent’s by increasing to
₱50,000 the attorney’s fees awarded to it and additionally awarding it exemplary
damages and imposing interest on the principal amount payable to it. Thus it disposed:

WHEREFORE, the foregoing considered, the appeal instituted by appellant RCBC is

hereby DENIED for lack of merit while the appeal of appellant Royal Cargo is PARTLY
GRANTED in that the amount of attorney’s fees awarded by the RTC is increased to
P50,000.00.

In addition, RCBC is ordered to pay Royal Cargo the amount of P100,000.00

as exemplary damages. The principal amount of P296,662.18 [sic] to be paid by RCBC
to Royal Cargo shall likewise earn 12% interest per annum from the time the petition was
filed in the court a quo until fully paid. The rest of the decision is AFFIRMED.

SO ORDERED. (Emphasis and underscoring supplied)

In partly granting respondent’s appeal  from the Decision of Br. 16 of RTC Manila, the
appellate court ratiocinated that respondent had a right to be "timely informed" of the
foreclosure sale.

RCBC’s citations [sic] of numerous rulings on the matter more than supports the fact that
as mortgagee, it had preferential right over the chattels subject of the foreclosure sale.
This however is not at issue in this case. What is being contested is the right of Royal
Cargo to be timely informed of the foreclosure sale  as it too had interests over the
mortgagee Terrymanila, Inc.’s assets. We note that this matter had already been passed
upon by this Court on February 21, 1994 in CA-G.R. SP No. 31125 as well as by the
Supreme Court on November 7, 1994 in G.R. No. [1]15662. RCBC, by arguing about its
preferential right as mortgagee in the instant appeal merely reiterates what had already
been considered and ruled upon in earlier proceedings.

xxxx

Moreover, Section 14 of the Chattel Mortgage Law pertaining to the procedure in the
foreclosure of chattel mortgages provides, to wit:

xxxx
The above-quoted provision clearly requires that the mortgagee should notify in writing
the mortgagor or person holding under him of the time and place of the sale  by personal
delivery of the notice. Thus, RCBC’s failure to comply with this requirement warranted a
ruling against it by the RTC. (Italics in the original; emphasis partly in the original;
underscoring supplied)

Its motion for reconsideration having been denied by the appellate court, 19 petitioner
lodged the present petition for review which raises the following issues:

WHETHER OR NOT RESPONDENT SHOULD HAVE BEEN GIVEN A

TEN(10)-DAY PRIOR NOTICE OF THE JUNE 16, 1992 FORECLOSURE
SALE

II

WHETHER OR NOT THE TRIAL COURT AND THE COURT OF

APPEALS GRAVELY ERRED IN DECLARING PETITIONER GUILTY OF
CONSTRUCTIVE FRAUD IN FAILING TO PROVIDE RESPONDENT A
TEN (10)-DAY PRIOR NOTICE OF THE FORECLOSURE SALE.

III

WHETHER OR NOT THE PETITIONER WAS CORRECTLY HELD

LIABLE TO PAY RESPONDENT P296,662.[16] PLUS
INTEREST THEREON, EXEMPLARY DAMAGES AND ATTORNEY’S
FEES.

IV

WHETHER OR NOT PETITIONER IS ENTITLED TO AN AWARD OF

ATTORNEY’S FEES.20 (Underscoring supplied)

Petitioner faults the appellate court in applying res judicata by holding that respondent’s
entitlement to notice of the auction sale had already been settled in its Decision in CA
G.R. SP No. 31125 and in this Court’s Decision in G.R. No. 115662. For, so it contends,
the decisions in these cases dealt on interlocutory issues, viz: the issue of whether
respondent’s petition for annulment of the sale stated a cause of action, and the issue
of whether petitioner’s motion to dismiss was properly denied.21

Arguing against respondent’s position that it was entitled to notice of the auction sale,
petitioner cites the Chattel Mortgage Law which enumerates who are entitled to be
notified under Section 14 thereof. It posits that "[h]ad the law intended to include in said
Section an attaching creditor or a judgment creditor [like herein respondent], it could have
so specifically stated therein, since in the preceding section, Section 13, it already
mentioned that a subsequent attaching creditor may redeem." 22

Petitioner goes on to fault the appellate court in echoing its ruling in CA-G.R. SP No.
31125 that Sections 1323 and 14 of the Chattel Mortgage Law should be read in tandem
since the right given to the attaching creditor under Section 13 "would not serve its
purpose if we were to exclude the subsequent attaching creditor from those who under
Section 14 need to be notified of the foreclosure sale ten days before it is held." 24
Petitioner likewise posits that Section 13 permits a subsequent attaching creditor to
"redeem" the mortgage only before the holding of the auction sale, drawing attention to
Paray v. Rodriguez25 which instructs that no right of redemption exists over personal
property as the Chattel Mortgage Law is silent thereon.26

Even assuming arguendo, petitioner contends, that there exists an obligation to furnish
respondent a notice of the auction sale 10 days prior thereto, "respondent’s judgment
award of ₱296,662.16 with interest thereon at the legal rate from the date of filing of the
[c]omplaint and ₱10,000.00 as reasonable attorney’s fees is very much less than the
P1.5 [m]illion bid of petitioner…"27

As for the issue of constructive fraud-basis of the award of damages to respondent,

petitioner maintains that both the trial and appellate courts erred in concluding that it
(petitioner) was the one which sent the notice of sheriff’s sale to, which was received on
the day of the sale by, the counsel for respondent for, so it contends, it had absolutely no
participation in the preparation and sending of such notice. 28

In its Comment,29 respondent reiterates that the respective decisions of the appellate

court and this Court in CA G.R. SP No. 31125  and G.R. No. 115662 are conclusive
between the parties, hence, "the right of [respondent] to a [ten-day] notice has a binding
effect and must be adopted in any other controversy between the same parties in which
the very same question is raised." 30

And respondent maintains that the obligation to notify the mortgagor or person holding
under him and the persons holding subsequent mortgages falls upon petitioner as the
mortgagee.

The petition is MERITORIOUS.

The respective decisions of the appellate court in CA G.R. SP No. 31125  and this Court
in G.R. No. 115662 did not conclusively settle the issue on the need to give a 10-day
notice to respondent of the holding of the public auction sale of the chattels.

The elements of res judicata are: (1) the judgment sought to bar the new action must be
final; (2) the decision must have been rendered by a court having jurisdiction over the
subject matter and the parties; (3) the disposition of the case must be a judgment on the
merits; and (4) there must be as between the first and second action, identity of parties,
subject matter, and causes of action. 31

Res judicata has two concepts: (1) bar by prior judgment as enunciated in Rule 39,
Section 47 (b) of the Rules of Civil Procedure; and (2) conclusiveness of judgment in
Rule 39, Section 47 (c).32

There is bar by prior judgment when, as between the first case where the judgment was
rendered, and the second case that is sought to be barred, there is identity of parties,
subject matter, and causes of action. Where there is identity of parties and subject matter
in the first and second cases, but no identity of causes of action, there is conclusiveness
of judgment.33 The first judgment is conclusive only as to those matters actually and
directly controverted and determined, not as to matters merely involved therein.

The Court of Appeals, in CA G.R. SP No. 31125, resolved only the interlocutory issue of
whether the trial court’s Order of April 12, 1993 denying petitioner’s motion to dismiss
respondent’s petition for annulment was attended by grave abuse of discretion. The
appellate court did not rule on the merits of the petition as to establish a controlling legal
rule which has to be subsequently followed by the parties in the same case. It merely
held that respondent’s petition in the trial court stated a sufficient cause of action. Its
determination of respondent’s entitlement to notice of the public auction sale was at best
prima facie. Thus, the appellate court held:

In view of the above, We are of the considered view that the private respondent’s petition
in the court a quo prima facie states a sufficient cause of action and that the public
respondent in denying the petitioner’s motion to dismiss, had acted advisedly and well
within its powers and authority. We, therefore, find no cause to annul the challenged
order issued by the respondent court in Civil Case No. 92-62106. (Underscoring in the
original; emphasis and italics supplied)34

An order denying a motion to dismiss is merely interlocutory and cannot give rise to res
judicata, hence, it is subject to amendments until the rendition of the final judgment. 35

On respondent’s contention that petitioner, as mortgagee, had the duty to notify it of the
public auction sale, the Court finds the same immaterial to the case.

Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to

redeem the mortgaged property only before its sale. Consider the following
pronouncement in Paray: 36

[T]here is no law in our statute books which vests the right of redemption over personal
property. Act No. 1508, or the Chattel Mortgage Law, ostensibly could have served as
the vehicle for any legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged personal property,
but the statute is definitely silent on the point. And Section 39 of the 1997 Rules of Civil
Procedure, extensively relied upon by the Court of Appeals, starkly utters that the right of
redemption applies to real properties, not personal properties, sold on execution.
(Emphasis, italics and underscoring supplied)

Unmistakably, the redemption cited in Section 13 partakes of an equity of redemption,

which is the right of the mortgagor to redeem the mortgaged property  after his default in
the performance of the conditions of the mortgage but before the sale of the property37 to
clear it from the encumbrance of the mortgage. 38 It is not the same as right of redemption
which is the right of the mortgagor to redeem the mortgaged property after registration of
the foreclosure sale,39 and even after confirmation of the sale.40

While respondent had attached some of Terrymanila’s assets to secure the satisfaction
of a ₱296,662.16 judgment rendered in another case, what it effectively attached was
Terrymanila’s equity of redemption. That respondent’s claim is much lower than the ₱1.5
million actual bid of petitioner at the auction sale does not defeat respondent’s  equity of
redemption. Top Rate International Services, Inc. v. IAC41 enlightens:

It is, therefore, error on the part of the petitioner to say that since private
respondents’ lien is only a total of ₱343,227.40, they cannot be entitled to the
equity of redemption because the exercise of such right would require the
payment of an amount which cannot be less than ₱40,000,000.00.

When herein private respondents prayed for the attachment of the properties to secure
their respective claims against Consolidated Mines, Inc., the properties had already been
mortgaged to the consortium of twelve banks to secure an obligation of
US$62,062,720.66. Thus, like subsequent mortgagees, the respondents’ liens on such
properties became inferior to that of banks, which claims in the event of foreclosure
proceedings, must first be satisfied. The appellate court, therefore, was correct in
holding that in reality, what was attached by the respondents was
merely Consolidated Mines’ . . . equity of redemption. x x x x
 xxxx

We, therefore, hold that the appellate court did not commit any error in ruling that there
was no over-levy on the disputed properties. What was actually attached by
respondents was Consolidated Mines’  right or equity of redemption, an incorporeal
and intangible right, the value of which can neither be quantified nor equated with the
actual value of the properties upon which it may be exercised.42 (Emphasis, italics and
underscoring supplied)

Having thus attached Terrymanila’s equity of redemption, respondent had to be informed

of the date of sale of the mortgaged assets for it to exercise such equity of redemption
over some of those foreclosed properties, as provided for in Section 13.

Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order
of the RTC Bataan-insolvency court which granted leave to petitioner to foreclose the
chattel mortgage, which motion was denied. Notably, respondent failed to allege this
incident in his annulment of sale case before the RTC of Manila.

Thus, even prior to receiving, through counsel, a mailed notice of the auction sale on the
date of the auction sale itself on June 16, 1992, respondent was already put on notice of
the impending foreclosure sale of the mortgaged chattels. It could thus have expediently
exercised its equity of redemption, at the earliest when it received the insolvency court’s
Order of March 20, 1992 denying its Motion for Reconsideration of the February 3, 1992
Order.

Despite its window of opportunity to exercise its equity of redemption, however,

respondent chose to be technically shrewd about its chances, preferring instead to seek
annulment of the auction sale, which was the result of the foreclosure of the mortgage,
permission to conduct which it had early on opposed before the insolvency court. Its
negligence or omission to exercise its equity of redemption within a reasonable time, or
even on the day of the auction sale, warrants a presumption that it had either abandoned
it or opted not to assert it.43 Equitable considerations thus sway against it.

It is also not lost on the Court that as early as April 12, 1991, Terrymanila had been
judicially declared insolvent. Respondent’s recourse was thus to demand the satisfaction
of its judgment award before the insolvency court as its judgment award is a preferred
credit under Article 224444 of the Civil Code. To now allow respondent have its way in
annulling the auction sale and at the same time let it proceed with its claims before the
insolvency court would neither rhyme with reason nor with justice.

Parenthetically, respondent has not shown that it was prejudiced by the auction sale
since the insolvency court already determined that even if the mortgaged properties were
foreclosed, there were still sufficient, unencumbered assets of Terrymanila to cover the
obligations owing to other creditors, including that of respondent’s. 45

In any event, even if respondent would have participated in the auction sale and matched
petitioner’s bid, the superiority of petitioner’s lien over the mortgaged assets would
preclude respondent from recovering the chattels. 1avvphi1

It has long been settled by this Court that "the right of those who acquire said
properties should not and can not 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. x x x. 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.
(Emphasis and underscoring supplied) 46

It bears noting that the chattel mortgage in favor of petitioner was registered more than
two years before the issuance of a writ of attachment over some of Terrymanila’s chattels
in favor of respondent. This is significant in determining who between petitioner and
respondent should be given preference over the subject properties. Since the registration
of a chattel mortgage is an effective and binding notice to other creditors of its existence
and creates a real right or lien that follows the property wherever it may be, 47 the right of
respondent, as an attaching creditor or as purchaser, had it purchased the mortgaged
chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his
favor a valid chattel mortgage.48

Contrary then to the appellate court’s ruling, petitioner is not liable for constructive fraud
for proceeding with the auction sale. Nor for subsequently selling the chattel. For
foreclosure suits may be initiated even during insolvency proceedings, as long as leave
must first be obtained from the insolvency court49 as what petitioner did.

The appellate court’s award of exemplary damages and attorney’s fees for respondent,
given petitioner’s good faith, is thus not warranted.

As for petitioner’s prayer for attorney’s fees in its Compulsory Counterclaim, the same is
in order, the dismissal of respondent’s Complaint nowithstanding. 50 Perkin Elmer
Singapore v. Dakila Trading,51 citing Pinga v. Heirs of German Santiago,52 enlightens:

It bears to emphasize that petitioner’s counterclaim against respondent is for damages

and attorney’s fees arising from the unfounded suit. While respondent’s Complaint
against petitioner is already dismissed, petitioner may have very well incurred damages
and litigation expenses such as attorney’s fees since it was forced to engage legal
representation in the Philippines to protect its rights and to assert lack of jurisdiction of
the courts over its person by virtue of the improper service of summons upon it. Hence,
the cause of action of petitioner’s counterclaim is not eliminated by the mere dismissal of
respondent’s complaint.53 (Underscoring supplied)

To the Court, the amount of ₱250,000 prayed for by petitioner in its Counterclaim is just
and equitable, given the nature and extent of legal services employed in controverting
respondent’s unfounded claim.

WHEREFORE, the petition for review is GRANTED. The challenged Decision and
Resolution of the Court of Appeals are REVERSED and SET ASIDE. Civil Case No. 92-
62106 lodged before the Regional Trial Court of Manila, Branch 16, is DISMISSED for
lack of merit.

Respondent, Royal Cargo Corporation, is ORDERED to pay petitioner, Rizal Commercial

Banking Corporation, ₱250,000 as and for attorney’s fees.

No costs.

SO ORDERED.

Servicewide Specialists, Inc. v. Court of Appeals, G.R. No. 110048,

November 19, 1999, 318
SCRA 493.
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of the
Decision of the Court of Appeals[1] in CA-G.R. CV No. 19571,
affirming the judgment of the Regional Trial Court of Manila,
Branch XX, dismissing Civil Case No. 84-25763 for replevin and
damages.

The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan

automobile, with Motor No. 2E-08927, Serial No. A112A-5297,
Model No. 1976.

The appellate court culled the facts that matter as follows:[2]

"On May 14, 1976, Leticia L. Laus of Quezon City

purchased on credit a Colt Galant xxx from Fortune
Motors (Phils.) Corporation.  On the same date, she
executed a promissory note for the amount of
P56,028.00, inclusive of interest at 12% per annum,
payable within a period of 48 months starting August,
1976 at a monthly installment of P1,167.25 due and
demandable on the 17th day of each month (Exhibit
"A", pp. 144, Orig. Records,). It was agreed upon,
among others, that in case of default in the payment of
any installment the total principal sum, together with
the interest, shall become immediately due and payable
(Exhibit "A"; p. 144, Orig. Records).  As a security for
the promissory note, a chattel mortgage was
constituted over the said motor vehicle (Exhibit "B",
ibid.), with a deed of assignment incorporated therein
such that the credit and mortgage rights were assigned
by Fortune Motors Corp. in favor of Filinvest Credit
Corporation with the consent of the mortgagor-debtor
Leticia Laus (Exhibits "B-1" and "B-2"; p. 147, ibid.).
The vehicle was then registered in the name of Leticia
L. Laus with the chattel mortgage annotated on said
certificate.  (Exhibit "H"; p. 154, ibid.)

On September 25, 1978, Filinvest Credit Corporation in

turn assigned the credit in favor of Servicewide
Specialists, Inc. (Servicewide, for brevity) transferring
unto the latter all its rights under the promissory note
and the chattel mortgage (Exhibit "B-3"; p. 149, ibid.)
with the corresponding notice of assignment sent to the
 registered car owner (Exhibit "C"; p. 150, Ibid.).

On April 18, 1977, Leticia Laus failed to pay the

monthly installment for that month.  The installments
for the succeeding 17 months were not likewise fully
paid, hence on September 25, 1978, pursuant to the
provisions of the promissory note, Servicewide
demanded payment of the entire outstanding balance
of P46,775.24 inclusive of interests (Exhibits "D" and
"E"; pp. 151-152, ibid.).  Despite said formal demand,
Leticia Laus failed to pay all the monthly installments
due until July 18, 1980.

On July 25, 1984, Servicewide sent a statement of

account to Leticia Laus and demanded payment of the
amount of P86,613.32 representing the outstanding
balance plus interests up to July 25, 1985, attorney's
fees, liquidated damages, estimated repossession
expense, and bonding fee (Exhibit "F"; p. 153, ibid.)

As a result of the failure of Leticia Laus to settle her

obligation, or at least to surrender possession of the
motor vehicle for the purpose of foreclosure,
Servicewide instituted a complaint for replevin,
impleading Hilda Tee and John Dee in whose custody
the vehicle was believed to be at the time of the filing of
the suit.

In its complaint, plaintiff alleged that it had superior lien over the
mortgaged vehicle; that it is lawfully entitled to the possession of
the same together with all its accessories and equipments; (sic)
that Hilda Tee was wrongfully detaining the motor vehicle for the
purpose of defeating its mortgage lien; and that a sufficient bond
had been filed in court.  (Complaint with Annexes, pp. 1-13, ibid.). 
On July 30, 1984, the court approved the replevin bond (p.
20, ibid.)

On August 1, 1984, Alberto Villafranca filed a third party claim

contending that he is the absolute owner of the subject motor
vehicle duly evidenced by the Bureau of Land Transportation's
Certificate of Registration issued in his name on June 22, 1984;
that he acquired the said mother vehicle from a certain Remedios
D. Yang under a Deed of Sale dated May 16, 1984; that he acquired
the same free from all lien and emcumbrances; and that on July
30, 1984, the said automobile was taken from his residence by
Deputy Sheriff Bernardo Bernabe pursuant to the seizure order
issued by the court a quo.

Upon motion of the plaintiff below, Alberto Villafranca was

substituted as defendant.  Summons was served upon him.  (pp.
55-56, ibid).

On March 20, 1985, Alberto Villafranca moved for the dismissal of

the complaint on the ground that there is another action pending
between the same parties before the Regional Trial Court of
Makati, Branch 140, docketed as Civil Case No. 8310, involving the
seizure of subject motor vehicle and the indemnity bond posted by
Servicewide (Motion to Dismiss with Annexes; pp. 57-110, ibid.)
On March 28, 1985, the court granted the aforesaid motion (p. 122,
ibid.), but subsequently the order of dismissal was reconsidered
and set aside (pp. 135-136, ibid.).  For failure to file his Answer as
required by the court a quo, Alberto Villafranca was declared in
default and plaintiff's evidence was received ex parte.

On December 27, 1985, the lower court rendered a decision

dismissing the complaint for insufficiency of evidence.  Its motion
for reconsideration of said decision having been denied, xxx."

In its appeal to the Court of Appeals, petitioner theorized that a

suit for replevin aimed at the foreclosure of a chattel is an
action quasi in rem, and does not require the inclusion of the
principal obligor in the Complaint.  However, the appellate court
affirmed the decision of the lower Court; ratiocinating, thus:
"A cursory reading, however, of the Promissory Note
dated May 14, 1976 in favor of Fortune Motors (Phils.)
Corp. in the sum of P56,028.00 (Annex "A" of
Complaint, p. 7, Original Records) and the Chattel
Mortgage of the same date (Annex "B" of Complaint;
pp. 8-9, ibid.) will disclose that the maker and
mortgagor respectively are one and the same person: 
Leticia Laus.  In fact, plaintiff-appellant admits in
paragraphs (sic) nos. 2 and 3 of its Complaint that the
aforesaid public documents (Annexes "A" and "B"
thereof) were executed by Leticia Laus, who, for
reasons not explained, was never impleaded.  In the
 case under consideration, plaintiff-appellant's main
case is for judicial foreclosure of the chattel mortgage
against Hilda Tee and John Doe who was later
substituted by appellee Alberto Villafranca.  But as
there is no privity of contract, not even a causal link,
between plaintiff-appellant Servicewide Specialists,
Inc. and defendant-appellee Alberto Villafranca, the
court a quo committed no reversible error when it
dismissed the case for insufficiency of evidence against
Hilda Tee and Alberto Villafranca since the evidence
adduced pointed to Leticia Laus as the party liable for
the obligation sued upon (p. 2, RTC Decision)."[3]

Petitioner presented a Motion for Reconsideration but in its

Resolution[4] of May 10, 1993, the Court of Appeals denied the
same, taking notice of another case "pending between the same
parties xxx relating to the very chattel mortgage of the motor
vehicle in litigation."

Hence, the present petition for review on certiorari under Rule 45. 

Essentially, the sole issue here is:  Whether or not a case for
replevin may be pursued against the defendant, Alberto
Villafranca, without impleading the absconding debtor-mortgagor?

Rule 60 of the Revised Rules of Court requires that an applicant for

replevin must show that he "is the owner of the property claimed,
particularly describing it, or is entitled to the possession
thereof."[5] Where the right of the plaintiff to the possession of the
specified property is so conceded or evident, the action need only
be maintained against him who so possesses the property.  In rem
action est per quam rem nostram quae ab alio possidetur
petimus, et semper adversus eum est qui rem possidet.[6]

Citing Northern Motors, Inc. vs. Herrera,[7] the Court said in

the case of BA Finance (which is of similar import with the
present case):
"There can be no question that persons having a special
right of property in the goods the recovery of which is
sought, such as a chattel mortgagee, may maintain an
action for replevin therefor.  Where the mortgage
authorizes the mortgagee to take possession of the
property on default, he may maintain an action to
 recover possession of the mortgaged chattels from the
mortgagor or from any person in whose hands he may
find them."[8]

Thus, in default of the mortgagor, the mortgagee is thereby

constituted as attorney-in-fact of the mortgagor, enabling such
mortgagee to act for and in behalf of the owner.  That the
defendant is not privy to the chattel mortgage should be
inconsequential.  By the fact that the object of replevin is traced to
his possession, one properly can be a defendant in an action for
replevin. It is here assumed that the plaintiff's right to possess the
thing is not or cannot be disputed.[9] (Italics supplied)

However, in case the right of possession on the part of the plaintiff,

or his authority to claim such possession or that of his principal, is
put to great doubt (a contending party may contest the legal bases
for plaintiff's cause of action or an adverse and independent claim
of ownership or right of possession may be raised by that party), it
could become essential to have other persons involved and
impleaded for a complete determination and resolution of the
controversy.[10] In the case under scrutiny, it is not disputed that
there is an adverse and independent claim of ownership by the
respondent as evinced by the existence of a pending case before the
Court of Appeals involving subject motor vehicle between the same
parties herein.[11] Its resolution is a factual matter, the province of
which properly lies in the lower Court and not in the Supreme
Court, in the guise of a petition for review on certiorari.  For it is
basic that under Rule 45, this Court only entertains questions of
law, and rare are the exceptions and the present case does not
appear to be one of them.

In a suit for replevin, a clear right of possession must be

established.  (Italics supplied) A foreclosure under a chattel
mortgage may properly be commenced only once there is default
on the part of the mortgagor of his obligation secured by the
mortgage. The replevin in this case has been resorted to in order to
pave the way for the foreclosure of what is covered by the chattel
mortgage.  The conditions essential for such foreclosure would be
to show, firstly, the existence of the chattel mortgage and,
secondly, the default of the mortgagor. These requirements must
be shown because the validity of the plaintiff's exercise of the right
of foreclosure is inevitably dependent thereon.[12]
Since the mortgagee's right of possession is conditioned upon the
actual fact of default which itself may be controverted, the
inclusion of other parties, like the debtor or the mortgagor himself,
may be required in order to allow a full and conclusive
determination of the case.  When the mortgagee seeks a replevin in
order to effect the eventual foreclosure of the mortgage, it is not
only the existence of, but also the mortgagor's default on, the
chattel mortgage that, among other things, can properly uphold the
right to replevy the property.  The burden to establish a valid
justification for such action lies with the plaintiff.  An adverse
possessor, who is not the mortgagor, cannot just be deprived of his
possession, let alone be bound by the terms of the chattel mortgage
contract, simply because the mortgagee brings up an action for
replevin."[13]

Leticia Laus, being an indispensable party, should have been

impleaded in the complaint for replevin and damages.  An
indispensable party is one whose interest will be affected by the
court's action in the litigation, and without whom no final
determination of the case can be had.  The party's interest in the
subject matter of the suit and in the relief sought are so
inextricably intertwined with the other parties that his legal
presence as a party to the proceeding is an absolute necessity.  In
his absence, there cannot be a resolution of the dispute of the
parties before the Court which is effective, complete, or equitable.

Conversely, a party is not indispensable to the suit if his interest in

the controversy or subject matter is distinct and divisible from the
interest of the other parties and will not necessarily be prejudiced
by a judgment which does complete justice to the parties in Court. 
He is not indispensable if his presence would merely complete
relief between him and those already parties to the action or will
simply avoid multiple litigation.[14] Without the presence of
indispensable parties to a suit or proceeding, a judgment of a Court
cannot attain real finality.[15]

That petitioner could not locate the mortgagor, Leticia Laus, is no

excuse for resorting to a procedural short-cut.  It could have
properly availed of substituted service of summons under the
Revised Rules of Court.[16] If it deemed such a mode to be
unavailing, it could have proceeded in accordance with Section 14
of the same Rule.[17] Indeed, petitioner had other proper
remedies, it could have resorted to but failed to avail of.  For
instance, it could have properly impleaded the mortgagor.  Such
failure is fatal to petitioner's cause.

With the foregoing disquisition and conclusion, the other issues

raised by petitioner need not be passed upon.

WHEREFORE, the Petition is DENIED and the Decision of the

Court of Appeals in CA-G.R. CV No. 19571 AFFIRMED.  No
pronouncement as to costs.

SO ORDERED.

PAMECA Wood Treatment Plant, Inc. v. Court of Appeals, G.R. No.

106435, July 14, 1999,
310 SCRA 281.
GONZAGA-REYES, J.:

Before Us for review on certiorari is the decision of the respondent Court of Appeals in
C.A. G.R. C.V. No. 27861, promulgated on April 23, 1992,   affirming in toto the decision
1

of the Regional Trial Court of Makati   to a award respondent bank's deficiency claim,
2

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
PAMECA's 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 PAMECA's 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   with
3

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 PAMECA's 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 corporation's
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  , which valued the properties at P2,518,621.00,
5

in accordance with the terms of the chattel mortgage contract   between the parties that
6

required that the inventories "be maintained at a level no less than P2 million". Petitioners
argue that respondent bank's 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.   The Court of Appeals, in turn, disregarded these documents for
7

petitioners' failure to present them in evidence, or to even allude to them in their

testimonies before the lower courtr.   Instead, respondent court declared that it is not at
8

all unlikely for the chattels to have sufficiently deteriorated as to have fetched such a low
price at the time of the auction sale.   Neither did respondent court find anything irregular
9

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.   Private petitioners contend that they
11

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   and 2115   of the Civil Code be applied in analogy to the instant case to
13 14

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  , the lower
16

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 court's 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 foreclosire sale are less than the amount of the principal
obligation, will apply.

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

Sec. 14 of Act No. 1508, as amended, or the chattel Mortgage Law, states:

xxx xxx 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 officer's 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.  , cited in Ablaza vs.
17

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 vendee's failure to pay cover two or
more installments, this provision is specifically applicable to a sale on installments.

To accommodate petitioners' prayer even on the basis of equity would be to expand the
application of the provisions of Article 1484 to situations beyond its specific purview, and
ignore the language and intent of the Chattel Mortgage Law. Equity, which has been
aptly described as "justice outside legality", is applied only in the absence of, and never
against, statutory law or judicial rules of procedure.  19

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

Having nonetheless examined the inventory and chattel mortgage document as part of
the records, We are not convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on January 18, 1984, the date of
the foreclosure sale. At best, the chattel mortgage contract only indicates the obligation
of the mortgagor to maintain the inventory at a value of at least P2,000,000.00, but does
not evidence compliance therewith. The inventory, in turn, was as of March 31, 1980, or
even prior to April 17, 1980, the date when the parties entered into the contracts of loan
and chattel mortgage, and is far from being an accurate estimate of the market value of
the properties at the time of the foreclosure sale four years thereafter. Thus, even
assuming that the inventory and chattel mortgage contract were duly submitted as
evidence before the trial court, it is clear that they cannot suffice to substantiate
petitioners' allegation of inadequacy of price.1âwphi1.nêt

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,   and may not be inferred from the lone circumstance that it was only
20

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 DBP's borrowing rate for these funds. Before the date of maturity, we hereby
bind ourselves, jointly and severally, to make partial payments as follows:

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

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

xxx 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 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 attorney's fees as
provided for in the mortgage contract, in addition to the legal fees and other incidental
expenses. In the event of foreclosure of the mortgage securing this note, we further bind
ourselves jointly and severally to pay the deficiency, if any. (Emphasis supplied)  21

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

PAMECA WOOD TREATMENT PLANT, INC.

By:

(Sgd) HERMINIO G. TEVES

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

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES  22

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

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

SO ORDERED.