FIRST DIVISION

[G.R. No. 126200. August 16, 2001.]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.

HONORABLE COURT OF APPEALS and REMINGTON
INDUSTRIAL SALES CORPORATION, respondents.

Office of the Legal Counsel for petitioner.

P.C. Nolasco & Associates for private respondents.

SYNOPSIS

In 1984, when Marinduque Mining and Industrial Corporation (MMIC)

failed to settle its loan obligations, PNB and DBP foreclosed and eventually
acquired MMIC's mortgaged properties. PNB and DBP then assigned their
rights to the properties to Nonoc Mining, Maricalum Mining and Island
Cement. Meantime, however, between 1982 to 1983, MMIC purchased
construction materials from Remington Corp. which remained unpaid as of
1984. Remington Corp. thus filed "a collection case against MMIC and later
included therein PNB and DBP, then Nonoc Mining, Maricalum Mining, and
Island Cement. Remington Corp. asserted that the transfer of MMIC
properties to the three newly created entities practically owned wholly by
PNB and DBP, were made in fraud of creditors. The defendant corporations
must be treated as one and the same entity by disregarding the veil of
corporate fiction.
The Court found no fraud on the part of MMIC and its transferees to
warrant the piercing of the corporate veil. PNB and DBP foreclosed the
mortgaged properties by mandate of PD 385, when the past due account of
MMIC incurred arrearages of more than 20% of the total outstanding
obligation. The establishment of the three new corporations were by
necessity since DBP is not authorized to engage in mining business. The
hiring of MMIC's personnel and the maintaining of business at MMIC's
premises are both incidental. Lastly, DBP cannot be held liable for the
obligation of MMIC in the absence of liquidation proceedings.

SYLLABUS

1. COMMERCIAL LAW; MORTGAGES; (PD 385) LAW ON MANDATORY

FORECLOSURE. — It bears stressing that PNB and DBP are mandated by
Section 1 of Presidential Decree No. 385 (The Law on Mandatory
Foreclosure) to foreclose on the mortgage when the past due account had
incurred arrearages of more than 20% of the total outstanding obligation.
Thus, PNB and DBP did not only have a right, but the duty under said law, to
foreclose upon the subject properties. The banks had no choice but to obey
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 the statutory command.
2. ID.; CORPORATIONS; PIERCING THE VEIL OF CORPORATE
FICTION. — The doctrine of piercing the veil of corporate fiction applies only
when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. In this case the Court finds
that Remington failed to discharge its burden of proving bad faith on the part
of Marinduque Mining and its transferees in the mortgage and foreclosure of
the subject properties to justify the piercing of the corporate veil.
3. CIVIL LAW; CONCURRENCE AND PREFERENCE OF CREDITS;
CLASSIFICATION OF CREDITS; LIEN OF CREDITOR OVER SPECIFIC PROPERTY
OF DEBTOR CANNOT BE ENFORCED AGAINST THE TRANSFEREE IN THE
ABSENCE OF LIQUIDATION PROCEEDINGS. — Under Article 2241 of the Civil
Code, with reference to specific movable property, in the absence of
liquidation proceedings, the claim of creditor Remington from MMIC cannot
be enforced against its transferee, DBP. Thus, as the extra-judicial
foreclosure instituted by PNB and DBP is not the liquidation proceeding
contemplated by the Civil Code, Remington cannot claim its pro rata share
from DBP.

DECISION

KAPUNAN, J : p

Before the Court is a petition for review on certiorari under Rule 45 of

the Rules of Court, seeking a review of the Decision of the Court of Appeals
dated October 6, 1995 and the Resolution of the same court dated August
29, 1996.
The facts are as follows:
Marinduque Mining Industrial Corporation (Marinduque Mining), a
corporation engaged in the manufacture of pure and refined nickel, nickel
and cobalt in mixed sulfides, copper ore/concentrates, cement and pyrite
conc., obtained from the Philippine National Bank (PNB) various loan
accommodations. To secure the loans, Marinduque Mining executed on
October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in
favor of PNB. The mortgage covered all of Marinduque Mining's real
properties, located at Surigao del Norte, Sipalay, Negros Occidental, and at
Antipolo, Rizal, including the improvements thereon. As of November 20,
1980, the loans extended by PNB amounted to P4 Billion, exclusive of
interest and charges. 1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the
Development Bank of the Philippines (DBP) a second Mortgage Trust
Agreement. In said agreement, Marinduque Mining mortgaged to PNB and
DBP all its real properties located at Surigao del Norte, Sipalay, Negros
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 Occidental, and Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Mining's chattels, as well as assets
of whatever kind, nature and description which Marinduque Mining may
subsequently acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel Mortgage dated
October 7, 1978. Apparently, Marinduque Mining had also obtained loans
totaling P2 Billion from DBP, exclusive of interest and charges. 2
On April 27, 1984, Marinduque Mining executed in favor of PNB and
DBP an Amendment to Mortgage Trust Agreement by virtue of which
Marinduque Mining mortgaged in favor of PNB and DBP all other real and
personal properties and other real rights subsequently acquired by
Marinduque Mining. 3
For failure of Marinduque Mining to settle its loan obligations, PNB and
DBP instituted sometime on July and August 1984 extrajudicial foreclosure
proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition,
as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and
DBP emerged and were declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights together with the
improvements thereon as well as machineries [sic] and equipments [sic] of MMIC
located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of
P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at
Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders,
bidded for P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP). For
the foreclosed real properties together with all the buildings, major machineries &
equipment and other improvements of MMIC located at Antipolo, Rizal, likewise
held on August 31, 1984, were sold to PNB and DBP as highest bidders in the sum
of P1,107,167,950.00 (Exhs. "10" to "10-X"- PNB/DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed
real properties, buildings, & machineries/equipment of MMIC located at Sipalay,
Negros Occidental were sold to PNB and DBP, as highest bidders, in the amount
of P2,383,534,000.00 and P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9"
to "90-GGGGGG"—PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the
foreclosed personal properties of MMIC, the same were sold to PNB and DBP as
the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"—
PNB). TaCDcE

PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984,
purposely, in order to ensure the continued operation of the Nickel refinery plant
and to prevent the deterioration of the assets foreclosed, assigned and
transferred to Nonoc Mining and Industrial Corporation all their rights, interest
and participation over the foreclosed properties of MMIC located at Nonoc Island,
Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"-
PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP
assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest
and participation over the foreclosed properties of MMIC at Sipalay, Negros
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 Occidental for an initial consideration of P325,800,000.00 (Exh. "14"—PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National Government
thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest
over the assets of MMIC, earlier assigned to Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation and Island Cement Corporation (Exh.
"15" & "15-A" PNB/DBP). 4
In the meantime, between July 16, 1982 to October 4, 1983,
Marinduque Mining purchased and caused to be delivered construction
materials and other merchandise from Remington Industrial Sales
Corporation (Remington) worth P921,755.95. The purchases remained
unpaid as of August 1, 1984 when Remington filed a complaint for a sum of
money and damages against Marinduque Mining for the value of the unpaid
construction materials and other merchandise purchased by Marinduque
Mining, as well as interest, attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was amended
to include PNB and DBP as co-defendants in view of the foreclosure by the
latter of the real and chattel mortgages on the real and personal properties,
chattels, mining claims, machinery, equipment and other assets of
Marinduque Mining. 5
On September 13, 1984, Remington filed a second amended complaint
to include as additional defendant, the Nonoc Mining and Industrial
Corporation (Nonoc Mining). Nonoc Mining is the assignee of all real and
personal properties, chattels, machinery, equipment and all other assets of
Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte. 6
On March 26, 1986, Remington filed a third amended complaint
including the Maricalum Mining Corporation (Maricalum Mining) and Island
Cement Corporation (Island Cement) as co-defendants. Remington asserted
that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and
Island Cement must be treated in law as one and the same entity by
disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly
created entities are practically owned wholly by defendants PNB and DBP, and
managed by their officers, aside from the fact that the aforesaid co-defendants
NMIC, Maricalum and Island Cement were organized in such a hurry and in such
suspicious circumstances by co-defendants PNB and DBP after the supposed
extrajudicial foreclosure of MMIC's assets as to make their supposed projects
assets, machineries and equipment which were originally owned by co-defendant
MMIC beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees
of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants
PNB and DBP were the personnel of co-defendant MMIC such that . . . practically
there has only been a change of name for all legal purpose and intents.
3. The places of business not to mention the mining claims and project
premises of co-defendants NMIC, Maricalum and Island Cement likewise used to
be the places of business, mining claims and project premises of co-defendant
MMIC as to make the aforesaid co-defendants NMIC, Maricalum and Island
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 Cement mere adjuncts and subsidiaries of co-defendants PNB and DBP, and
subject to their control and management. SHaATC

On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island

Cement being all corporations created by the government in the pursuit of
business ventures should not be allowed to ignore, . . . or obliterate with impunity
nay illegally, the financial obligations of . . . MMIC whose operations co-
defendants PNB and DBP had highly financed before the alleged extrajudicial
foreclosure of defendant MMIC's assets, machineries and equipment to the extent
that major policies of co-defendant MMIC were being decided upon by co-
defendants PNB and DBP as major financiers who were represented in its board of
directors forming part of the majority thereof which through the alleged
extrajudicial foreclosure culminated in a complete take-over by co-defendants
PNB and DBP bringing about the organization of their co-defendants NMIC,
Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its nickel
mining project in Surigao del Norte, copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of
co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation
whose stockholders, officers and rank-and-file workers in the legitimate pursuit of
its business activities, invested considerable time, sweat and private money to
supply, among others, co-defendant MMIC with some of its vital needs for its
operation, which co-defendant MMIC during the time of the transactions material
to this case became . . . co-defendants PNB and DBP's instrumentality, business
conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by virtue of
which it becomes doubly necessary to disregard the corporation fiction that co-
defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six (6) distinct
and separate entities, when in fact and in law, they should be treated as one and
the same at least as far as plaintiff's transactions with co-defendant MMIC are
concerned, so as not to defeat public convenience, justify wrong, subvert justice,
protect fraud or confuse legitimate issues involving creditors such as plaintiff, a
fact which all defendants were as (sic) still are aware of during all the time
material to the transactions subject of this case. 7
On April 3, 1989, Remington filed a motion for leave to file a fourth
amended complaint impleading the Asset Privatization Trust (APT) as co-
defendant. Said fourth amended complaint was admitted by the lower court
in its Order dated April 29, 1989. ECDAcS

On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in
favor of Remington, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering
the defendants Marinduque Mining & Industrial Corporation, Philippine National
Bank, Development Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement Corporation and Asset
Privatization Trust to pay, jointly and severally, the sum of P920,755.95,
representing the principal obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until
the amount is fully paid; the sum equivalent to 10% of the amount due as and for
attorney's fees; and to pay the costs. 8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island
Cement and APT, the Court of Appeals, in its Decision dated October 6, 1995,
affirmed the decision of the RTC. Petitioner filed a Motion for
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 Reconsideration, which was denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of
action against it or PNB, nor against their transferees, Nonoc Mining, Island
Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the
transfer of the properties was made in fraud of creditors. The presence of
fraud, according to Remington, warrants the piercing of the corporate veil
such that Marinduque Mining and its transferees could be considered as one
and the same corporation. The transferees, therefore, are also liable for the
value of Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals , 9 cited by the Court
of Appeals in its decision, 10 this Court declared:
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders and from
other corporations to which it may be connected. However, when the notion of
legal entity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as an association of persons or
in case of two corporations, merge them into one". (Koppel [Phils.], Inc., vs.
Yatco, 71 Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed.,
pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co ., 142 Fed., 247, 255 per
Sanborn, J.). . . .
In accordance with the foregoing rule, this Court has disregarded the
separate personality of the corporation where the corporate entity was used
to escape liability to third parties. 11 In this case, however, we do not find
any fraud on the part of Marinduque Mining and its transferees to warrant
the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the
mortgage when the past due account had incurred arrearages of more than
20% of the total outstanding obligation. Section 1 of Presidential Decree No.
385 (The Law on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse
of sixty (60) days from the issuance of this decree, to foreclose the collateral
and/or securities for any loan, credit accommodation, and/or guarantees granted
by them whenever the arrearages on such account, including accrued interest
and other charges, amount to at least twenty percent (20%) of the total
outstanding obligations, including interest and other charges, as appearing in the
books of account and/or related records of the financial institution concerned.
This shall be without prejudice to the exercise by the government financial
institution of such rights and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on loans, credits,
accommodations and/or guarantees on which the arrearages are less than twenty
(20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said
law, to foreclose upon the subject properties. The banks had no choice but to
obey the statutory command. acAIES

The import of this mandate was lost on the Court of Appeals, which
reasoned that under Article 19 of the Civil Code, "Every person must, in the
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 exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith." The appellate
court, however, did not point to any fact evidencing bad faith on the part of
the Marinduque Mining and its transferees. Indeed, it skirted the issue
entirely by holding that the question of actual fraudulent intent on the part
of the interlocking directors of DBP and Marinduque Mining was irrelevant
because:
As aptly stated by the appellee in its brief, ". . . where the corporations
have directors and officers in common, there may be circumstances under which
their interest as officers in one company may disqualify them in equity from
representing both corporations in transactions between the two. Thus, where one
corporation was 'insolvent and indebted to another, it has been held that the
directors of the creditor corporation were disqualified, by reason of self-interest,
from acting as directors of the debtor corporation in the authorization of a
mortgage or deed of trust to the former to secure such indebtedness . . ." (page
105 of the Appellee's Brief). In the same manner that ". . . when the corporation is
insolvent, its directors who are its creditors can not secure to themselves any
advantage or preference over other creditors. They can not thus take advantage
of their fiduciary relation and deal directly with themselves, to the injury of others
in equal right. If they do, equity will set aside the transaction at the suit of
creditors of the corporation or their representatives, without reference to the
question of any actual fraudulent intent on the part of the directors, for the right
of the creditors does not depend upon fraud in fact, but upon the violation of the
fiduciary relation to the directors." . . . . (page 106 of the Appellee's Brief)
We also concede that ". . . directors of insolvent corporation, who are
creditors of the company, can not secure to themselves any preference or
advantage over other creditors in the payment of their claims. It is not good
morals or good law. The governing body of officers thereof are charged with the
duty of conducting its affairs strictly in the interest of its existing creditors, and it
would be a breach of such trust for them to undertake to give any one of its
members any advantage over any other creditors in securing the payment of his
debts in preference to all others. When validity of these mortgages, to secure
debts upon which the directors were indorsers, was questioned by other creditors
of the corporation, they should have been classed as instruments rendered void
by the legal principle which prevents directors of an insolvent corporation from
giving themselves a preference over outside creditors. . . . " (page 106-107 of the
Appellee's Brief.) 12
The Court of Appeals made reference to two principles in corporation
law. The first pertains to transactions between corporations with interlocking
directors resulting in the prejudice to one of the corporations. This rule does
not apply in this case, however, since the corporation allegedly prejudiced
(Remington) is a third party, not one of the corporations with interlocking
directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors . .
. who are creditors" which is also inapplicable herein. Here, the creditor of
Marinduque Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation
of Nonoc Mining, Maricalum and Island Cement. As Remington itself
concedes, DBP is not authorized by its charter to engage in the mining
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 business. 13 The creation of the three corporations was necessary to manage
and operate the assets acquired in the foreclosure sale lest they deteriorate
from non-use and lose their value. In the absence of any entity willing to
purchase these assets from the bank, what else would it do with these
properties in the meantime? Sound business practice required that they be
utilized for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of
Nonoc Mining, Maricalum and Island Cement of the premises of Marinduque
Mining and the hiring of the latter's officers and personnel also constitute
badges of bad faith.
Assuming that the premises of Marinduque Mining were not among
those acquired by DBP in the foreclosure sale, convenience and practicality
dictated that the corporations so created occupy the premises where these
assets were found instead of relocating them. No doubt, many of these
assets are heavy equipment and it may have been impossible to move them.
The same reasons of convenience and practicality, not to mention efficiency,
justified the hiring by Nonoc Mining, Maricalum and Island Cement of
Marinduque Mining's personnel to manage and operate the properties and to
maintain the continuity of the mining operations. EACTSH

To reiterate, the doctrine of piercing the veil of corporate fiction applies

only when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime. 14 To disregard the separate juridical
personality of a corporation, the wrongdoing must be clearly and
convincingly established. It cannot be presumed. 15 In this case, the Court
finds that Remington failed to discharge its burden of proving bad faith on
the part of Marinduque Mining and its transferees in the mortgage and
foreclosure of the subject properties to justify the piercing of the corporate
veil.
The Court of Appeals also held that there exists in Remington's favor a
"lien" on the unpaid purchases of Marinduque Mining, and as transferee of
these purchases, DBP should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of
Remington cannot be enforced against DBP. Article 2241 of the Civil Code
provides:
ARTICLE 2241. With reference to specific movable property of the
debtor, the following claims or liens shall be preferred:
xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on said movables, so
long as they are in the possession of the debtor, up to the value of the same; and
if the movable has been resold by the debtor and the price is still unpaid, the lien
may be enforced on the price; this right is not lost by the immobilization of the
thing by destination, provided it has not lost its form, substance and identity,
neither is the right lost by the sale of the thing together with other property for a
lump sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are
in the hands of the creditor, or those guaranteed by a chattel mortgage, upon the
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 things pledged or mortgaged, up to the value thereof;
xxx xxx xxx
In Barretto vs. Villanueva, 16 the Court had occasion to construe Article
2242, governing claims or liens over specific immovable property. The facts
that gave rise to the case were summarized by this Court in its resolution as
follows:
. . . Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura L. Villanueva for P19,000.00.
The purchaser paid P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay P5,500 on account of
the note, for which reason the vendor obtained judgment for the unpaid balance.
In the meantime, the buyer Villanueva was able to secure a clean certificate of
title (No. 32626), and mortgaged the property to appellant Magdalena C. Barretto,
married to Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having
been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The
latter foreclosed the mortgage in her favor, obtained judgment, and upon its
becoming final asked for execution on 31 July 1958. On 14 August 1958, Cruzado
filed a motion for recognition for her "vendor's lien" in the amount of P12,000.00,
plus legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code.
After hearing, the court below ordered the "lien" annotated on the back of
Certificate of Title No. 32526, with the proviso that in case of sale under the
foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto
should be paid pro rata from the proceeds. Our original decision affirmed this
order of the Court of First Instance of Manila.
In its decision upholding the order of the lower court, the Court
ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and
liens that constitute an encumbrance on specific immovable property, and among
them are:
"(2) For the unpaid price of real property sold, upon the immovable
sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more
credits with respect to the same specific real property or real rights, they shall be
satisfied pro-rata, after the payment of the taxes and assessments upon the
immovable property or real rights." aHDTAI

Application of the above-quoted provisions to the case at bar would mean

that the herein appellee Rosario Cruzado as an unpaid vendor of the property in
question has the right to share pro-rata with the appellants the proceeds of the
foreclosure sale.
xxx xxx xxx
As to the point made that the articles of the Civil Code on concurrence and
preference of credits are applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we are to interpret this
portion of the Code as intended only for insolvency cases, then other creditor-
debtor relationships where there are concurrence of credits would be left without
any rules to govern them, and it would render purposeless the special laws on
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 insolvency. 17

Upon motion by appellants, however, the Court reconsidered its

decision. Justice J.B.L. Reyes, speaking for the Court, explained the reasons
for the reversal:
A. The previous decision failed to take fully into account the radical
changes introduced by the Civil Code of the Philippines into the system of
priorities among creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to
preference as to specific real property under Article 1923 were to be resolved
according to an order of priorities established by Article 1927, whereby one class
of creditors could exclude the creditors of lower order until the claims of the
former were fully satisfied out of the proceeds of the sale of the real property
subject of the preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes
enjoy a similar absolute preference. All the remaining thirteen classes of
preferred creditors under Article 2242 enjoy no priority among themselves, but
must be paid pro rata, i.e., in proportion to the amount of the respective credits.
Thus, Article 2249 provides:
"If there are two or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro rata, after the payment of the
taxes and assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import .
This explains the rule of Article 2243 of the new Civil Code that —
"The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency . . . (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as
follows:
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to
the proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under
Article 2242 can not be ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that the proceeds of the
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 foreclosure sale be apportioned only between appellant and appellee, is incorrect,
and must be reversed. [Italics supplied] cTACIa

The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon.
Lantin, Jr., etc., et al., 18 and in two cases both entitled Development Bank of
the Philippines vs. NLRC . 19
Although Barretto involved specific immovable property, the ruling
therein should apply equally in this case where specific movable property is
involved. As the extrajudicial foreclosure instituted by PNB and DBP is not
the liquidation proceeding contemplated by the Civil Code, Remington
cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of
Appeals dated October 6, 1995 and its Resolution promulgated on August
29, 1996 is REVERSED and SET ASIDE. The original complaint filed in the
Regional Trial Court in CV Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.
Davide, Jr ., C .J ., Puno, Pardo and Ynares-Santiago, JJ., concur.

Footnotes

1. Rollo , pp. 61-62.

2. Id., at 62.

3. Id.

4. Rollo , pp. 62-63. Underscoring in the original.

5. Id., at 90.

6. Id.
7. Id., at 91-92.

8. Id., at 89.

9. 1 SCRA 160 (1961).

10. Rollo , p. 102.

11. Tan Bonn Bee & Co. vs. Jarencio, 163 SCRA 205 (1988); Claparols, et al. vs.
Court of Industrial Relations, 65 SCRA 613 (1975); Villa Rey Transit, Inc. vs.
Eusebio E. Ferrer, 25 SCRA 849 (1968); National Marketing Corporation vs.
Associated Financing Company, et al., 19 SCRA 962 (1967); Palacio, et al. vs.
Fely Transportation Company, 5 SCRA 1011 (1962): McConnel. et al. vs.
Court of Appeals, et al., 1 SCRA 721 (1961).
12. Rollo , p. 107. Italics in the original.
13. Id., at 232.

14. Union Bank of the Philippines vs. Court of Appeals, 290 SCRA 198 (1998).

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 15. Complex Electronics Employees Association vs. NLRC , 310 SCRA 403 (1990);
Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA 315 (1999); Matuguina
Integrated Wood Products vs. Court of Appeals, 263 SCRA 490 (1996).
16. 1 SCRA 288 (1961).
17. Id., at 292-294.

18. 209 SCRA 383 (1983).

19. 183 SCRA 328 (1990), 186 SCRA 841 (1990).

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