DIOSDADO YULIONGSIU, plaintiff-appellant, vs.PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

FACTS:  Plaintiff-appellant Diosdado Yuliongsiu was the owner of two (2) vessels, namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end of the current year.

          On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the same day and duly registered with the office of the Collector of Customs for the Port of Cebu. 3

          Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December 18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates.

    On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for indemnification was returned unsatisfied as plaintiff was totally insolvent. 

          Meanwhile, together with the institution of the criminal action, defendant bank took physical possession of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72.  

          The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission which rescinded the sale to plaintiff on September 8,

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1948, for failure to pay the remaining installments on the purchase price thereof.  The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant bank to third parties on March 15, 1951.

ISSUE: Whether “A” & “1-Bank” is a chattel mortgage contract so that the creditor defendant could not take possession of the chattels object thereof until after there has been default.

Whether constructive delivery is insufficient to make pledge effective.

Whether the cases holding statutory requirements as to public sales with prior notice in connection with foreclosure proceedings are waivable, are no longer authoritative in view of the passage of Act 3135 and that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private sales

HELD: NO. The parties stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract —

          3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein; (Emphasis supplied)1äwphï1.ñët

          Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru palpable mistake, no amount of rationalization can offset it.  

          The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was expressly made "subject to the order of the pledgee." The provision of Art. 2110 of the present Civil Code being new — cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is regarded as holding the pledged property merely as trustee for the pledgee. 

NO. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.

          Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru the plaintiff, the former could take actual possession at any time during the life of the pledge to make more effective its security. Its taking of the

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vessels therefore on April 6, 1948, was not unlawful. Nor was it unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000.

NO.  This law refers only, and is limited, to foreclosure of real estate mortgages. So, whatever formalities there are in Act 3135 do not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor." This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs.LAUREANO ATENDIDO, defendants-appellant.

FACTS: On June 26, 1940, Laureano Atendido obtained from the Philippine National Bank a loan of P3,000 payable in 120 days with interests at 6% per annum from the date of maturity. To guarantee the payment of the obligation the borrower pledged to the bank 2,000 cavanes of palay which were then deposited in the warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan, and to that effect the borrower endorsed in favor of the bank the corresponding warehouse receipt. Before the maturity of the loan, the 2,000 cavanes of palay disappeared for unknown reasons in the warehouse. When the loan matured the borrower failed to pay either the principal or the interest and so the present action was instituted.

Defendant set up a special defense and a counterclaim. As regards the former, defendant claimed that the warehouse receipt covering the palay which was given as security having been endorsed in blank in favor of the bank, and the palay having been lost or disappeared, he thereby became relieved of liability. And, by way of counterclaim, defendant claimed that, as a corollary to his theory, he is entitled to an indemnity which represents the difference between the value of the palay lost and the amount of his obligation.

ISSUE: Whether the surrender of the warehouse receipt covering the 2,000 cavanes of palay given as a security, endorsed in blank, to appellee, has the effect of transferring their title or ownership to said appellee, or it should be considered merely as a guarantee to secure the payment of the obligation of appellant.

HELD: YES, AS TO GUARANTY. In upholding the view of appellee, the lower court said: "The surrendering of warehouse receipt No. S-1719 covering the 2,000 cavanes of palay by the defendant in favor of the plaintiff was not that of a final transfer of that warehouse receipt but merely as a guarantee to the fulfillment of the original obligation of P3,000.00. In other word, plaintiff corporation had no right to dispose (of) the warehouse receipt until after the maturity of the promissory note Exhibit A. Moreover,

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the 2,000 cavanes of palay were not in the first place in the actual possession of plaintiff corporation, although symbolically speaking the delivery of the warehouse receipt was actually done to the bank."

We hold this finding to be correct not only because it is in line with the nature of a contract of pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil Code), but is supported by the stipulations embodied in the contract signed by appellant when he secured the loan from the appellee. There is no question that the 2,000 cavanes of palay covered by the warehouse receipt were given to appellee only as a guarantee to secure the fulfillment by appellant of his obligation. This clearly appears in the contract Exhibit A wherein it is expressly stated that said 2,000 cavanes of palay were given as a collateral security. The delivery of said palay being merely by way of security, it follows that by the very nature of the transaction its ownership remains with the pledgor subject only to foreclose in case of non-fulfillment of the obligation. By this we mean that if the obligation is not paid upon maturity the most that the pledgee can do is to sell the property and apply the proceeds to the payment of the obligation and to return the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the essence of this contract, for, according to law, a pledgee cannot become the owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old Civil Code). If by the contract of pledge the pledgor continues to be the owner of the thing pledged during the pendency of the obligation, it stands to reason that in case of loss of the property, the loss should be borne by the pledgor. The fact that the warehouse receipt covering the palay was delivered, endorsed in blank, to the bank does not alter the situation, the purpose of such endorsement being merely to transfer the juridical possession of the property to the pledgee and to forestall any possible disposition thereof on the part of the pledgor. This is true notwithstanding the provisions to the contrary of the Warehouse Receipt Law.

Wherefore, the decision appealed from is affirmed.

CALTEX (PHILIPPINES), INC., petitioner, vs.COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.

FACTS: On various dates, defendant, a commercial banking institution, through its Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel dela Cruz who is tasked to deposit aggregate amounts.

One time Mr. dela Cruz delivered the CTDs to Caltex Philippines in connection with his purchased of fuel products from the latter. However, Sometime in March 1982, he informed Mr. Timoteo Tiangco, the Sucat Branch Manger, that he lost all the certificates of time deposit in dispute. Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of Loss, as required by defendant bank's procedure, if he desired replacement of said lost CTDs.

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Angel dela Cruz negotiated and obtained a loan from defendant bank and executed a notarized Deed of Assignment of Time Deposit, which stated, among others, that he surrenders to defendant bank "full control of the indicated time deposits from and after date" of the assignment and further authorizes said bank to pre-terminate, set-off and "apply the said time deposits to the payment of whatever amount or amounts may be due" on the loan upon its maturity.

In 1982, Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc., went to the defendant bank's Sucat branch and presented for verification the CTDs declared lost by Angel dela Cruz alleging that the same were delivered to herein plaintiff "as security for purchases made with Caltex Philippines, Inc." by said depositor.

Mr dela Cruz received a letter from the plaintiff formally informing of its possession of the CTDs in question and of its decision to pre-terminate the same. ccordingly, defendant bank rejected the plaintiff's demand and claim for payment of the value of the CTDs in a letter dated February 7, 1983.

The loan of Angel dela Cruz with the defendant bank matured and fell due and on August 5, 1983, the latter set-off and applied the time deposits in question to the payment of the matured loan. However, the plaintiff filed the instant complaint, praying that defendant bank be ordered to pay it the aggregate value of the certificates of time deposit of P1,120,000.00 plus accrued interest and compounded interest therein at 16% per annum, moral and exemplary damages as well as attorney's fees.

On appeal, CA affirmed the lower court's dismissal of the complaint, and ruled (1) that the subject certificates of deposit are non-negotiable despite being clearly negotiable instruments; (2) that petitioner did not become a holder in due course of the said certificates of deposit; and (3) in disregarding the pertinent provisions of the Code of Commerce relating to lost instruments payable to bearer.

FACTS (NET) : On various dates, Security Bank and Trust Co. (SEBTC), through its Sucat branch, issued 280 certificates of time deposit (CTD) in favor of one Angel dela Cruz who deposited with the bank the aggregate amount of P1.12 million. Anger de la Cruz delivered the CTDs to Caltex in connection with his purchase of fuel products from the latter. Subsequently, dela Cruz informed the bank that he lost all the CTDs, and thus executed an affidavit of loss to facilitate the issuance of the replacement CTDs. De la Cruz was able to obtain a loan of P875,000 from the bank, and in turn, he executed a notarized Deed of Assignment of Time Deposit in favor of the bank. Thereafter, Caltex presented for verification the CTDs (which were declared lost by de la Cruz) with the bank. Caltex formally informed the bank of its possession of the CTDs and its decision to preterminate the same. The bank rejected Caltex’ claim and demand, after Caltex failed to furnish copy of the requested documents evidencing the guarantee agreement, etc. In 1983, de la Cruz’ loan matured and the bank set-off and applied the time deposits as payment for the loan. Caltex filed the complaint, but which was dismissed.

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ISSUE: Whether the Certificates of Time Deposit (CTDs) are negotiable instruments.

Whether petitioner can rightfully recover on the CTDs.

HELD: YES. We disagree with these findings and conclusions, and hereby hold that the CTDs in question are negotiable instruments. Section 1 Act No. 2031, otherwise known as the Negotiable Instruments Law, enumerates the requisites for an instrument to become negotiable, viz:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

The CTDs in question undoubtedly meet the requirements of the law for negotiability. The parties' bone of contention is with regard to requisite (d) set forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch Manager way back in 1982, testified in open court that the depositor reffered to in the CTDs is no other than Mr. Angel de la Cruz.

On this score, the accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be legally ascertained. While the writing may be read in the light of surrounding circumstances in order to more perfectly understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words express, but what is the meaning of the words they have used. What the parties meant must be determined by what they said.

NO. This time, the answer is in the negative. The records reveal that Angel de la Cruz, whom petitioner chose not to implead in this suit for reasons of its own, delivered the CTDs amounting to P1,120,000.00 to petitioner without informing respondent bank thereof at any time. Unfortunately for petitioner, although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it

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and De la Cruz, as ultimately ascertained, requires both delivery and indorsement. For, although petitioner seeks to deflect this fact, the CTDs were in reality delivered to it as a security for De la Cruz' purchases of its fuel products. Any doubt as to whether the CTDs were delivered as payment for the fuel products or as a security has been dissipated and resolved in favor of the latter by petitioner's own authorized and responsible representative himself.

Although the CTDs are bearer instruments, a valid negotiation thereof for the true purpose and agreement between it (Caltex) and de la Cruz requires both delivery and indorsement; as the CTDs were delivered to it as security for dela Cruz’ purchases of its fuel products, and not for payment. Herein, there was no negotiation in the sense of a transfer of title, or legal title, to the CTDs in which situation mere delivery of the bearer CTDs would have sufficed. The delivery thereof as security for the fuel purchases at most constitutes Caltex as a holder for value by reason of his lien. Accordingly, a negotiation for such purpose cannot be effected by mere delivery of the instrument since the terms thereof and the subsequent disposition of such security, in the event of non-payment of the principal obligation, must be contractually provided for.

The pertinent law on this point is that where the holder has a lien on the instrument arising from contract, he is deemed a holder for value to the extent of his lien.  23 As such holder of collateral security, he would be a pledgee but the requirements therefor and the effects thereof, not being provided for by the Negotiable Instruments Law, shall be governed by the Civil Code provisions on pledge of incorporeal rights, 24 which inceptively provide:

Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also be pledged. The instrument proving the right pledged shall be delivered to the creditor, and if negotiable, must be indorsed.

Art. 2096. A pledge shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public instrument.

Aside from the fact that the CTDs were only delivered but not indorsed, the factual findings of respondent court quoted at the start of this opinion show that petitioner failed to produce any document evidencing any contract of pledge or guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere delivery of the CTDs did not legally vest in petitioner any right effective against and binding upon respondent bank. The requirement under Article 2096 aforementioned is not a mere rule of adjective law prescribing the mode whereby proof may be made of the date of a pledge contract, but a rule of substantive law prescribing a condition without which the execution of a pledge contract cannot affect third persons adversely. 26

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On the other hand, the assignment of the CTDs made by Angel de la Cruz in favor of respondent bank was embodied in a public instrument. 27 With regard to this other mode of transfer, the Civil Code specifically declares:

Art. 1625. An assignment of credit, right or action shall produce no effect as against third persons, unless it appears in a public instrument, or the instrument is recorded in the Registry of Property in case the assignment involves real property.

Respondent bank duly complied with this statutory requirement. Contrarily, petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither proved the amount of its credit or the extent of its lien nor the execution of any public instrument which could affect or bind private respondent. Necessarily, therefore, as between petitioner and respondent bank, the latter has definitely the better right over the CTDs in question.

Wherefore, on the modified premises above set forth, the petition is DENIED.

SARMIENTO case—read n lng

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee, vs.RODOLFO R. VELAYO, defendant-appellant.

FACTS: In 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to pay under the bond including costs and attorneys' fees. As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety Company "for the latter's further protection", with power to sell the same in case the surety paid or become obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after deducting legal expenses and costs. 

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing therefrom a net product of P235.00 only. 

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Thereafter and upon Velayo's failure to pay the balance, the surety company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code. 

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of this opinion. Thereupon, Velayo resorted to this Court on appeal. 

ISSUE: WON the sale of the pledged jewelry extinguished any further liability under Article 2115 of the CC. 

HELD: YES. Article 2115, in its last portion, clearly establishes that the extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override: If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency notwithstanding any stipulation to the contrary. The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide by the results of the sale. No deficiency is recoverable. 

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel mortgage constituted to secure the price of the personal property sold in installments, and which originated in Act 4110 promulgated by the Philippine Legislature in 1933.

SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL ESPELETA, Petitioners, vs.DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL, SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO assisted by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO assisted by her husband ALFONSO SORONIO, Respondents.

FACTS: Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as the Quirino-Leonor-Rodriguez Realty Inc. Sometime during the years 1979 to 1980, respondents secured by way of pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain loan obligations.

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When the Parays attempted to foreclose the pledges on account of respondents’ failure to pay their loans, respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements, among others. However the RTC, in its decision dated 14 October 1988, dismissed the complaint and gave "due course to the foreclosure and sale at public auction of the various pledges subject of these two cases." This decision attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was issued on 14 August 1991.

Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction on 4 November 1991. However, before the scheduled date of auction, all of respondents caused the consignation with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender these payments to the Parays, but had been rebuffed. 

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or appeared at the auction of 4 November 1991.

Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and consignations were made long after their obligations had fallen due.

RTC - dismissed the complaint, expressing agreement with the position of the Parays. It held, among others that respondents had failed to tender or consign payments within a reasonable period after default and that the proper remedy of respondents was to have participated in the auction sale.7 The Court of Appeals Eighth Division however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject pledge contracts; and the auction sale of 4 November 1991 as null and void. Most crucially, the appellate court chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized as made in the exercise of the right of redemption.

CA -  likewise found fault with the auction sale, holding that there was a need to individually sell the various shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the auction sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose of

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knowing the price to be paid by the different pledgors upon redemption of the auctioned sales of stock.

Petitioners contention - Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since they were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and 20131, which did not authorize the payment of the principal obligation by respondents. They point out that the amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient to cover the interests due on the debt. They likewise argue that the essential procedural requisites for the auction sale had been satisfied.

We rule in favor of petitioners.

ISSUE: Whether the consignations made by respondents sufficiently acquitted them of their principal obligations.

HELD: NO. As affirmed by the Civil Code,the decision to proceed with the sale by public auction remains in the sole discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing in the dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character.

The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more precisely execution sales of real property.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the persons named in the statute.

The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as amended. The said law does not extend the same benefit to personal property. In fact, there 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.

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Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking and applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated with liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must reject the appellate court’s declaration that the buyer of at the public auction is not "ipso facto" rendered the owner of the auctioned shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously, since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.

Under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose which of the items should be sold if two or more things are pledged.15 No similar option is given to pledgors under the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can recover whatever deficiency or excess there may be between the purchase price and the amount of the principal obligation.

There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098 of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under Article 2112 of the Code.

Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and the pledge agreements. They are mistaken.

Petitioners point out that while the amounts consigned by respondents could answer for their respective principal loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of 5% per month or 60% per annum. Before this Court, respondents, save for Dolores Soberano, do not contest this interest rate as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."

The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly interest rate was noted in the statement of facts in the 14

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October 1988 RTC Decision which had since become final. Moreover, the said decision pronounced that even assuming that the interest rates of the various loans were 5% per month, "it is doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for sometime now, usury has become ‘legally inexistent.’"  The finality of this 1988 Decision is a settled fact, and thus the time to challenge the validity of the 5% monthly interest rate had long passed. With that in mind, there is no reason for the Court to disagree with petitioners that in order that the consignation could have the effect of extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly interests thereon.

The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted. Petitioners’ right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment. Any subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of superseding a final and executory judgment.

Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply participated in the auction sale, as they are permitted to bid themselves on their pledged properties.20 Moreover, they would have had a better right had they

matched the terms of the highest bidder.21 Under the circumstances, with the high interest payments that accrued after several years, respondents were even placed in a favorable position by the pledge agreements, since the creditor would be unable to recover any deficiency from the debtors should the sale price be insufficient to cover the principal amounts with interests. Certainly, had respondents participated in the auction, there would have been a chance for them to recover the shares at a price lower than the amount that was actually due from them to the Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all respondents can recover is the amounts they had consigned.

WHEREFORE, the petition is GRANTED.

MAKATI LEASING AND FINANCIAL CORPORATION VS. WEAREVER TEXTILE MILLS, INC.

DOCTRINE: Where a chattel mortgage is constituted on a machinery permanently attached to the ground, the machinery is to be considered as personal property.

FACTS: Wearever Textile Mills, Inc. discounted and assigned several receivables with Makati Leasing and Financial Corp. under a Receivable Purchase Agreement so that the latter would lend money to the former. In order to secure the collection of the

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receivables assigned, Wearever executed a Chattel Mortgage over certain raw materials inventory as well as a machinery (Artos Aero Dryer Stentering Range). Upon default of Wearever in paying what is due, Makati Leasing filed a petition for extrajudicial foreclosure of the properties mortgaged to it. The Sheriff assigned to execute such foreclosure, however, failed to enter the premises of Wearever to effect the seizure of the machinery. Afterwhich, petitioner filed a complaint for a judicial foreclosure with the RTC of Rizal which was granted even after the motion for reconsideration filed by the private respondent. Enforcing then the writ of seizure issued by the lower court, the Sheriff removed the main drive motor of the machinery. Upon appeal, CA reversed the ruling of the RTC and ordered the return of the motor to Wearever since the said machinery cannot be the subject of a replevin and chattel mortgage for it is a real property pursuant to Art. 415 (3) of the NCC. CA argued that the machinery is attached to the ground by means of bolts and the only way to remove it from the respondent’s plant would be to drill out or destroy the concrete floor – which is why all that the sheriff could do to enforce the writ was to take the main drive motor of the machinery. Hence, this petition for certiorari.

ISSUE: Whether the machinery is a personal property.

HELD: YES. By destination, it is a real property but by virtue of the intention of the parties stipulated in their chattel mortgage contract, the machinery was intended to be a personal property. The Court made reference to its ruling inTumalad v. Vicencio and Standard Oil Co. of New York v. Jaramillo where it held that a real property may be considered as a 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, and once the parties so agreed, they are already stopped from claiming otherwise. Private respondent contended that its characterization of the subject machinery as chattel in their agreement should not be appreciated against it because it had never represented nor agreed in such as it was merely required and dictated on by the petitioner to sign a chattel mortgage in blank form. The Court was not persuaded by its contention as the said issue was not duly raised in the lower and appellate courts nor will the said signing in blank by the respondent make the contract void but merely voidable by a proper action in court. Furthermore as it was undeniable that it benefited from the chattel mortgage, it cannot be allowed to impugn its efficacy for equity reasons.

TORRES v. LIMJAP

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FACTS: The plaintiffs alleged that the defendant, in his lifetime, executed in their favor a chattel mortgage(Exhibit A) on his drug store at Nos. 101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000, although it was made to appear in the instrument that the loan was for P20,000. The defendant denied generally and specifically the plaintiffs' allegations and set up the defense that the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in G.R. No. 34286) are null and void for lack of sufficient particularity in the description of the property mortgaged. A judgment was rendered in favor of the plaintiff and against the defendant, confirming the attachment of said drug store by the sheriff of the City of Manila and the delivery thereof to the plaintiff.

A chattel mortgage was executed in favor of the plaintiff. Plaintiff alleged that the defendant violated the terms and that, in consequence thereof they became entitled to the possession of the chattels and to foreclose their mortgages thereon. After filing of the petition and the necessary bonds, the court issued in each case an order directing the sheriff of the City of Manila to take immediate possession of said drug stores. After hearing the evidence the trial court arrived at the conclusion (a) that the defendant defaulted in the payment of interest on the loans secured by the mortgages, in violation of the terms thereof; (b) that by reason of said failure said mortgages became due, and (c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug stores. Accordingly, a judgment was rendered in favor of the plaintiffs and against the defendant, confirming the attachment of said drug stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs.

The defendant appealed from the judgment and made the assignments of error, among others, that the lower court erred in failing to make a finding on the question of the sufficiency of the description of the chattels mortgaged and in failing to hold that the chattel mortgages were null and void for lack of particularity in the description of the chattels mortgaged and in refusing to allow the defendant to introduce evidence tending to show that the stock of merchandise found in the two drug stores was in existence or owned by the mortgagor at the time of execution of the mortgages in question. Defendant then insists that a stipulation authorizing the disposal and substitution of chattels mortgage does not operate to extend the mortgage to after-acquired party, and that such stipulation is in contravention of the express provision of the last paragraph of section 7 Act No.1508, which provides that “A chattel mortgage shall be deemed to cover only the property described therein and not like or substituted property thereafter acquired by the mortgagor and placed in the same depository as the property originally mortgaged, anything in the mortgage to the contrary notwithstanding”

ISSUE: Whether the provision in the chattel mortgage law that extends coverage to after-acquired property is valid and binding.

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HELD: A stipulation in the mortgage, extending its scope and effect to after-acquired property, is valid and binding —.

. . where the after-acquired property is in renewal of, or in substitution for, goods on hand when the mortgage was executed, or is purchased with the proceeds of the sale of such goods, etc. (11 C.J., p. 436.)

Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of stipulations relating to after-acquired and substituted chattels. His views are based on the decisions of the supreme courts of several states of the Union. He says:

"A mortgage may, by express stipulations, be drawn to cover goods put in stock in place of others sold out from time to time. A mortgage may be made to include future acquisitions of goods to be added to the original stock mortgaged, but the mortgage must expressly provide that such future acquisitions shall be held as included in the mortgage. ... Where a mortgage covering the stock in trade, furniture, and fixtures in the mortgagor's store provides that "all goods, stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall be included in and covered by the mortgage," the mortgage covers all after-acquired property of the classes mentioned, and, upon foreclosure, such property may be taken and sold by the mortgagee the same as the property in possession of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on Chattel Mortgages, sec. 361, pp. 474, 475.)

In harmony with the foregoing, we are of the opinion (a) that the provision of the last paragraph of section 7 of Act No. 1508 is not applicable to drug stores, bazaars and all other stores in the nature of a revolving and floating business; (b) that the stipulation in the chattel mortgages in question, extending their effect to after-acquired property, is valid and binding; and (c) that the lower court committed no error in not permitting the defendant-appellant to introduce evidence tending to show that the goods seized by the sheriff were in the nature of after-acquired property.

TUMALAD v. VICENCIO

FACTS: Alberta Vicencio and Emiliano Simeon received a loan of P4, 800 from Gavino

and Generosa Tumalad. To guaranty said loan, Vicencio executed a chattel mortgage in

favor of Tumalad over their house of strong materials which stood on a land which was

rented from the Madrigal & Company, Inc. When Vicencio defaulted in paying, the

house was extrajudicially foreclosed, pursuant to their contract. It was sold to Tumalad

and they instituted a Civil case in the Municipal Court of Manila to have Vicencio vacate

the house and pay rent.

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The MTC decided in favor of Tumalad ordering Vicencio to vacate the house and pay

rent until they have completely vacated the house. Vicencio is questioning the legality of

the chattel mortgage on the ground that 1) the signature on it was obtained thru fraud

and 2) the mortgage is a house of strong materials which is an immovable therefore can

only be the subject of a REM. On appeal, the CFI found in favor of Tumalad, and since

the Vicencio failed to deposit the rent ordered, it issued a writ of execution, however the

house was already demolished pursuant to an order of the court in an ejectment suit

against Vicencio for non-payment of rentals.

Defendant-appellants impugned the legality of the chattel mortgage claiming that they are still the owner of the house but waived their rights to introduce evidence. Nearly a year after the foreclosure sale the mortgaged house had been demolished on 14and 15 January 1957 by virtue of a decision obtained by the lessor of the land on which the house stood for non-payment of rentals.

ISSUE:

I. Whether the subject matter of the mortgage which is a house of strong material can be subject of real estate mortgage or a chattel mortgage.

II. Whether or not the defendants are legally bound to pay rentals to the plaintiffs during the period of 1 year provided by law for the redemption of the extrajudicially foreclosed house.

HELD:

I. YES. The inclusion of the building separate and distinct from the land in the enumeration of what may constitute real property, that the building is by itself an immovable property. However deviations have been allowed for various reasons specially if it is stipulated in the subject of contract. In the case at bar, although there is no specific statement referring to the subject house as a 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 a chattel. Hence if a house belonging to a person stands on a rented land belonging to another person, It may be mortgaged as a personal

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property as so stipulated in the document of mortgage. It should be noted that the principle is predicated on statements by the owner declaring his house to be chattel. Party in a chattel mortgage cannot question the validity of the chattel mortgage entered into. The doctrine of estoppels therefore applies to the defendant-appellants.

II. NO. Section 6 of the Act referred to provides that the debtor-mortgagor (defendants-appellants herein) may, at any time within one year from and after the date of the auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7 of the same Act allows the purchaser of the property to obtain from the court the possession during the period of redemption: but the same provision expressly requires the filing of a petition with the proper Court of First Instance and the furnishing of a bond. It is only upon filing of the proper motion and the approval of the corresponding bond that the order for a writ of possession issues as a matter of course. No discretion is left to the court. In the absence of such a compliance, as in the instant case, the purchaser cannot claim possession during the period of redemption as a matter of right. In such a case, the governing provision is Section 34, Rule 39, of the Revised Rules of Court which also applies to properties purchased in extrajudicial foreclosure proceedings. 

Since the defendants-appellants were occupying the house at the time of the auction sale, they are entitled to remain in possession during the period of redemption or within one year from and after 27 March 1956, the date of the auction sale, and to collect the rents or profits during the said period.

It will be noted further that in the case at bar the period of redemption had not yet expired when action was instituted in the court of origin, and that plaintiffs-appellees did not choose to take possession under Section 7, Act No. 3135, as amended, which is the law selected by the parties to govern the extrajudicial foreclosure of the chattel mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees' right to possess was not yet born at the filing of the complaint, there could be no violation or breach thereof. Wherefore, the original complaint stated no cause of action and was prematurely filed. For this reason, the same should be ordered dismissed, even if there was no assignment of error to that effect. The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision of the cases. 

It follows that the court below erred in requiring the mortgagors to pay rents for the year following the foreclosure sale, as well as attorney's fees.

ACME SHOE, RUBBER & PLASTIC CORP v. CA

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FACTS: Chua Pac, the president and general manager of Acme Shoe, Rubber & Plastic Corp., executed for and in behalf of the company, a chattel mortgage in favor of Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of P3,000,000. A provision in the chattel mortgage agreement states that if the mortgagor of his heirs, executors or administrators shall well and truly perform their full obligations, then the mortgage shall be null and void. The mortgage shall also stand as security for the payment of subsequent promissory notes, extensions or new loans that the mortgagor shall subsequently execute, including any obligations of the mortgagor to the mortgagee, whether such obligations have been contracted before, during or after the constitution of the mortgage.

In due time, the loan of P3,000,000 was paid by the corporation. Subsequently, in 1981, it obtained from the bank additional accommodations totalling P2,700,000. These borrowings were also fully paid.

On January 1984, the bank yet again extended to the corporation a loan of P1,000,000. covered by four promissory notes for P250,000 each. Due to financial constraints, the loan was not settled at maturity. The bank applied for an extra judicial foreclosure of the chattel mortgage, with the Sheriff of Caloocan City, prompting the corporation to file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the RTC. The court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held the corporation was bound by the stipulations of the chattel mortgage. The CA affirmed

ISSUE: Whether chattel mortgage may secure after incurred obligations.

HELD: NO. 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. In contracts of real security, the property encumbered can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, then the contract of security becomes, ipso facto, null and void.

While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower to

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execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed.

A chattel mortgage 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 provided that the parties to the contract must execute an oath 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 loan which the 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, vs. Magallanes Press:

. . . 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.

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 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter.

SERVICEWIDE SPECIALISTS v. CA

FACTS: 1. Leticia Laus purchased on credit a Colt Galant xxx from Fortune Motors (Phils.) Corporation and executed a promissory note for the amount of P56,028.00, inclusive of 12% annual interest, payable within a period of 48 months. In case of default in the payment of any installment, the total principal sum, together with the interest, shall become immediately due and payable.

2. As a security for the promissory note, a chattel mortgage was constituted over the said motor vehicle, with a deed of assignment incorporated therein such that the credit

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and mortgage rights were assigned by Fortune Motors Corp. in favor of Filinvest Credit Corporation with the consent of the mortgagor-debtor Laus.

3. Filinvest in turn assigned the credit in favor of Servicewide Specialists, Inc.

4. Laus failed to pay the monthly installment for April 1977 and the succeeding 17 months. Servicewide demanded payment of the entire outstanding balance with interests but Laus failed to pay despite formal demands.

5. As a result of Laus’ failure to settle her obligation, or at least to surrender possession of the motor vehicle for 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. Plaintiff alleged, among others, that it had superior lien over the mortgaged vehicle. The court approved the replevin bond.

6. Alberto Villafranca filed a third party claim contending that he is the absolute owner of the subject motor vehicle after purchasing it from a certain Remedios Yang free from all lien and emcumbrances; and that on July 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.

7. Upon motion of the plaintiff below, Villafranca was substituted as defendant and summons was served upon him. Villafranca moved for the dismissal of the complaint on the ground that there is another action pending between the same parties before the Makati RTC. The court granted the the motion but subsequently set aside the order of dismissal. For failure to file his Answer as required by the court a quo, Villafranca was declared in default and plaintiff’s evidence was received ex parte.

8. The lower court later on dismissed the complaint for insufficiency of evidence. Its motion for reconsideration having been denied, petitioner appealed to CA on the ground 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.

9. CA affirmed the RTC decision. 

ISSUE: Whether a case for replevin may be pursued against the defendant, Alberto Villafranca, without impleading the absconding debtor-mortgagor

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HELD: No. 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.” 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.

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. 

In a suit for replevin, a clear right of possession must be established. The conditions essential for foreclosure of chattel mortgage would be to show, firstly, the existence of the chattel mortgage and, secondly, the default of the mortgagor. 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. 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. Petition DENIED.

(Perfecto Dy)Dy, JR. v. CA

FACTS: Perfecto Dy and Wilfredo Dy are brothers. Wilfredo Dy purchased a truck and a farm tractor through LIBRA which was also mortgaged with the latter, as a security to the loan.

Petitioner, expresses his desire to purchased his brother’s tractor in a letter to LIBRA which also includes his intention to shoulder its mortgaged. LIBRA approved the request. At the time that Wilfredo Dy executed a deed of absolute sale in favor of petitioner, the tractor and truck were in the possession of LIBRA for his failure to pay the amortization.

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When petitioner finally fulfilled its obligation to pay the tractor, LIBRA would only release the same only if he would also pay for the truck. In order to fulfill LIBRA’s condition, petitioner convinced his sister to pay for the remaining truck, to which she released a check amounting to P22,000. LIBRA however, insisted that the check must be first cleared before it delivers the truck and tractor.

Meanwhile, another case penned “Gelac Trading Inc vs. Wilfredo Dy” was pending in Cebu as a case to recover for a sum of money (P12,269.80). By a writ of execution the court in Cebu ordered to seize and levy the tractor which was in the premise of LIBRA, it was sold in a public auction to which it was purchased by GELAC. The latter then sold the tractor to Antonio Gonzales.

RTC- rendered judgment in favor of the petitioner pronouncing that the plaintiff is the owner of the tractor and that the defendants (GELAC TRADING AND ANTONIO GONZALES) are ordered to return the same to the plaintiff, directing them to be jointly and severally to pay the plaintiff for the expenses for hiring a tractor and damages.

CA – reversed the decision of the RTC. It held that the tractor still belong to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ of execution issued on the Civil Case.

ISSUE: Whether the sale between the brothers are valid

HELD: YES. 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.

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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. 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.

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).

PAMECA WOOD TREATMENT PLANT v. CA

FACTS: 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 Branch 132 of the Regional Trial Court of Makati City against

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petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA under the promissory note.

The RTC of Makati rendered a decision  ordering the defendants to pay jointly and severally plaintiff. The Court of Appeals affirmed the RTC decision.

ISSUE:

i. Whether the auction sale of petitioner PAMECA’s chattels were tainted with fraud.

ii. Whether Article 1484 and 2115 of the Civil Code can be apply.

HELD:

1. NO. 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 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.

2. NO. 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.

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Ignacio  the lower court dismissed the complaint for collection of deficiency judgment in view of Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on pledge shall also apply to chattel mortgages, insofar as they are not in conflict with the Chattel Mortgage Law. It was the lower 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.

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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.

MAGNA FINANCIAL SERVICES GROUP v. COLARINA

FACTS: Elias Colarina bought on installment from Magna Financial Services Group one unit of Suzuki Multicab.

After making a downpayment, Colarina executed a promissory note. To secure payment thereof, Colarina executed an integrated promissory note and deed of chattel mortgage over the motor vehicle.

Colarina failed to pay the monthly amortization. Despite repeated demands, he failed to make the necessary payment. Magna Financial filed a Complaint for Foreclosure of Chattel Mortgage with Replevin. Upon filing a Replevin Bond, a Writ of Replevin was issued by the MTCC. Summons, together with a copy of the writ was served on Colarina who voluntarily surrendered physical possession of the vehicle to the Sheriff. The aforesaid motor vehicle was turned over by the sheriff to Magna Financial. Colarina was declared in default for having filed his answer after more than 6 months from the service of summons upon him. Thereupon, the trial court rendered judgment in favor Magna Financial.

Colarina appealed to the RTC. During the pendency of his appeal, Colarina died and was substituted in the case by his heirs. The RTC affirmed in toto the decision of the MTCC. Colarina filed a petitioner for review before the CA which reversed and set aside the decision of the RTC and granted his petition.

ISSUE Whether Magna Financial can foreclose the mortgage at the same time exact specific performance. 

Held: No. Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to foreclose the chattel mortgage, “he shall have no further action against the

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purchaser to recover any unpaid balance of the purchase price. Any agreement to the contrary shall be void.” 

Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel Mortgage Law. This rule governs extrajudicial foreclosure of chattel mortgage. 

In sum, since the petitioner has undeniably elected a remedy of foreclosure under Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to change what it has opted for nor to ask for more. 

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit and the decision of the Court of Appeals dated 21 January 2003 is AFFIRMED. Costs against petitioner.

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