CREDIT TRANSACTIONS - REAL SECURITY

Spouses Sierra v. Paic Savings and Mortgage Bank

G.R. No. 197857 | Sept. 10, 2014

Perlas-Bernabe, J.

Doctrine: An accommodation mortgagor is a third person who is not a debtor to a

principal obligation but merely secures it by mortgaging his or her own property.

Facts:

The Goldstar Conglomerates, Inc. (GCI) obtained a loan from First Summa Savings and

Mortgage Bank (Summa Bank), which is now known as Paic Savings and Mortgage

Bank, Inc. (PSMB). Herein petitioners Francisco Sierra, Rosario Sierra, and Spouses

Felix Gatlabayan and Salome Sierra mortgaged four parcels of land in Antipolo City

as additional security for the said loan. The GCI then defaulted in the loan resulting

in the foreclosure of the mortgaged properties. The said properties were eventually

acquired by the PSMB.

Petitioners then filed against the respondent in the RTC a complaint for the

declaration of nullity of the real estate mortgage and its extrajudicial foreclosure.

They argued that they were made to believe, due to their lack of education, that they

applied for a loan, in which the proceeds thereof would be released through checks

drawn against Summa Bank. They also added that the loan agreement was not

explained in a language known to them and they were also not furnished with copies

of the loan documents.

On the other hand, the respondent argued that PSMB and Summa Bank were the

same entity and that they never extended a loan to petitioners.

The RTC ruled in favor of petitioners stating that their consent was invalidated when

they were made to believe that they were the principal obligors in the loan. The CA

however reversed the trial court’s ruling and held that the petitioners were unable to

prove that they were uneducated after having previously mortgaged their properties

twice to the Rural Bank of Antipolo.

Issue:

Were the petitioners aware that they were mere accommodation mortgagors?

Ruling:

Yes. The petitioners are aware that they were mere accommodation mortgagors. As

correctly observed by the CA, the testimony of petitioner Francisco Sierra as to

petitioners’ respective educational backgrounds remained uncorroborated. The other

petitioners-signatories to the deed never testified that their educational background

prevented them from knowingly executing the subject deed as mere accommodation

mortgagors. Petitioners’ claim of lack of "proper instruction on the intricacies in

securing the loan from the bank"is further belied by the fact that petitioners

Francisco and Rosario Sierra had previously mortgaged two (2) of the subject

properties twice to the Rural Bank of Antipolo. Moreover, petitioners did not: (a)

demand for any loan document containing the details of the transaction, i.e., monthly

amortization, interest rate, added charges, etc., and the release of the remaining

amount of their alleged loan; and (b) offer to pay the purported partial loan proceeds

they received at any time, complaining thereof only in 1991 when they filed their

complaint. Indeed, the foregoing circumstances clearly show that petitioners are

aware that they were mere accommodation mortgagors, debunking their claim that

mistake vitiated their consent to the mortgage.

Thus, there being valid consent on the part of petitioners to act as accommodation

mortgagors, no reversible error was committed by the CA in setting aside the RTC’s

Decision declaring the real estate mortgage as void for vices of consent and

awarding damages to petitioners. As mere accommodation mortgagors, petitioners

are not entitled to the proceeds of the loan, nor were required to be furnished with

the loan documents or notice of the borrower’s default in paying the principal,

interests, penalties, and other charges on due date, or of the extrajudicial

foreclosure proceedings, unless stipulated in the subject deed. As jurisprudence

states, an accommodation mortgagor is a third person who is not a debtor to a

principal obligation but merely secures it by mortgaging his or her own property.

Like an accommodation party to a negotiable instrument, the accommodation

mortgagor in effect becomes a surety to enable the accommodated debtor to obtain

credit, as petitioners in this case.



Vitug v. Abuda

G.R. No. 201264, January 11, 2016

Leonen, J.

Doctrine: Contracts entered into in violation of restrictions on a property owner's rights

do not always have the effect of making them void ab initio especially when these

restrictions do not divest petitioner of his ownership rights. These restrictions are mere

burdens or limitations on petitioner's jus disponendi. Contracts that only subject a

property owner's property rights to conditions or limitations but otherwise contain all

the elements of a valid contract are merely voidable by the person in whose favor the

conditions or limitations are made.

Facts:

Abuda loaned P250,000.00 to Vitug and his wife, Narcisa Vitug. As security for the

loan, Vitug mortgaged to Abuda his property in Tondo. Spouses Vitug failed to pay

their loans despite Abuda’s demands. Abuda filed a Complaint for Forclosure of

Property. The RTC ruled in Abuda’s favor, ordering the Spouses Vitug to pay their

debt and upon default, the sale of the property mortgaged. Spouses Vitug appealed

the decision. Vitug contends that he lacks free disposal of the property due to the

restrictions imposed on his title by the National Housing Authority. These

restrictions were annotated on his title:

Entry No. 4519/V-013/T-234246 — RESTRICTION — that the Vendee shall not

sell, encumber, mortgage, lease, sub-let or in any manner, alter or dispose the

lot or right therein at any time, in whole or in part without obtaining the written

consent of the Vendor.

Vitug submits that not all the requisites of a valid mortgage are present. A

mortgagor must have free disposal of the mortgaged property. The existence of a

restriction clause means that he does not have free disposal of his property. The

restriction clause does not allow him to mortgage the property without the NHA’s

approval. Since the NHA never gave its consent to the mortgage, the mortgage

between him and respondent is invalid.

Issue:

Is the mortgage void for failure to comply with the restriction clause in favor of

NHA?

Ruling:

No. The mortgage is not void. The Supreme Court held that restrictions do not divest

petitioner of his ownership rights. They are mere burdens or limitations on

petitioner's jus disponendi. Thus, petitioner may dispose or encumber his property.

However, the disposition or encumbrance of his property is subject to the limitations

and to the rights that may accrue to the National Housing Authority. When annotated

to the title, these restrictions serve as notice to the whole world that the NHA has

claims over the property, which it may enforce against others. Furthermore, contracts

that only subject a property owner's property rights to conditions or limitations but

otherwise contain all the elements of a valid contract are merely voidable by the

person in whose favor the conditions or limitations are made.

In this case, the mortgage contract entered into by petitioner and respondent

contains all the elements of a valid contract of mortgage. The trial court and the

Court of Appeals found no irregularity in its execution. The restrictions annotated on

petitioner’s title gave NHA the right to assail the validity and seek the annulment of

the mortgage contract. Petitioner has no actionable right or cause of action based on

those restrictions. Therefore, since the restrictions did not divest petitioner of his

ownership rights, the mortgage contract is valid as between the mortgagor and the

mortgagee and only the NHA has the right to seek the annulment of the mortgage

contract based on the restriction clause.



The Bachrach Motors, Inc. v. Esteva

G.R.No. L-40233 February 14, 1934

Malcolm, J.

Doctrine: In the law of chattel mortgages the debt is the principal thing. The mortgage

is but an incident to the debt. Separated from the debt, the mortgage has no

determinate value.

Facts:

Jose Esteva bought a number of motor trucks from the Teal Motor Co., Inc. The latter

company assured Esteva that it would not make any attempt to repossess the

property in less than three months after the due date of any one note. On April 8,

1930, a chattel mortgage was made which consolidated all of Jose Esteva's

indebtedness to the Teal Motor Co., Inc. The mortgage was for the sum of P54,500,

and was given as security for the payment of twenty-two promissory notes maturing

on specified dates. On April 12, 1930, the Teal Motor Co., Inc., endorsed the

promissory notes to the Bachrach Motor Co., Inc. Esteva failed to make payments of

certain notes as they became due.

On March 31, 1931, foreclosure proceedings were started by the Teal Motor Co., Inc.,

and shortly thereafter the trucks, trailers, and automobile of Esteva were sold to the

highest bidder, Teal Motor Co., Inc., for the sum of P20,000. Subsequently, on

December 9, 1931, the instant action was begun by the Bachrach Motor Co., Inc., to

secure the payment from Jose Esteva and the Teal Motor Co., Inc., of the amounts due

under the promissory notes.

Herein respondent claims that the foreclosure of the mortgage by Teal Motor Co.,

Inc., was illegal.

Judgment was rendered in favor of Bachrach Motor co., and against Jose Esteva and

the Teal Motor Co., Inc.,jointly and severally, for the sum of P34,749.41, with interest

at the rate of 12 per cent per annum.

Issue:

Was there a valid foreclosure considering the endorsement of Teal Motor to

Bachrach?

Ruling:

No, there was no valid foreclosure because the passing of the mortgage with the

notes as incidents to them was precluded by a special agreement between Esteva and

Teal Motors to the contrary.

Our Chattel Mortgage Law, Act No. 1508, in its section 3, defines a chattel mortgage

as "a conditional sale of personal property as security for the payment of a debt, or

the performance of some other obligation specified therein." In the same, the debt is

the principal thing. The mortgage is but an incident to the debt. Separated from the

debt, the mortgage has no determinate value.

A sale and delivery of notes secured by a chattel mortgage, although unaccompanied

by an assignment of the mortgage itself, authorizes the purchaser to act as the

mortgagee's agent and to do whatever he could have done to enforce the mortgage.

Whatever discharges the debt discharges the mortgage. If by special agreement the

chattel mortgage does not accompany the security assigned, it is ipso facto

extinguished, and ceases to be a subsisting demand.

In the instant case, given the contrary agreement between the Esteva and Teal Motor

Co., Inc., the latter retained the mortgage and foreclosed it, while the Bachrach

Motor Co., Inc., received the promissory notes and sued upon them.

As to the mortgage, since it ceased to exist because there was no debt to which it

could attach, the foreclosure proceedings were in consequence a nullity, and as to

the debt, the promissory notes unpaid, they were obligations which the holder of the

notes could sue upon.



Ong v. Roban Lending Corp.

G.R. No. 172592, July 9, 2008

Carpio Morales, J.

Doctrine: The elements of pactum commissorium which enables the mortgagee to

acquire ownership of the mortgaged property without the need of any foreclosure

proceedings, are: (1) there should be a property mortgaged by way of security for the

payment of the principal obligation, and (2) there should be a stipulation for automatic

appropriation by the creditor of the thing mortgaged in case of non-payment of the

principal obligation within the stipulated period.

Facts:

Petitioner-spouses Wilfredo Ong and Edna Ong obtained several loans from

respondent Roban Lending Corporation in the total amount of P4 Million. The loans

were secured by a real estate mortgage on parcels of land owned by petitioners

located in Tarlac City.

On February 12, 2001, petitioners and respondent executed an Amendment to

Amended Real Estate Mortgage consolidating their loans inclusive of charges which

totaled P5,916,117.50. The parties executed a Dacion in Payment Agreement where

the petitioners assigned their properties in Tarlac City to respondent in settlement

of their total obligation. In view of such settlement, a Memorandum of Agreement

was also executed.

On April 2002, petitioners filed a complaint with the RTC of Tarlac City for

declaration of mortgage contract as abandoned, annulment of deeds, illegal

exaction, unjust enrichment, accounting and damages alleging that the MOA and

Dacion in Payment are void for being pactum commissorium.

Petitioners alleged that the loans extended to them were founded on uniform

promissory notes which provided for monthly interest rates, monthly penalty rates,

and attorney’s fees. Petitioners claimed that the additional charges are illegal,

among others. It was further alleged that they had previously made payments on

their loan accounts, but because of the illegal exactions thereon, the total balance

appears not to have moved at all, hence, accounting was in order.

In their answer, respondent insisted on the legality of its transactions with

petitioners.

The RTC ruled in favor of respondent and held that there was no pactum

commissorium. On appeal, the CA upheld the trial court’s decision that there was no

pactum commissorium.

Issue:

Does pactum commissorium exist which would make the MOA and Dacion in

Payment void?

Ruling:

YES, the court finds that the MOA and Dacion in Payment constitute pactum

commissorium which is prohibited under Art. 2088 of the Civil Code which provides:

“The creditor cannot appropriate the things given by way of pledge or mortgage, or

dispose of them. Any stipulation to the contrary is null and void.”

The elements of pactum commissorum which enables the mortgagee to acquire

ownership of the mortgaged property without the need of any foreclosure

proceedings, are: (1) there should be a property mortgaged by way of security for the

payment of the principal obligation, and (2) there should be a stipulation for

automatic appropriation by the creditor of the thing mortgaged in case of nonpayment

of the principal obligation within the stipulated period.

In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain

no provisions for foreclosure proceedings nor redemption. Under the Memorandum of

Agreement, the failure by the petitioners to pay their debt within the one-year period

gives respondent the right to enforce the Dacion in Payment transferring to it

ownership of the properties in Tarlac City. Respondent, in effect, automatically

acquires ownership of the properties upon petitioners’ failure to pay their debt

within the stipulated period.

Furthermore, In a true dacion en pago, the assignment of the property extinguishes

the monetary debt.33 In the case at bar, the alienation of the properties was by way

of security, and not by way of satisfying the debt.34 The Dacion in Payment did not

extinguish petitioners’ obligation to respondent. On the contrary, under the

Memorandum of Agreement executed on the same day as the Dacion in Payment,

petitioners had to execute a promissory note for ₱5,916,117.50 which they were to

pay within one year.



Nakpil v. IAC

G.R. No. 74449. August 20, 1993.

Bellosillo, J.

Doctrine: Pactum commissorium which is expressly prohibited by Art. 2088 of the Civil

Code.

Facts:

Jose “Pinggoy” Nakpil and Carlos “Charlie” Valdez were best of friends. However, the

relationship had to end when a tragedy struck on July 1973. While they were

vacationing at Bataan, Pinggoy drowned. Charlie went to the succor of Pinggoy’s

distressed wife, Nena. He acted as the legal counsel and accountant of Nena, who

became the administratrix of her husband’s estate.

Towards the end of 1978, the question arose as to who between the Nakpils and the

Valdeses should own Pulong Maulap, a summer residence in Baguio City.

Petitioner instituted an action for reconveyance with damages for breach of trust

before the RTC against respondents Valdes and Caval Realty Corp. She alleged in her

complaint that her husband prior to his death had requested Valdes to purchase

Pulong Maulap and thereafter register the sale and hold the title thereto in trust for

him (Pinggoy Nakpil), which respondent Valdes did. But after her husband's death,

Valdes concealed and suppressed all information regarding the trust agreement;

instead, he transferred Pulong Maulap in the name of respondent Caval Realty

Corporation, which is 99.7% owned by him, in exchange for 1,500 shares of stock.

However, the respondent denied the existence of any trust agreement over Pulong

Maulap.

The RTC rendered a decision holding that a trust relationship existed. But dismissed

the petition for reconveyance on the ground that petitioner, by conforming to Exh. "J"

and acquiescing with Exh. "L," the very documents she presented to prove the

existence of a trust relationship, has waived her right over Pulong Maulap.

Both parties appealed to respondent IAC which on December 1985 reversed the trial

court and ruled that there was no trust at all. The petitioner filed for reconsideration

but the appellate court denied it for absolute lack of merit.

Issue:

Is there a pactum commissorium existing?

Ruling:

Yes. The arrangement entered into between the parties, whereby Pulong Maulap was

to be considered sold to the respondent in case petitioner fails to reimburse Valdes,

must then be construed as tantamount to a pactum commissorium which is expressly

prohibited by Art. 2088 of the Civil Code. For, there was to be automatic

appropriation of the property by Valdes in the event of failure of petitioner to pay

the value of the advances. Thus, contrary to respondent's manifestations, all the

elements of a pactum commissorium were present:

1. there was a creditor-debtor relationship between the parties;

2. the property was used as security for the loan; and

3. there was automatic appropriation by respondent of Pulong Maulap in case of

default of petitioner.

Petitioner may redeem and compel conveyance of the disputed property but only

after reimbursing respondent the sum of P375,056.64, with legal interest from July

31, 1978, the amount advanced by Valdes for the purchase of the Pulong Maulap.



Philnico Industrial Corporation v. Privatization and Management

Office

G.R. No. 199420. August 27, 2014

Leonardo-De Castro, J.

Doctrine: The automatic reversion of the PPC shares of stock to PMO in case of default

by PIC constitutes pactum commissorium which is null and void.

Facts:

Philnico Industrial Corporation (PIC) along with Philnico Processing Corporation

(PPC) and Pacific Nickel Philippines, Inc. (PNPI) form the Philnico Group. The

group is engaged in nickel mining and refining. Privatization and Management

Ofice (PMO), on the other hand, is a government agency under the Department of

Finance which is tasked to take title to and possession of, conserve,

provisionally manage, and dispose of assets previously identified for

privatization.

The Development Bank of the Philippines and the Philippine National Bank, by

virtue of foreclosure proceedings, became the holders of all the shares of stock of

PPC which they subsequently transferred to PMO. The PMO, PPC, and PIC executed

a contract denominated as the Amended and Restated Definitive Agreement (ARDA)

which laid down the terms and conditions of the purchase and acquisition by PIC

from PMO of 22,500,000 shares of stock of PPC. Under the ARDA, PIC agreed to pay

PMO the peso equivalent of US$333,762,000.00 as purchase price. Pursuant to Sec.

8.02 of the ARDA, there was a need to execute a pledge over the shares, and in case

of default, the title of the shares shall ipso facto revert to PMO without need of

demand if not remedied by PIC within 90 days. Moreover, by virtue of the ARDA’s

security clause, the PIC and PNPI as pledgors and PMO as pledgee executed a

Pledge Agreement to secure payment by PIC of the purchase price and all amounts

due to PMO under the ARDA, and the performance by PIC of its obligations.

When PIC had defaulted in the payment of its obligations, PMO demanded that the

former to settle its unpaid amortizations, otherwise it would would enforce the

automatic reversion of the PPC shares of stock under Section 8.02 of the ARDA.

A day before the deadline for payment set by PMO, the PIC filed before the RTC a

Complaint for Prohibition against Reversion of Shares, among others. The RTC ruled

in favor of PIC as it declared the ARDA provision providing for the ipso facto

reversion of the shares of stock is null and void for being a pactum commissorium.

On appeal, the CA declared that the ARDA did not constitute a pactum commissorium

since the ARDA and Pledge Agreement are entirely separate and distinct contracts

and neither contract satisfies both elements of pactum commissorium.

Issue:

Does Section 8.02 of the ARDA which provides for the automatic reversion of the PPC

shares of stock to PMO in case of default by PIC constitute a pactum commissorium?

Ruling:

Yes.

Pactum commissorium is defined as stipulation empowering the creditor to

appropriate the thing given as guaranty for the fulfillment of the obligation in the

event the obligor fails to live up to his undertakings, without further formality, such

as foreclosure proceedings, and a public sale. The elements thereof are 1) there

should be a pledge or mortgage wherein a property is pledged or mortgaged by way

of security for the payment of the principal obligation; and 2) there should be a

stipulation for an automatic appropriation by the creditor of the thing pledged or

mortgaged in the event of nonpayment of the principal obligation within the

stipulated period.

In this case, both elements are present. For the first element, by virtue of the Pledge

Agreement , PIC pledged its PPC shares of stock in favor of PMO as security for the

fulfillment of the former's obligations under the ARDA and the Pledge Agreement

itself. For the second element, there is automatic appropriation as under Section 8.02

of the ARDA, in the event of default by PIC, title to the PPC shares of stock shall ipso

facto revert from PIC to PMO without need of demand. Moreover, the ruling of the

CA is incorrect as the ARDA and the Pledge Agreement herein, although executed in

separate written instruments, are integral to one another. It has been settled that the

agreement of the parties may be embodied in only one contract or in two or more

separate writings. In case of the latter, the writings of the parties should be read and

interpreted together in such a way as to render their intention effective.

Given the foregoing, Sec. 8.02 of the ARDA constitutes a pactum commissorium and

is thus null and void for being contrary to Art. 2088 of the Civil Code.



Spouses Pen v. Spouses Julian

G.R. No. 160408 ; January 11, 2016

Bersamin, J.

Doctrine: Article 2088 of the Civil Code prohibits the creditor from appropriating the

things given by way of pledge or mortgage, or from disposing of them; any stipulation

to the contrary is null and void.

Facts:

Respondent Sps. Julian obtained loans from petitione Adelaida Pen in the amount of

P60,000, P50,000 and P10,000 respectively which they secured by a REM over their

property. When they defaulted in payment, they agreed that the mortgaged property

would instead become a payment in kind to avoid foreclosure proceedings. Sps. Pen

then required Sps. Julian to sign a one-page Deed of Sale. However, it was found out

that the property is already registered under the name of Sps. Julian so Pen filed an

Affidavit of Adverse Claim. Sps. Julian then averred that the sale is void alleging that

Pen merely used the spurious deed of sale as the vehicle for the transfer of land to

herself.

Issue:

1. Is the Absolute Deed of Sale valid?

2. Is the transaction a valid dacion en pago?

Ruling:

1. No, the contract of sale is void and inexistent. The court ruled that the

transaction was a pactum commisorium.

Article 2088 of the Civil Code prohibits the creditor from appropriating the things

given by way of pledge or mortgage, or from disposing of them; any stipulation to

the contrary is null and void. The elements for pactum commissorium to exist are

as follows, to wit: (a) that there should be a pledge or mortgage wherein property

is pledged or mortgaged by way of security for the payment of the principal

obligation; and (b) that there should be a stipulation for an automatic

appropriation by the creditor of the thing pledged or mortgaged in the event of

non-payment of the principal obligation within the stipulated period. The first

element was present considering that the property of the respondents was

mortgaged by Linda in favor of Adelaida as security for the farmer's indebtedness.

As to the second, the authorization for Adelaida to appropriate the property

subject of the mortgage upon Linda's default was implied from Linda's having

signed the blank deed of sale simultaneously with her signing of the real estate

mortgage. Therefore, the haste with which the transfer of property was made

upon the default by Linda on her obligation, and the eventual transfer of the

property in a manner not in the form of a valid dacion en pago ultimately

confirmed the nature of the transaction as a pactum commissorium.

2. No, it is a pactum commissorium and not a dacion en pago.

The petitioners have theorized that their transaction with the respondents was a

valid dacion en pago by highlighting that it was Linda who had offered to sell her

property upon her default. Their theory cannot stand scrutiny. Dacion en pago is

in the nature of a sale because property is alienated in favor of the creditor in

satisfaction of a debt in money. For a valid dacion en pago to transpire, however,

the attendance of the following elements must be established, namely: (a) the

existence of a money obligation; (b) the alienation to the creditor of a property

by the debtor with the consent of the former; and (c) the satisfaction of the

money obligation of the debtor. To have a valid dacion en pago, therefore, the

alienation of the property must fully extinguish the debt. Yet, the debt of the

respondents subsisted despite the transfer of the property in favor of Adelaida.



Development Bank of the Phil. v. Court of Appeals

G.R. Nos. 118342, 118367. January 5, 1998

Davide, Jr., J.

Doctrine: The elements of pactum commissorium are as follows: (1) there should be a

property mortgaged by way of security for the payment of the principal obligation, and

(2) there should be a stipulation for automatic appropriation by the creditor of the

thing mortgaged in case of non-payment of the principal obligation within the

stipulated period.

Facts:

Lyndia Cuba obtained from DBP three separate loans totaling P335,000, each of

which was covered by a promissory note. Simultaneous with the execution of the

notes was the execution of "Assignments of Leasehold Rights” where CUBA assigned

her leasehold rights and interest on a 44-hectare fishpond, together with the

improvements thereon.

For failure of Cuba to pay her loans, DBP appropriated her Leasehold Rights over

the fishpond without foreclosure proceedings. Subsequently, Cuba offered and

agreed to repurchase her leasehold rights from DBP. For failure to pay the monthly

amortizations stipulated in the deed of conditional sale executed by DBP in favor of

Cuba, DBP took possession of the leasehold right and subsequently sold the same to

Agripina Capera.

Cuba filed a complaint with the Regional Trial Court seeking declaration of nullity

DBP's appropriation of her leasehold rights without foreclosure proceedings which

is contrary to Article 2088 of the Civil Code. The trial court resolved the issue in

favor of Cuba and declared invalid the deed of assignment for being a clear case of

pactum commissorium. On appeal, the Court of Appeals reversed the decision of the

trial court and declared that the deed of assignment was an express authority from

Cuba for DBP to sell whatever right she had over the fishpond.

Issue:

Is the questioned deed of assignment a pactum commissorium?

Ruling:

No. The elements of pactum commissorium are as follows: (1) there should be a

property mortgaged by way of security for the payment of the principal obligation,

and (2) there should be a stipulation for automatic appropriation by the creditor of

the thing mortgaged in case of non-payment of the principal obligation within the

stipulated period.

Condition no. 12 did not provide that the ownership over the leasehold rights would

automatically pass to DBP upon CUBA's failure to pay the loan on time. It merely

provided for the appointment of DBP as attorney-in-fact with authority, among other

things, to sell or otherwise dispose of the said real rights, in case of default by

CUBA, and to apply the proceeds to the payment of the loan. This provision is a

standard condition in mortgage contracts and is in conformity with Article 2087 of

the Civil Code, which authorizes the mortgagee to foreclose the mortgage and

alienate the mortgaged property for the payment of the principal obligation.

DBP, however, exceeded the authority vested by condition No. 12 of the deed of

assignment. As admitted by it during the pre-trial, it had "without, foreclosure

proceedings, whether judicial or extrajudicial . . . appropriated the leasehold rights

of plaintiff Lydia Cuba over the fishpond in question."



Bustamante v. Rosel

G. R. No. 126800. November 29, 1999

Pardo, J.

Doctrine: The general rule is contracts have the force of law between contracting

parties, and that parties are free to establish stipulations,clauses, terms, and conditions

as they may deem convenient. One of the exceptions is when the stipulation is contrary

to law, which in this case,was a pactum commissorium. According to Article 2088, “The

creditor cannot appropriate the things given by way of pledge or motgage, ordispose of

them. Any stipulation to the contrary is null and void.”

Facts:

Respondent Rosel entered into a loan agreement with petitioner spouses

Bustamante wherein the latter borrowedP100,000 payable in 2 years. To guarantee

payment, the spouses put as collateral 70 sq m of their lot inclusive of the

apartment therein. In the event of borrowers default, contract states the lender has

the option to buy or purchase the collateral for P200,000.

When the loan was about to mature on March 1, 1989, respondents proposed to buy

the said portion at the pre-set price. Petitioners, however, refused and requested

for extension of time to pay the loan. On the due date, petitioners tendered

payment of the loan to respondents which the latter refused to accept. On March 4,

1990, respondents sent a demand letter asking petitioner to sell the collateral

pursuant to the option to buy embodied in the loan agreement. Prior to that, they

filed with the RTC an action for specific performance in February.

Issue:

Is the respondent justified in compelling petitioners to sell the portion of the lot

pursuant to the stipulation in the agreement?

Ruling:

No. The SC said that the stipulation is void. the intent of the creditor appears to be

evident,for the debtor is obliged to dispose of the collateral at the pre agreed

consideration amounting to practically the same amount as the loan. In effect, the

creditor acquires the collateral in the event of non-payment of the loan. This is

within the concept of pactum commissorium. Such stipulation is void.



Philippine National Bank v. Amores

G.R.No. 54551, November 9, 1987

Sarmiento, J.

Doctrine: Explicit is the law that a mortgage obligation is one and indivisible. Every

portion of the property mortgaged is answerable for the whole obligation as soon as the

latter falls due.

Facts:

The plaintiffs Kalaw Investment and Augusto Kalaw obtained a loan from defendant

Philippine National Bank in the amount of 150,000.00, and in order to secure the

said loan a property was mortgaged to defendant PNB. A portion of said property,

with an area of 45.186 hectares, was subjected to Operations Land Transfer in favor

of tenants-beneficiaries in accordance with Presidential Decree No. 27 and the

provisions of Republic Act No. 3844 (otherwise known as the Code of Agrarian

Reform of the Philippines), as amended more particularly by Presidential Decree No.

251. Defendant Land Bank of the Philippines paid defendant PNB for the account of

the plaintiffs P14,588.50 in cash and Land Bank Bonds with a total face value of

P130,000.00.

Pursuant to PNB Board Resolution No. 627, defendant PNB, after crediting the sum of

P 14,588.50 to the account of plaintiff Augusto Kalaw, applied the land Bank bonds

to the payment of the account on a one-to-one basis to the extent of P31,000.00 and

on a discounted basis to the extent of P59,400.00, or a total of P90,400,00.

Contesting the manner of application of Land Bank bonds to the payment of loan

obligations pursuant to Board Resolution No. 627 plaintiffs herein wrote the PNB

requesting the reconsideration or revision of its policy. Defendant PNB, however, did

not find merit in the request of plaintiffs but agreed that the latter seek judicial

ruling to which it would abide. As a consequence, plaintiffs brought the present

action for declaratory relief. The petitioner Philippine National Bank (PNB) appealed

from the decision of the lower court and assigned several errors.

Issue:

Is PNB correct in applying Land bank bonds on a one-to-one basis pro tanto on a part

of a mortgage and discounted basis with the other parts of the same mortgage?

Ruling:

No. Explicit is the law that a mortgage obligation is one and indivisible. Every

portion of the property mortgaged is answerable for the whole obligation as soon as

the latter falls due. The mortgagor cannot opt, much less compel the mortgagee, to

apply any payment made by him on a specific portion of the mortgaged property to

effect release. Neither may the mortgagee apply payments made to it on, and

consequently release, a portion of the mortgaged property and effect foreclosure on

the rest.

In this case, the petitioner's method evidently contravenes the principle of

indivisibility of mortgage for it applied the Land Bank bonds as payment on a one-toone

basis pro tanto of the mortgage debt secured by the particular portion acquired

by the Land Bank which had an area of 45.186 hectares, but on a discounted basis

with respect to the other portions of the debt secured by the same mortgage. From

the foregoing, it is clear that petitioner PNB cannot be allowed to do precisely what

it had done in the case at bar.



Sps. Gonzales v. GSIS

G.R. No. L-51997, September 10, 1981

Melencio - Herrera, J.

Doctrine: A real estate mortgage voluntarily constituted by the debtor on two or more

parcels of land is one and indivisible. Each and every parcel under mortgage answers

for the totality of the debt.

Facts:

Petitioner-spouses obtained a housing loan of P80,000.00 from the respondent GSIS,

repayable within 15 years and secured by their two residential lots and two parcels

of agricultural lands. After they compulsorily retired from the government service,

they left an unpaid obligation of over P73,000.00 which later on amounted to

P135,884.87 due to accumulated interests or arrearages. In the meantime, a parcel of

their agricultural lands earlier put up as collateral for the loan was subdivided

among the tenant-farmers pursuant to Presidential Decree No. 27 under Operation

Land Transfer, and the Land Bank accordingly tendered to the GSIS as payment for

the loan, the amount of P117,005.00 which was the appraised value of said land

broken down as follows; 20% in cash P23,505.00) and 80% in bonds (P93,500.00).

The GSIS, however, refused acceptance unless the bonds were given a creditable

value of only P41,775.00 instead of its face value of P93,500.00. Petitioners accepted

under protest the condition of the GSIS, and failing to get a reconsideration of the

GSIS decision, filed the instant petition praying that respondent GSIS be directed to

accept payment of the Land Bank bonds at par value so that all their collaterals

could be released.

Issue:

Were the four parcels of land given in mortgage guarantees only a determinate

portion of the credit and which contemplates separate debts secured by separate

properties?

Ruling:

No. The case at bar does not fall under the exception in Article 2089 of the Civll

Code.

Article 2089. A pledge or mortgage is indivisible, even though the debt may be

divided among the successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the

proportionate extinguishment of the pledge or mortgage as long as the debt is not

completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or

cancel the mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given

in mortgage or pledge, each one of them guarantees only a determinate portion of the

credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or

mortgage as the portion of the debt for which each thing is specially answerable is

satisfied.

It can neither be said that the Land Bank, by operation of law, has rendered the

mortgage of the four parcels divisible by taking only one of them solely to obtain its

release. The basic indivisibility of the mortgage obligation still remains unimpaired

despite that fact. To hold that the acceptance of the bonds at par value should be

limited only to the loan value of properties acquired by the Land Bank but should be

discounted as to other lands not so acquired, would not only run counter to the

principle of indivisibility of a mortgage and contravene the clear mandate of PD No.

251, but would also reduce the bond payment to the dispossessed landowner by

approximately one-half, to his complete detriment. This is a consequence that

neither law, equity, nor justice would countenance.

A real estate mortgage voluntarily constituted by the debtor on two or more parcels

of land is one and indivisible. Each and every parcel under mortgage answers for the

totality of the debt. Hence, the four parcels of land given in mortgage is indivisible

and each land answers for the totality of the debt.

 


Bank of the Philippine Islands v. Vda. De Coscolluela

GR No 167724, June 27, 2006

Callejo, Sr, J.

Doctrine: If the mortgagee opts to foreclose the real estate mortgage, he thereby

waives the action for the collection of the debt and vice versa. If the creditor is allowed

to file its separate complaints simultaneously or successively, one to recover his credit

and another to foreclose his mortgage, he will, in effect, be authorized plural redress

for a single breach of contract at so much costs to the court and with so much vexation

and oppressiveness to the debtor.

Facts:

Respondent Margarita and her husband Oscar Coscolluela obtained an agricultural

sugar crop loan from FEBTC (later on merged with petitioner BPI) for crop years

1997 and 1998. However, in the book of FEBTC, the loan account of the spouses

was treated as a single account which amounted to Php13,592,492.00 as evidenced

by 67 promissory notes executed on various dates from Aug 29, 1996 to Jan 23,

1998. Promissory note nos 1 to 3 bear the maturity date of Feb 9, 1998 with a 30-

day extension while the rest bear Dec 28, 1998 as maturity date. On June 13, 1997,

the spouses executed a real estate mortgage with an acceleration clause in favor of

FEBTC over subject land as security of loans on credit accommodation obtained

from FEBTC. Respondents failed to settle the outstanding obligation which

prompted FEBTC to demand the principal of the loan amounting to

Php13,481,498.68 plus interest and penalties. Respondent failed to settle her

obligation. Shortly thereafter, FEBTC filed a petition for the extrajudicial

foreclosure of the mortgaged property for the total amount of Php4,687,006.68.

While the extrajudicial foreclosure proceeding was pending, FEBTC filed a

complaint against respondent for the collection of the principal amount of

Php8,794,492.00, plus interest and penalty, indicated in promissory note nos 34 to

67.

Issue:

Should the action concerning promissory note nos 34-67 prosper?

Ruling:

No. it was held in Industrial Finance Corporation v. Apostol that “If the mortgagee

opts to foreclose the real estate mortgage, he thereby waives the action for the

collection of the debt and vice versa.” Moreover, it was held in Bachrach Motor Co.,

Inc. V. Esteban Icarañgal and Oriental Commercial that, “If the creditor is allowed to

file its separate complaints simultaneously or successively, one to recover his credit

and another to foreclose his mortgage, he will, in effect, be authorized plural redress

for a single breach of contract at so much costs to the court and with so much

vexation and oppressiveness to the debtor.” In the present case, petitioner opted to

file a petition for extrajudicial foreclosure of the real estate mortgage but only for

the principal amount of P4,687,006.08 covering only 31 of the 67 promissory notes.

By resorting to the extrajudicial foreclosure of the real estate mortgage, petitioner

thereby waived its personal action to recover the amount covered not only by said

promissory notes but also of the rest of the promissory notes.



Spouses Viola v. Equitable PCI Bank, Inc.

G.R. No. 177886, November 27, 2008

Carpio Morales, J.

Doctrine: A mortgage must "sufficiently describe the debt sought to be secured, which

description must not be such as to mislead or deceive, and an obligation is not secured

by a mortgage unless it comes fairly within the terms of the mortgage.

Facts:

Via a contract denominated as “Credit Line and Real Estate Mortgage Agreement for

Property Line” (Credit Line Agreement) Leo-Mers Commercial Inc, as the client, and

its officers Sps. Leopoldo and Mercedita Viola obtained a loan through a credit line

facility in the maximum amount of P4,700,000 from PCI Bank, which later emerged

and became known as Equitable PCI Bank. The Credit Line Agreement stipulated that

the loan would bear interest at the "prevailing PCIBank lending rate" per annum on

the principal obligation and a "penalty fee of three percent (3%) per month on the

outstanding amount." To secure the payment of the loan, petitioners executed a real

estate mortgage in favor of PCIBank over their two parcels of land. Petitioners

availed of the full amount of the loan and paid partial payments amounting to P

3,669,210.67. However, petitioner since November 24, 2000 made no further

payments and despite demand, they failed to pay the outstanding obligation

amounting to P 14,024,623.22. Thus respondent extrajudicially foreclosed the

mortgage. The mortgaged properties were sold at a public auction to respondent

Equitable PCI Bank. More than 5 months later, petitioners filed a complaint for

annulment of foreclosure sale before the RTC.

Petitioners argue that that "the parties never agreed and stipulated in the real estate

mortgage contract" that the 15% interest per annum on the principal loan and the 3%

penalty fee per month on the outstanding amount would be covered or secured by

the mortgage;

Respondent denied petitioner’s assertions and contended that the absence of

stipulation in the mortgage contract securing the payment of 15% interest per annum

on the principal loan, as well as the 3% penalty fee per month on the outstanding

amount, is immaterial since the mortgage contract is "a mere accessory contract

which must take its bearings from the principal Credit Line Agreement."

The trial court ruled in favor of Respondent Equitable PCI Bank. Accordingly, the

court nullified the foreclosure proceedings. On appeal to the Court of Appeals, the

CA dismissed the same for lack of merit. holding that "the Real Estate Mortgage

covers not only the principal amount, of P4,700,000.00, but also the 'interest and

bank charges,' which refers to the penalty charges stipulated in the Credit Line

Agreement."

Issue:

Did the mortgage contract also secure the penalty fee per month on the outstanding

amount as stipulated in the Credit Line Agreement?

Ruling:

No. The mortgage contract did not secure the penalty fee per month on the

outstanding amount as stipulated in the Credit Line Agreement.

A mortgage must "sufficiently describe the debt sought to be secured, which

description must not be such as to mislead or deceive, and an obligation is not

secured by a mortgage unless it comes fairly within the terms of the mortgage.

In the case at bar, the parties executed two separate documents the Credit Line

Agreement granting the Client a loan through a credit facility in the maximum

amount of P4,700,000.00, and the Real Estate Mortgage contract securing the

payment thereof.

The Credit Line Agreement contained the stipulation on interest and delinquency

charges:

9. INTEREST ON AVAILMENTS

The CLIENT shall pay the BANK interest on each availment against the Credit

Facility at the rate of:

PREVAILING PCIBANK LENDING RATE

for the first interest period as defined in A(10) hereof. x x x.

x x x

15. DELINQUENCY

CLIENT's account shall be considered delinquent if the availments exceed the

amount of the line and/or in case the Account is debited for unpaid interest

and the Available Balance is insufficient to cover the amount debited. In such

cases, the Available Balance shall become negative and the CLIENT shall pay

the deficiency immediately in addition to collection expenses incurred by the

BANK and a penalty fee of three percent (3%) per month of the outstanding

amount to be computed from the day deficiency is incurred up to the date of

full payment thereon.

The Real Estate Mortgage contract states its coverage as:

Xxx That for and in consideration of certain loans, credit and other banking

facilities obtained x x x from the Mortgagee, the principal amount of which is

PESOS FOUR MILLION SEVEN HUNDERED THOUSAND ONLY (P4,700,000.00)

Philippine Currency, and for the purpose of securing the payment thereof,

including the interest and bank charges accruing thereon, xxx

The immediately-quoted provision of the mortgage contract does not specifically

mention that, aside from the principal loan obligation, it also secures the payment of

"a penalty fee of three percent (3%) per month of the outstanding amount to be

computed from the day deficiency is incurred up to the date of full payment thereon,"

which penalty as the above-quoted portion of the Credit Line Agreement expressly

stipulates.

Since an action to foreclose "must be limited to the amount mentioned in the

mortgage" and the penalty fee of 3% per month of the outstanding obligation is not

mentioned in the mortgage, it must be excluded from the computation of the amount

secured by the mortgage.



Prudential Bank v. Alviar

G.R. No. 150197, July 28, 2005

Tinga, J.

Doctrine: Mortgages given to secure future advancements are valid and legal contracts,

and the amounts named as consideration in said contracts do not limit the amount for

which the mortgage may stand as security if from the four corners of the instrument the

intent to secure future and other indebtedness can be gathered.

Facts:

Respondent spouses are the registered owners of a parcel of land. They executed a

deed of real estate mortgage in favor of the petitioner to secure the payment of a

loan worth P250,000.00. Thereafter, respondents executed a promissory note

covering the said loan, which provided that the loan matured on August 4, 1976 at

an interest rate of 12% per annum with a 2% service charge, and that the note is

secured by a real estate mortgage. Significantly, the real estate mortgage contained

the following clause:

“That for and in consideration of certain loans, overdraft and other credit

accommodations obtained from the Mortgagee by the Mortgagor and/or

________________ hereinafter referred to, irrespective of number, as DEBTOR, and to

secure the payment of the same and those that may hereafter be obtained, the

principal or all of which is hereby fixed at Two Hundred Fifty Thousand

(₱250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may

extend to the Mortgagor and/or DEBTOR, including interest and expenses or any

other obligation owing to the Mortgagee, whether direct or indirect, principal or

secondary as appears in the accounts, books and records of the Mortgagee..”

Don Alviar executed another promissory note for P2,640,000 signifying that the loan

was secured by a “hold-out” on the mortgagor’s foreign currency savings account,

and that the mortgagor’s passbook is to be surrendered to the bank until the amount

secured by the “hold-out” is settled. Afterwards, respondent spouses executed for

Donalco Trading Inc., a promissory note covering P545,000. As provided in the note,

the loan is secured by “Clean-Phase out TOD CA 3923” which means that the

temporary overdraft incurred by Donalco Trading, Inc. with the petitioner is to be

converted into an ordinary loan. Petitioner then wrote Donalco Trading Inc.,

informing the latter of its approval of a straight loan of P545,000, the proceeds of

which shall be used to liquidate the outstanding loan of P545,000 TOD. The letter

likewise mentioned that the securities of the loan were the deed of assignment on

two promissory notes executed by Bancom Realty Corporation with Deed of

Guarantee in favor of A.U. Valencia and Co., and the chattel mortgage on various

heavy and transportation equipment. Respondents paid petitioner P2,000,000, to be

applied to the obligations of G.B Alviary Realty and Development, Inc., and for the

release of the real estate mortgage for the P450,000 loan covering the two lots

located at Vam Buren and Madison Streets in San Juan, Manila. The payment was

acknowledged by the petitioner who released the mortgage over the two properties.

Petitioner moved for the extrajudicial foreclosure of the mortgage on the property.

Per petitioner’s computation, respondents had the total obligation of P1,608,256.68

covering the three promissory notes. Respondents then filed for a complaint for

damages with a prayer for the issuance of a writ of preliminary injunction, claiming

that they have paid their principal loan secured by the mortgaged property, and thus

the mortgage should not be foreclosed.

The trial court dismissed the complaint and ordered the Sheriff to proceed with the

extrajudicial foreclosure. The court further ruled that only the P250,000 loan is

secured by the mortgage on the land. On the other hand, the P382,680.83 loan is

secured by the foreign currency deposit account of Don Alviar, while the P545,000

obligation was an unsecured loan, being a mere conversion of the temporary

overdraft of Donalco Trading Inc. The “blanket mortgage clause” relied upon by

petitioner applies only to future loans obtained by the mortgagors, and not by

parties other than the said mortgagors. On appeal, the CA ruled that the extrajudicial

foreclosure sale of the property for the three loans is improper. Further, it found that

respondents have not yet paid the P250,000 since the payment of P2,000,000

adverted to by respondents was issued for the obligations of G.B. Alviar Realty and

Development Inc.

Issue:

Does the “blanket mortgage” clause applies even to subsequent advances for which

other securities were intended?

Ruling:

Yes. A “blanket mortgage clause,” also known as a “dragnet clause” in American

jurisprudence, is one which is specifically phrase to subsume all debts of past or

future origins. Mortgages of this character enable the parties to provide continuous

dealings, the nature or extend of which may not be known or anticipated at the time,

and they avoid the expense and inconvenience of executing a new security on each

new transaction. Indeed, it has been settled in a long line of decisions that

mortgages given to secure future advancements are valid and legal contracts, and

the amounts named as consideration in said contracts do not limit the amount for

which the mortgage may stand as security if from the four corners of the instrument

the intent to secure future and other indebtedness can be gathered. The “blanket

mortgage clause” in the instant case states:

That for and in consideration of certain loans, overdraft and other credit

accommodations obtained from the Mortgagee by the Mortgagor and/or

________________ hereinafter referred to, irrespective of number, as DEBTOR, and to

secure the payment of the same and those that may hereafter be obtained, the

principal or all of which is hereby fixed at Two Hundred Fifty Thousand

(₱250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may

extend to the Mortgagor and/or DEBTOR, including interest and expenses or any

other obligation owing to the Mortgagee, whether direct or indirect, principal or

secondary as appears in the accounts, books and records of the Mortgagee, the

Mortgagor does hereby transfer and convey by way of mortgage unto the Mortgagee,

its successors or assigns, the parcels of land which are described in the list inserted

on the back of this document, and/or appended hereto, together with all the

buildings and improvements now existing or which may hereafter be erected or

constructed thereon, of which the Mortgagor declares that he/it is the absolute

owner free from all liens and incumbrances. . . .

Thus, contrary to the finding of the Court of Appeals, petitioner and respondents

intended the real estate mortgage to secure not only the P250,000 loan from the

petitioner, but also future credit facilities and advancements that may be obtained by

the respondents. The terms of the above provision being clear and unambiguous,

there is neither need nor excuse to construe it otherwise. The subsequent loans

obtained by respondents were secured by other securities, thus: a promissory note

executed by Don Alviar which was secured by a “hold-out” on his foreign currency

savings account, while the promissory note which was executed by respondents for

Donalco Trading, Inc., was secured by Bancom Realty Corporation with Deed of

Guarantee in favor of A.U Valencia and Co., and by a chattel mortgage on various

heavy and transportation equipment. It was therefore improper for the petitioner in

this case to seek foreclosure of the mortgage property because of non-payment of all

the three promissory notes. While the existence and validity of the “dragnet clause”

cannot be denied, there is a need to respect the existence of the other security given

for one of the promissory notes.



Vda. De Delfin v. Dellota

G.R. No. 143697. January 28, 2008

Sandoval -Gutierrez, J.

Doctrine: ART. 1602. The contract shall be presumed to be an equitable mortgage, in

any of the following cases: (1) When the price of a sale with right to repurchase is

unusually inadequate

Facts:

Dionisia Dorado Delfin was the registered owner of Lot No. 1213 in Capiz with an

area of 143, 935 sqm. Dionisia executed an “Escritura De Venta Con Pacto de Retro”

over a 50,000 sqm portion of the lot in favor of spouses Dellota and Patricia Delfin.

Dionisia failed to exercise her right of redemption. Dionisia sold another portion of

the lot (50,000 sqm to Gumersindo Delena evidenced by a notarized “Deed of Sale

with right of redemption.” Dionisia never redeemed this portion of the land from

Gumersindo. Records show that Salvador Dellota leased this area from Gumersindo.

Sometime in 1956, Dionisia executed a “Deed of mortgage and promise to sell” in

favor of Salvador over a 90,000 sqm portion of Lot No. 1213 without specifying

whether it included the 50,000 sqm portion sold to Gumersindo. Dionisia filed with

the CFI a complaint for recovery of possession. The trial court declared that the

ownership over the 50,000 sqm portion of the subject lot is owned by the heirs of

Gumersindo. This was affirmed by the Court of Appeals. Petitioner contends that the

Court of Appeals erred in not holding that the Deed of Sale with the right of

redemption is an equitable mortgage under Art. 1602. They insist that the P5,300

price for a five hectare portion is grossly inadequate.

Issue:

Was there an equitable mortgage because P5,300 was grossly inadequate?

Ruling:

No. The Sale with a right of redemption is not an equitable mortgage.

ART. 1602. The contract shall be presumed to be an equitable mortgage, in any of the

following cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase, another instrument

extending the period of redemption or granting a new period is extended;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the

parties is that the transaction shall secure the payment of a debt or the performance

of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the

vendee as rent or otherwise shall be considered as interest which shall be subject to

the usury laws.

In this case, the courts find no cogent reason to conclude that the price as agreed

upon by the parties was unreasonable or unusually inadequate. According to

jurisprudence, the price agreed upon should not generally be considered as the just

value of the thing sold, absent other corroborative evidence. This is due to the fact

that the right to repurchase the land makes it immaterial to him whether or not the

price of the sale is the just value thereof.

The deed of sale with right to redemption is not an equitable mortgage and the

consideration of P5,300 is not grossly inadequate.



Erena v. Querrer-Kauffman

G.R. No. 165853, June 22, 2006

Callejo, Sr., J.

Doctrine: The doctrine of "mortgagee in good faith" is based on the rule that persons

dealing with properties covered by a Torrens certificate of title are not required to go

beyond what appears on the face of the title. However, this is only in a situation where

the mortgagor has a fraudulent or otherwise defective title, but not when the

mortgagor is an impostor and a forger.

Facts:

Vida Dana Querrer-Kauffman is the owner of a residential lot with a house

constructed thereon covered with a TCT. The owner’s duplicate copy of the title and

the tax declarations covering the property were kept in a safety deposit box in the

house. As she was going to the U.S., Kauffman entrusted her minor daughter, Vida

Rose, and the key to her house to her live-in partner, Eduardo Victor. Later on, both

Vida Rose and Victor also left for the U.S. and Mira Bernal, Victor’s sister, was

entrusted with the house and the key thereto. Afterwards, Kauffman asked her

sister, Evelyn Pares, to get the house from Bernal so that the property could be

sold, which the latter did. Upon the opening of the safe, Pares discovered that the

owner’s duplicate title and the tax declarations were missing. Kauffman returned to

the Philippines and went with Pares to the Register of Deeds. They found out that

the lot had been mortgaged to Rosana Ereña. Further, it appeared that respondent

had “signed” the real estate mortgage as owner-mortgagor, together with Jennifer

Ramirez, Victor’s daughter, as attorney-in-fact. As such, Kauffman filed a complaint

for nullification of deed of real estate mortgage and damages against Ereña, Bernal,

and Ramirez before the trial court. The trial court ruled that although Kauffman

provided proof that she owned the property and that her signatures were forged,

Ereña provided evidence that she was a mortgagee in good faith. On appeal, the CA

reversed the decision of the trial court and ruled in favor of Kauffman.

Issue:

Can the doctrine of “mortgagee in good faith” be applied in this case?

Ruling:

No, the doctrine of “mortgagee in good faith” cannot be applied in this case. One of

the essential requisites of a mortgage contract is that the mortgagor must be the

absolute owner of the thing mortgaged. A mortgage is invalid if the mortgagor is not

the property owner. In this case, the owner of the property is the respondent who

was not the one who mortgaged the same to the petitioner. Meanwhile, the doctrine

of "mortgagee in good faith" is based on the rule that persons dealing with

properties covered by a Torrens certificate of title are not required to go beyond

what appears on the face of the title. However, this is only in a situation where the

mortgagor has a fraudulent or otherwise defective title, but not when the mortgagor

is an impostor and a forger. In a forged mortgage, the doctrine of "mortgagee in good

faith" cannot be applied and will not benefit a mortgagee no matter how large is his

or her reservoir of good faith and diligence. Such mortgage is void and cannot

prejudice the registered owner whose signature to the deed is falsified. When the

instrument presented is forged, even if accompanied by the owner’s duplicate

certificate of title, the registered owner does not lose his title, and neither does the

assignee in the forged deed acquire any right or title to the property. In this case,

respondent’s signature on the real estate mortgage was forged by an impostor.

Hence, the doctrine of “mortgagee in good faith” cannot be applied in this case.



Cavite Development Bank v. Spouses Lim

G.R. No. 131769, February 1, 2000

Mendoza, J.

Doctrine: Under Art. 1459 of the Civil Code, at the time of delivery or consummation

stage of the sale, it is required that the seller be the owner of the thing sold.

Otherwise, he will not be able to comply with his obligation to transfer ownership to

the buyer.

Facts:

A certain Rodolfo Guinsang obtained a loan in the amount of P90,000 from CDB, to

secure which he mortgaged a parcel of land registered in his name. As Guinsang

defaulted in the payment of his loan, CDB foreclosed the mortgage. At the

foreclosure sale, the mortgaged property was sold to CDB as the highest bidder.

Private respondent Lim, assisted by broker Gatpandan, offered to purchase the

property from CDB for P300,000, payable 10% “Option Money”, balance in cash.

However, the prospective buyer found out that Rodolfo’s title had been cancelled

for being fraudulent. The buyer and her husband then filed an action against CDB

for specific performance and damages arguing that the latter committed serious

misrepresentation. CDB contended, among others, that there was no perfected

contract of sale yet as the buyer’s offer was still subject to approval. The RTC ruled

in favor if the buyers holding, among others, that there was already a perfected

contract of sale and that the sellers failed to exercise due diligence for failure to

discover the defect in Rodolfo’s title. The CA affirmed the RTC ruling.

Issue:

Was the CDB, a “mortgagee in good faith”, which would allow the foreclosure sale

to be given effect by reason of public policy?

Ruling:

No. Under Art. 1459 of the Civil Code, at the time of delivery or consummation

stage of the sale, it is required that the seller be the owner of the thing sold.

Otherwise, he will not be able to comply with his obligation to transfer ownership

to the buyer. The sale by CDB to Lim of the property mortgaged by Rodolfo

Guansing is deemed null and void for CDB did not have a valid title to the said

property because at the time that CDB was awarded with the property as the

highest bidder, the mortgagor was not the owner of the property foreclosed.

CDB failed to exercise their duty of exercising the due diligence of banking

institutions. While it is not required to make a detailed investigation of the history of

the title of the property given as security before accepting a mortgage as this was

covered by a Torrens Title, it was noted by the Supreme Court that it is standard for

banks to investigate on the properties offered to them as security for loans. Banks

are held at stricter standards given that their business is imbued with public interest.

In this case, it was shown that Rodolfo obtained his fraudulent title via a selfexecuted

deed showing that he, and another, were the only heirs over the subject

properties and that the latter waived his rights thereto. This should have placed the

bank on-guard to conduct further inquiry. There was also no showing that the records

of the investigation conducted by CDB was introduced as evidence.



Agag v. Alpha Financing Corp.

G.R. No. 154826, July 31, 2003

Ynares-Santiago, J.

Doctrine: When the purchaser or mortgagee is a financing institution, the general rule

that a purchaser or mortgagee of land is not required to look further than what appears

on the face of the title does not apply.

Facts:

In 1977, petitioner Romy Agag and Teresita Vda. De Castro executed a document

whereby the latter sold to petitioner three parcels of land. On the same date,

petitioner took possession of and occupied said lots after paying a down payment. He

also then introduced improvements on the subject lots and repeatedly demanded

from De Castro the delivery to him of the title of the lots but the latter failed to do

so. In 1997, respondent Alpha Financing Corporation requested petitioner to vacate

the disputed lots and claimed that it is the lawful owner of the subject parcels of

land occupied by petitioner, having purchased the same in a foreclosure sale after De

Castro failed to pay her loan with a mortgagee bank. Thereafter, TCT in the name of

De Castro were cancelled, and TCT were issued in the name of respondent in 1986.

Since petitioner refused to vacate the premises, respondent filed an ejectment case

with the Municipal Trial Court. MTC ruled in favor of petitioner holding that the

mortgage and the foreclosure sale from which respondent allegedly derived his

rights are inferior to the prior unregistered deed of absolute sale executed by De

Castro, the original owner in favor of petitioner. Since De Castro was no longer the

owner of the property at the time of the mortgage, respondent acquired no right from

her. MTC further ruled that respondent was not a purchaser in good faith because it

failed to exercise the degree of diligence required of financing institutions in dealing

with registered lands. The said decision was sustained by the Regional Trial Court.

However, on the petition for review, it was reversed by the Court of Appeals by

holding that the respondent had a better right to possess the lots because the best

proof of ownership is the indefeasible and incontrovertible title registered in its

name.

Issue:

Does the respondent have a better right to possess the disputed lots?

Ruling:

No. Indeed, as a general rule, where there is nothing on the certificate of title to

indicate any cloud or vice in the ownership of the property, or any encumbrance

thereon, the purchaser is not required to explore further than what the Torrens Title

indicates on its face, in quest for any hidden defect or inchoate right that may

subsequently defeat his right thereto. This rule, however, applies only to innocent

purchasers for value and in good faith. It excludes a purchaser or mortgagee who has

knowledge of a defect or lack of title in the vendor, or of facts sufficient to induce a

reasonably prudent man to inquire into the status of the property.

In Sunshine Finance and Investment Corp. v. Intermediate Appellate Court, the Court

ruled that when the purchaser or mortgagee is a financing institution, the general

rule that a purchaser or mortgagee of land is not required to look further than what

appears on the face of the title does not apply. "Ascertainment of the status and

condition of properties offered to it as security for the loans it extends must be a

standard and indispensable part of its operations. Surely it cannot simply rely on an

examination of a Torrens certificate to determine what the subject property looks

like as its condition is not apparent in the document." In Cruz v. Bancom Finance

Corporation, the Court ruled that their expertise or experience in dealing with

encumbrances on lands, not to mention the public interest affecting their business,

require them to exercise more care and prudence in dealing even with registered

lands.

In the case, respondent, being a financial institution, cannot claim good faith

considering that neither it nor the alleged mortgagee bank was in possession of the

lots prior and after the foreclosure sale. Had respondent conducted an ocular

inspection of the premises, this being the standard practice in the real estate

industry, it would have discovered that the land is occupied by petitioner. The failure

of respondent to take such precautionary steps is considered negligence on its part

and would thereby preclude the defense of good faith. Therefore, it is the petitioner

who has the better right on the disputed lots, the mortgage and the foreclosure sale

being inferior to the prior unregistered deed of absolute sale executed by De Castro,

in favor of petitioner.



Luntao v. BAP Credit Guaranty Corp.

G.R. No. 204412, September 20, 2017

Leonen, J.

Doctrine: As an accessory contract, a mortgage contract's validity depends on the loan

contract's validity.

Facts:

Vicente was the owner of a real property He executed a Special Power of Attorney in

favor of his sister Nanette, authorizing her (1) to mortgage his real property; (2) to

apply for any commercial loan as she may deem proper using the aforesaid property

as collateral for the loan; (3) to receive the proceeds of the loan to be used in the

improvements of her business; and (4) to sign, execute and deliver any documents to

effect the purposes aforestated. Using the authorization given to her, Nanette

applied for a loan with BAP and used Vicente's property as collateral. The loan was

for the improvement of the facilities of her business, the Holy Infant Medical Clinic.

Upon approval of the loan, the amount of P900,000.00, representing the loan

proceeds, was ordered to be released to the clinic through Security Bank. When the

loan obligation became due, BAP sent demand letters. In a letter dated October 14,

1997, Nanette and Eleanor's brother Jesus Luntao (Jesus) wrote BAP, asking for

additional time to settle his sisters’ accounts, which states “With reference to the

loans of my sisters, Nanette and Eleanor Luntao, under the name of Holy Infant

Medical Clinic, please be advised that due to some business reverses experienced for

the last several months, substantial losses were incurred that greatly affected our

capacity to service the loans. Perhaps, it could be recalled that in the past, we have

been meeting religiously the installments due.”

However, Nanette's loan was still left unpaid. As a result, BAP applied for Extra-

Judicial Foreclosure of Vicente's property. On November 27, 1997, the Regional Trial

Court issued a Notice of Foreclosure and a Notice of Extrajudicial Sale.

Subsequently, Vicente and Nanette filed a Complaint for Declaration of Nullity of

Real Estate Mortgage with a prayer for the issuance of a Temporary Restraining Order

and Writ of Preliminary Injunction against BAP. They also prayed for the award of

damages and attorney's fees in their favor.

According to Nanette, she was surprised to receive the notice of foreclosure since

she did not “receive” the proceeds of the loan. She also noticed that the documents

attached to the notice of foreclosure were the blank documents she signed earlier.

Upon checking, she was shocked to see that Eleanor's name was included in the loan

documents. It was Nanette's position to obtain the principal loan as stated in the

Special Power of Attorney as she was the only person authorized to mortgage

Vicente's property.

Issue:

Should the Real Estate Mortgage be nullified?

Ruling:

No, the Real Estate Mortgage should not be nullified. As an accessory contract, a

mortgage contract's validity depends on the loan contract's validity. It is, thus,

imperative for the Court to determine if the contract of loan between petitioners and

private respondent is valid. It has been held that like any other contract, a contract

of loan is subject to the rules governing the requisites and validity of contracts in

general. The elements of a valid contract are enumerated in Article 1318 of the Civil

Code, which states that there is no contract unless the following requisites concur:

(1) Consent of the contracting parties; (2) Object certain which is the subject matter

of the contract; (3) Cause of the obligation which is established.

Here, both the trial court and the Court of Appeals found that petitioners received

the proceeds of the loan through the account under the name of Holy Infant Medical

Clinic/Nanette Luntao/Eleanor Luntao. This finding was supported by evidence

presented by the parties. Both courts also gave weight to Jesus' October 14, 1997

letter. Despite having the opportunity to prove that the admission of Jesus is false,

petitioners failed to present rebuttal evidence. They also failed to present evidence

to support their allegation that Eleanor received the loan proceeds or that Eleanor's

non-payment of her alleged personal loan with BAP caused the foreclosure of the

mortgage. What petitioners presented were mere denials. Therefore, the Real Estate

Mortgage is valid and should not be nullified.



Spouses Ellis R. Miles and Carolina Ronquillo-Miles v. Bonnie

Bautista Lao

G.R. No. 209544, November 22, 2017

Tijam, J.

Doctrine: The doctrine of "the mortgagee in good faith" is based on the rule that buyers

or mortgagees dealing with property covered by a Torrens Certificate of Title are not

required to go beyond what appears on the face of the title.

Facts:

Petitioners were registered owners of a parcel of land located in Makati City. Before

they left for the US, the duplicate copy of the said land was entrusted to their niece

Rodora. Petitioners alleged that Rodora and spouses Ocampo conspired and made it

appear, through a falsified Deed of Donation that petitioners were donating the

subject property to spouses Ocampo wherein a new TCT was issued to the latter.

Later on, petitioners claimed that spouses Ocampo caused the execution of a

falsified Real Estate Mortgage in favor of respondent Lao, with the subject property

as security, in exchange for a loan.

Defendant Rodora claimed that the sale was with petitioners' knowledge and consent

through a SPA. Spouses Ocampo maintained that they acquired the property in good

faith and for value. Respondent alleged that she entered into the mortgage contract

without knowledge that the title was defective.

A complaint was filed wherein the RTC ruled in favor of petitioners, which was

however reversed by the CA and ruled that respondent is a mortgagee in good faith.

Issue:

Does the Court of Appeals erred in ruling that the respondent is a mortgagee in good

faith?

Ruling:

No. A mortgagee has a right to rely in good faith on the certificate of title of the

mortgagor of the property given as security, and in the absence of any sign that

might arouse suspicion, the mortgagee has no obligation to undertake further

investigation. This doctrine presupposes, however, that the mortgagor, who is not

the rightful owner of the property, has already succeeded in obtaining Torrens title

over the property in his name and that, after obtaining the said title, he succeeds in

mortgaging the property to another who relies on what appears on the title.

In this case, the title of the property under the name of spouses Ocampo was already

registered as early as May 6, 1998, while the real estate mortgage was executed

December 16, 1998. Hence, it is clear that respondent had every right to rely on the

TCT presented to her insofar as the mortgagors' right of ownership over the subject

property is concerned.

Neither is respondent's act of filing a foreclosure suit instead of a criminal case

against spouses Ocampo indicative of her bad faith. In Sps. Yap and Guevarra v. First

e-Bank Corp., this Court already recognized that if the debtor fails (or unjustly

refuses) to pay his debt when it falls due and the debt is secured by a mortgage and

by a check, the creditor has three options against the debtor and the exercise of one

will bar the exercise of the others. The remedies include foreclosure and filing of a

criminal case for violation of BP 22 (Bouncing Checks Law).

Verily, when respondent opted to foreclose, he merely exercised a privilege granted

to him by law as a secured creditor.

Hence, being a mortgagee in good faith the real estate mortgage is valid and with

legal force and effect.



Spouses Teves v. Integrated Credit & Corporate Services, Co.

G.R. No. 216714, April 4, 2018

Del Castillo, J.

Doctrine: It is thus settled that the buyer in a foreclosure sale becomes the absolute

owner of the property purchased if it is not redeemed during the period of one year

after the registration of the sale. The buyer can in fact demand possession of the land

even during the redemption period except that he has to post a bond in accordance with

Section 7 of Act No. 3135, as amended. No such bond is required after the redemption

period if the property is not redeemed.

Facts:

Sometime in 1996, Standard Chartered Bank extended various loans to petitioners

Godfrey and Ma. Teresa Teves. As security, petitioners mortgaged their property

covered by Transfer Certificate of Title No. 107520. When petitioners defaulted in

their loan payments, Standard extrajudicially foreclosed on the mortgage, and the

property was sold to Integrated Credit and Corporate Services. ICCS was then issued

a new title when petitioners failed to redeem the subject property on May 23, 2007.

During the proceedings, in May 2010, ICCS was substituted by respondent Carol

Aqui who appears to have acquired the property from ICCS, and a new certificate of

title was issued in Aqui’s favor. The RTC then issued a decision ordering Petitioners

to surrender the property and that the rentals collected by them be surrendered as

well. Petitioners contend that the subject property has a notice of lis pendens and

that Standard waived its right for any deficiency and that the remedy for redeeming

the possession of the property and the collection of the back rentals are not proper

since Respondents should have filed a separate ordinary action. Respondents on the

other hand contend that petitioners are guilty of delaying the proceedings precisely

so that they may continue to unlawfully enjoy the use, fruits, and possession of the

subject property; that the Petition for Certiorari before the CA was an improper

remedy; and that what she is collecting from petitioners are not "back rentals" but

rents collected by the latter from tenants of the property, which she is entitled to

as a matter of law - being the owner of the subject property. The Court of Appeals

held that the remedy was proper since the action merely involved an interlocutory

order and does not refer to preliminary matters but rather they disposed of the

subject matter in its entirety, leaving nothing more to be done except to enforce it

by execution.

Is Respondent entitled to the possession and the back rentals of the subject

property?

Does the Regional Trial Court have the power to issue a writ of execution filed by

the purchaser in this case during the period of redemption?

Yes. Under Section 32, Rule 39 of the Rules of Court second sentence provides

that, “All rents, earnings and income derived from the property pending

redemption shall belong to the judgment obligor, until the expiration of his

period of redemption.” In this case, if petitioners leased out the property to third

parties after their period for redemption expired, as was in fact the case here,26

the rentals collected properly belonged to ICCS or Aqui, as the case may be.

Petitioners had no right to collect them. Aqui acquired the subject property from

ICCS only in 2010. Aqui cannot claim the subject rental collections from 2007,

because she was not yet the owner of the subject property at the time; they

belonged to ICCS. She is entitled to rentals collected only from the time she

became the owner of the property. However, as the substituted party in these

proceedings, this Court will allow her to collect the award of rentals collected by

petitioners but which pertain to ICCS - with the obligation to remit the same to

the latter. After all, she is merely ICCS's successor-in-interest. Thus Aqui is

entitled to such orders.

Yes. In the case of China Banking Corporation v. Spouses Lozada, the Supreme

Court held that if under Section 7 of Act No. 3135, as amended, the RTC has the

power during the period of redemption to issue a writ of possession on the ex

parte application of the purchaser, there is no reason why it should not also have

the same power after the expiration of the redemption period, especially where a

new title has already been issued in the name of the purchaser. Hence, the

procedure under Section 7 of Act No. 3135, as amended, may be availed of by a

purchaser seeking possession of the foreclosed property he bought at the public

auction sale after the redemption period has expired without redemption having

been made. Thus, the remedy of Respondent is proper and hence, entitled to the

possession of the subject property.



Bank Corporation v. Spouses Mercado

G.R. No. 192934, June 27, 2018

Jardeleza, J.

Doctrine: Act No. 3135 provides for the statutory requirements for a valid extrajudicial

foreclosure sale. Section 3 thereof requires that when the value of the property reaches

a threshold, the notice of sale must be published once a week for at least three

consecutive weeks in a newspaper of general circulation. Publication of the notice is

required to give the foreclosure sale a reasonably wide publicity such that those

interested might attend the public sale. It gives as much advertising to the sale as

possible in order to secure bidders and prevent a sacrifice of the property. Failure to

advertise a mortgage foreclosure sale in compliance with statutory requirements

constitutes a jurisdictional defect which invalidates the sale.

Facts:

Security Bank granted spouses Mercado a revolving credit line in the amount of

P1,000,000.00 subject to certain stipulations. To secure the credit line, the spouses

executed a Real Estate Mortgage in favor of petitioner Security bank over their

properties covered by TCT No. T-103519 (in Lipa City) and TCT No. T-89822 (in San

Jose, Batangas). Another Real Estate Mortgage in favor of Security Bank was

executed by the respondent-spouses over their properties covered by TCT Nos. T-

33150, T-34288, and T-34289 (all in Batangas City) to secure an additional amount

of P7,000,000.00 under the same revolving credit agreement.

Spouses Mercado defaulted in their payment under the revolving credit line

agreement. Security Bank requested the spouses Mercado to update their account,

and sent a final demand letter. It thereafter filed a petition for extrajudicial

foreclosure with respect to the parcel of land situated in Lipa City, San Jose,

Batangas, and Batangas City. The notices of the foreclosure sales of the properties

were published in newspapers of general circulation once a week for three

consecutive weeks as required by Act No. 3135, as amended. However, the

publication of the notices of the foreclosure of the properties in Batangas City and

San Jose, Batangas contained errors with respect to their technical description. The

errors in the notice consist of: (1) TCT No. T-33150- "Lot 952-C-1" which should be

"Lot 952-C-1-B;" (2) TCT No. T-89822 "Lot 1931, Cadm- 164-D" which should be "Lot

1931 Cadm 464-D;''[64] and (3) the omission of the location. Security Bank caused

the publication of an erratum in a newspaper to correct these errors. The erratum

was published only once, and did not correct the lack of indication of location in

both cases. The foreclosure sale of the properties were held wherein Security Bank

was adjudged as the winning bidder. The Certificate of Sale over these properties

were issued and registered with their respective Registry of Deeds. Spouses Mercado

offered to redeem the foreclosed properties for P10,000,000.00. However, Security

Bank allegedly refused the offer and made a counter-offer in the amount of

P15,000,000.00.

Respondent-spouses filed a complaint for annulment of foreclosure sale, damages,

injunction, specific performance, and accounting with application for temporary

restraining order and/or preliminary injunction with the RTC averring among others,

that (1) the parcel of land in San Jose, Batangas should not have been foreclosed

together with the properties in Batangas City because they are covered by separate

real estate mortgages; (2) the requirements of posting and publication of the notice

under Act No. 3135, as amended, were not complied with; (3) Security Bank acted

arbitrarily in disallowing the redemption of the foreclosed properties for

P10,000,000.00. Security Bank after consolidating its titles to the foreclosed parcels

of land, filed a petition for issuance of a writ of possession. The two cases were

consolidated before the RTC of Batangas City.

The RTC of Batangas City initially ruled that the foreclosure sales of the five parcels

of land were void, but later on modified its decision declaring that only the

foreclosure sales of the parcels of land in Batangas City and San Jose, Batangas are

void as it has no jurisdiction over the properties in Lipa City. The CA, on appeal,

affirmed with modification the RTC Amended Decision.

One of the arguments of Security Bank was that the CA erred in declaring that the

foreclosure sale was invalid. It argued that the foreclosure sale is valid because

Security Bank complied with the publication requirements of Act No. 3135, as

amended. The mistake in the original notice is inconsequential or minor since it only

pertains to a letter and number in the technical description without actually

affecting the actual size, location, and/or description or title number of the property.

It invokes Office of the Court Administrator (OCA) Circular No. 14 issued on May 29,

1984 governing the format of sale which allegedly does not require that the

complete technical description of the property be published.

Issue:

Are the foreclosure sales of the parcels of land in Batangas City and San Jose,

Batangas valid?

Ruling:

No. The foreclosure sales of the properties in Batangas City and San Jose, Batangas

are void for non-compliance with the publication requirement of the notice of sale.

Act No. 3135, as amended, provides for the statutory requirements for a valid

extrajudicial foreclosure sale. Among the requisites is a valid notice of sale. Section

3, as amended, requires that when the value of the property reaches a threshold, the

notice of sale must be published once a week for at least three consecutive weeks in

a newspaper of general circulation. Publication of the notice is required to give the

foreclosure sale a reasonably wide publicity such that those interested might attend

the public sale. It gives as much advertising to the sale as possible in order to secure

bidders and prevent a sacrifice of the property. Failure to advertise a mortgage

foreclosure sale in compliance with statutory requirements constitutes a

jurisdictional defect which invalidates the sale. This jurisdictional requirement may

not be waived by the parties; to allow them to do so would convert the required

public sale into a private sale. Thus, the statutory provisions governing publication

of notice of mortgage foreclosure sale must be strictly complied with and that even

slight deviations therefrom will invalidate the notice and render the sale at least

voidable.

Nevertheless, the validity of a notice of sale is not affected by immaterial errors.

Only a substantial error or omission in a notice of sale will render the notice

insufficient and vitiate the sale. An error is substantial if it will deter or mislead

bidders, depreciate the value of the property or prevent it from bringing a fair price.

In this case, while the errors seem inconsequential, they in fact constitute data

important to prospective bidders when they decide whether to acquire any of the lots

announced to be auctioned. First, the published notice misidentified the identity of

the properties. Since the lot numbers are misstated, the notice effectively identified

lots other than the ones sought to be sold. Second, the published notice omitted the

exact locations of the properties. As a result, prospective buyers are left completely

unaware of the type of neighborhood and conforming areas they may consider buying

into. With the properties misidentified and their locations omitted, the properties'

sizes and ultimately, the determination of their probable market prices, are

consequently compromised. The errors are of such nature that they will significantly

affect the public's decision on whether to participate in the public auction. The

errors in this case can deter or mislead bidders, depreciate the value of the

properties or prevent the process from fetching a fair price. To hold that the

publication of the correct technical description, with an incorrect title number, of the

property to be sold constitutes substantial compliance would certainly defeat the

purpose of the Notice. This is not to say that a correct statement of the title number

but with an incorrect technical description in the notice of sale constitutes a valid

notice of sale. The Notice of Sheriff’s Sale, to be valid, must contain the correct title

number and the correct technical description of the property to be sold.

While it is true that the circular does not require the full technical description of the

properties, it still requires the inclusion of the salient portions such as the lot

number of the property and its boundaries. In any case, what is apparent is that

Security Bank published incorrect data in the notice that could bring about confusion

to prospective bidders. In fact, their subsequent publication of an erratum is

recognition that the error is significant enough to bring about confusion as to the

identity, location, and size of the properties. However, the publication of a single

erratum does not cure the defect. The act of making only one corrective publication

in the publication requirement, instead of three corrections is a fatal omission

committed by the bank. The erratum is considered as a new notice that is subject to

the publication requirement for once a week for at least three consecutive weeks in a

newspaper of general circulation in the municipality or city where the property is

located. Thus, the foreclosure sales are void for non-compliance with the publication

requirement of the notice of sale.



Diego v. Fernando

GR No. L-15128, August 25, 1960

Reyes, J.B.L., J.

Doctrine: If a contract of loan with security does not stipulate the payment of interest,

and possession of the mortgaged property is delivered to the mortgagee in order that

the latter may gather its fruits, but without stating that said fruits are to be applied to

the payment of interest, if any, and afterwards that of the principal, the contract is a

mortgage and not antichresis.

Facts:

On May 26, 1950, the defendant Segundo Fernando executed a deed of mortgage in

favor of plaintiff Cecilio Diego over two parcels of land registered in his name, to

secure a loan of P2,000, without interest, payable within four years from the date of

the mortgage. After the execution of the deed, possession of the mortgaged

properties were turned over to the mortgagee. The debtor having failed to pay the

loan after four years, the mortgagee Diego made several demands upon him for

payment; and as the demands were unheeded, Diego filed this action for foreclosure

of mortgage.

Defendant Fernando's defense was that the true transaction between him and

plaintiff was one of antichresis and not of mortgage; and that as plaintiff had

allegedly received a total of 120 cavans of palay from the properties given as

security, which, at the rate of P10 a cavan, represented a value of P5,200, his debt

had already been paid, with plaintiff still owing him a refund of some P2,720.00.

The Court, however, found that there was nothing in the deed of mortgage to show

that it was not a true contract of mortgage, and that the fact that possession of the

mortgaged properties were turned over to the mortgagee did not alter the

transaction; that the parties must have intended that the mortgagee would collect

the fruits of the mortgaged properties as interest on his loan, which agreement is not

uncommon; and that the evidence showed that plaintiff had already received 55

cavans of palay from the properties during the period of his possession. Whereupon,

judgment was rendered for plaintiff.

Issue:

Is the contract between the parties one of mortgage?

Ruling:

Yes,the contract between the parties is a true mortgage and not an antichresis. As

ruled in Legaspi and Salcedo vs. Celestial, it is not an essential requisite of a

mortgage that possession of the mortgaged premises be retained by the mortgagor.

Pursuant to Article 2132 of the Civil Code, to be antichresis, it must be expressly

agreed between creditor and debtor that the former, having been given possession of

the properties given as security, is to apply their fruits to the payment of the

interest, if owing, and thereafter to the principal of his credit; so that if a contract of

loan with security does not stipulate the payment of interest but provides for the

delivery to the creditor by the debtor of the property given as security, in order that

the latter may gather its fruits, without stating that said fruits are to be applied to

the payment of interest, if any, and afterwards that of the principal, the contract is a

mortgage and not antichresis.

The above conclusion does not mean, however, that appellee, having received the

fruits of the properties mortgaged, will be allowed to appropriate them for himself

and not be required to account for them to the appellant. Similarly, in Enriquez vs.

National Bank, 55 Phil., 414, we ruled that a creditor with a lien on real property

who took possession thereof with the consent of the debtor, held it as an "antichretic

creditor with the right to collect the credit with interest from the fruits, returning to

the antichretic debtor the balance, if any, after deducting the expenses", because the

fact that the debtor consented and asked the creditor to take charge of managing his

property "does not entitle the latter to appropriate to itself the fruits thereof unless

the former has expressly waived his right thereto".

In the present case, the parties having agreed that the loan was to be without

interest, and the appellant not having expressly waived his right to the fruits of the

properties mortgaged during the time they were in appellee's possession, the latter,

like an antichretic creditor, must account for the value of the fruits received by him,

and deduct it from the loan obtained by appellant.



Valencia v. Alcala

G.R. No. 16256, September 28, 1921

Villamor, J.

Doctrine: When the terms of a contract are clear and leave no doubt as to the intention

of the contracting parties, the literal meaning of its clauses should prevail.

Facts:

This is an action for the redemption of certain land, which is described in the

complaint. In the year 1891, the plaintiff herein, Dionisia Valencia, and her

deceased husband, Daniel Adepueng, conveyed to one Severino Agbagala and his

wife Francisca Cadapan the land in question. Later on in the year 1899 Francisca

Cadapan, wife of Severino Agbagala, conveyed this same property to Juan Cagayat

and Josefa Galendis. That the possession of the land passed to Pedro Acala, who is

one of the Acalas, the defendants in the present action. In the year 1912, the herein

defendants Acala sold the land unconditionally to the herein defendant Bagayanan

for the sum of P70.

Issue:

Is their contract antichresis?

Ruling:

Yes. When the terms of a contract are clear and leave no doubts as to the intention

of the contracting parties, the literal meaning of its clauses should prevail. We are

of the opinion that the contract herein above copied is a contract of antichresis and

not of sale with the right of repurchase.

In the case of De la Vega v. Ballilos (34 Phil., 683), this court said:

"When money is loaned and the debtor places the creditor in possession of a

piece of real property as security for the sum loaned in order that he may hold it

in usufruct, in consideration for the said loan, the contract is not one of

mortgage, notwithstanding the terms thereof, inasmuch as it is not of the nature

of a public instrument, and even though it were, it does not appear to have been

recorded in the property registry. Neither can such a contract be classified as

one of sale under pacto de retro, notwithstanding that it is set forth therein that

the debtor cedes and conveys to the creditor the ownership and possession of the

said real property. Therefore, such a contract should be classified as one of

antichresis, by means of which the creditor acquires the right to collect the fruits

of the real property turned over to him by his debtor, but with the obligation to

apply them to the payment of whatever interest is due and the contracting parties

may stipulate that he interest of the debt be paid by the fruits of the property

given in antichresis."

The legal nature of the contract in question having thus been determined, it is

evident that the antichretic creditor and his successors in interest cannot acquire

ownership by prescription of the realty given in antichresis.

That the defendants Acala could not sell unconditionally the same land to their

codefendant Bagayanan, is proved by the agreed statement of facts according to

which the possession of the predecessor in interest of the Acala people was the same

precarious possession of his assignor Juan Cagayat.



Enriquez v. National Bank

GR. No. 33584, December 15, 1930

Villa-Real, J.

Doctrine: Since the bank took possession of the two parcels of land

with the consent of the debtor, the plaintiff herein, it held the land as an antichretic

creditor with the right to collect the credit with interest from the fruits, returning to the

antichretic debtor the balance, if any, after deducting the expenses.

Facts:

This is an appeal from the judgment of Court of First Instance. On and prior to the

15th of June, 1926, Marcelo Enriquez (debtor) was indebted to the Philippine

National Bank of Cebu (creditor) in the amount of P4,512.21, one of his sureties

being the defendant-appellee, Laureano Abella. By virtue of a complaint filed by said

bank against Marcelo Enriquez, Laureano Abella and Andres Abellana to collect the

amount of P3,554.66, the Court of First Instance of Cebu rendered judgment

requiring said defendants, Marcelo Enriquez, Laureano Abella, and Andres Abellana,

to pay the plaintiff the sum of P4,512.21 jointly and severally, with interest at nine

per cent per annum. With the consent of the bank, said decision was revoked by

Judge Guillermo F. Pablo. On March 26, 1927, by an agreement of counsel for both

parties, Judge Jose de la Rama reinstated the judgment, with the condition that a writ

of execution would be issued first against the defendant Marcelo Enriquez, and in

case of his insolvency, against the defendants Andres Abellana and Laureano Abella.

In accordance with said judgment a writ of execution was issued on March 29, 1927,

attaching the two parcels of land belonging to the judgment debtor, Marcelo

Enriquez, which were sold afterwards to the bank itself, being the highest bidder.

Later on, Marcelo Enriquez’s right of redemption was likewise sold, being adjudicated

to the defendant Laureano Abella. For nonpayment of the land tax, the two lots were

forfeited by the Government. At the request of the defendant judgment debtor, the

bank redeemed said lands from the Government on September 27, 1927, paying the

delinquent land taxes which amounted to P2,004.48. Said public auction sale has

been declared null and void by the court below in the judgment appealed from.

Issue:

Is the Philippine National Bank is bound to render an account to the net proceeds

from the said property.

Ruling:

Yes.

Article 2135 of the New Civil Code provides that the creditor, unless there is a

stipulation to the contrary, is obliged to pay the taxes and charges upon the estate.

He is also bound to bear the expenses necessary for its preservation and repair. The

sums spent for the purposes stated in this article shall be deducted from the fruits.

In this case, since the Philippine National Bank took possession of the two parcels of

land with the consent of the debtor, Marcelo Enriquez, it held the land as an

antichretic creditor with the right to collect the credit with interest from the fruits,

returning to the antichretic debtor the balance, if any, after deducting the expenses.

The fact that Marcelo Enriquez consented and asked the bank to take charge of

managing said property does not entitle the latter to appropriate to itself the fruits

thereof unless the former has expressly waived his right thereto.

In view of the foregoing consideration, we are of opinion and so hold that the

creditor who redeems from the Government real estate belonging to his debtor,

forfeited for delinquency in the payment of the land tax, and takes possession

thereof, is bound to render an account of the net proceeds received from said

property after deducting all the expenses incurred and the amount advanced for

redemption, with interest.

By virtue whereof, and with the sole modification that the defendant-appellee, the

Philippine National Bank, is required to render an account of the net proceeds from

the lands redeemed by it during its possession thereof, after deducting all the

expenses incurred and the amount paid for redemption, with interest, the judgment

appealed from is affirmed, with costs against the appellant.



Spouses Reyes v. Heirs of Malance

G.R. No. 219071, August 24, 2016

Perlas-Bernabe, J.

Doctrine: Thus, antichresis involves an express agreement between parties whereby :

(a) the creditor will have possession of the debtor's real property given as security;

(b)such creditor will apply the fruits of the said property to the interest owed by the

debtor, if any, then to the principal amount;(c) the creditor retains enjoyment of such

property until the debtor has totally paid what he owes; and (d) should the obligation

be duly paid, then the contract is automatically extinguished proceeding from the

accessory character of the agreement.

Facts:

Benjamin Malance owned a parcel of agricultural land in Pulilan, Bulacan. He

obtained from the Magtalas sisters a loan worth Php 600,000.00 as evidenced by a

Kasulatan Ng Ukol Sa Utang executed on June 26, 2006. Under the Kasulatan, the

Magtalas sisters shall have the right to the fruits of the subject land for six years or

until the loan is fully paid. Benjamin passed away on September 29, 2006.

His siblings, hereinr espondents, went to expect the subject property and

discovered that the Magtalas sisters and their spouses and father, were cultivating

the land. This prompted the respondents to file a Complaint for Recovery of

Possession, and sought to declare the nullity of the Kasulatan.

Respondents claimt that: a) during his lifetime, Benjamin accumulated enough

wealth to sustain himself, was unmarried and had no children to support; b) the

Kasulatan was executed during the time when Benjamin was seriously ill and

mentally incapacitated due to his illness and advanced age; and c) the Kasulatan

was simulated as the signature of Benjamin appearing thereon was not his

signature.

The petitioners, on the other hand, claim that Benjamin had not accumulated

enough wealth to sustain himself as his only income was his farm and further

averred that: a) when Benjamin became sickly in 2000, he leased the subject land to

different people who cultivated the same with their (petitioners') help; b) the

Kasulatan was executed before a notary public at the time when Benjamin was of

sound mind, though sickly; c) they were cultivating the subject land in accordance

with the said Kasulatan; d) the case involved an agrarian conflict within the

jurisdiction of the Department of Agrarian Reform Adjudication Board; and e) the

Malance heirs must pay Benjamin's indebtedness prior to recovery of possession

The RTC dismissed the complaint of the Malance heris for failing to substantiate

their claims. Upon appeal, the CA upheld the lower court's ruling and declared that

the contract between the parties wasa contract of antichresis.

Issue:

Is the contract between the parties a contract of Antichresis?

Ruling:

Yes. Art. 2132 of the Civil Code provides: "By the contract of antichresis the creditor

acquires the right to receive the fruits of an immovable of his debtor, with the

obligation to apply them to the payment of the interest, if owing, and thereafter to

the principal of his credit."

As correctly observed by the CA, The document specifically authorizes [the Magtalas

sisters] to receive the fruits of the subject landholding with the obligation to apply

them as payment to his [₱]600,000.00 principal loan for a period of six years.

From the provisions of Art. 2132, antichresis involves an express agreement between

parties whereby : (a) the creditor will have possession of the debtor's real property

given as security; (b)such creditor will apply the fruits of the said property to the

interest owed by the debtor, if any, then to the principal amount;(c) the creditor

retains enjoyment of such property until the debtor has totally paid what he owes;

and (d) should the obligation be duly paid, then the contract is automatically

extinguished proceeding from the accessory character of the agreement.



Victorino Verzosa v. Pedro Bucag

GR No. L-8031 | Oct 29, 1955

Labrador, J.

Doctrine: An antichretic contract wherein the products of the land should be applied to

the interest and then to the principal

Facts:

On November 1, 1926, the defendants herein, Pedro Bucag and Bibiano Bucag, their

sister, Irene Bucag, and their mother, Ambrocia Malenab, conveyed a certain parcel

of land (unirrigated) situated in Angadanan, Isabela, to the spouses Faustino Andres

and Petra Abara, in consideration of an amount of P1,620, which the former had

received from the latter by way of indebtedness.

The heirs of Faustino Andres and Petra Abara transferred the land to Victorino

Verzosa, plaintiff herein, in 1948, in consideration of the sum of Pl,000, and

plaintiff was in possession and enjoyment thereof from then until November 29,

1950, when the defendants took possession without the consent of the plaintiff and

without returning the amount of indebtedness. The defendants are two of the

signers of the original deed of conveyance, Exhibit A.

The present action was instituted on January 24, 1951. The plaintiff alleges that he

is entitled to the possession of the land by virtue of deeds of conveyance, Exhibit A

and Exhibit B. The defendants in answer allege that the deed of conveyance, Exhibit

A, by virtue of which plaintiff's predecessors in interest were in possession of the

property, is null and void us the contract contained the rein is usurious, and that

their (defendants) original indebtedness has been sufficiently paid from the

products of the land during the time that it was in the possession of the plaintiff

and his predecessors in interest. The parties submitted the case for decision upon a

stipulation of facts, the most important of which have been set forth above.

The trial court held that the claim of the defendants that the indebtedness has

already been paid from the products of the laid so as to make the contract one of

antichresis is not justified by the evidence, and that neither was the transaction

usurious or contrary to good morals or public policy. It further held that defendants

could not recover the property without first paying the amount of the indebtedness.

The trial court, therefore, ordered the defendants to return the possession of the

land to the plaintiff, and for their wrongful possession of the property, the

defendants were also ordered to pay to the plaintiff the sum of P200.00 as liquidated

damages and P200.00 every year from November 29, 1950 until the possession of the

land in returned.

The principal contentions of the appellants are: that the trial court erred in not

declaring that the contract (Exhibit A) is antichretic in character, and that the

appellants have fully paid the amount of indebtedness and in ordering them to

return the possession of the property to the plaintiff and the payment to him of

damages.

Issue:

Is the contract between plaintiff and defendants one of mortgage?

Ruling:

Yes. The Supreme Court held in this case upon a careful study of the contract, Exhibit

A discloses the existence of three provisions which are indicative of the contract as

one mortgage and not of antichresis. In the first place, it is agreed that the full

amount of the indebtedness of P1,620 must be returned to the lenders before the

borrowers could demand the return of the property. This is contrary to an antichretic

contract wherein the products of the land should be applied to the interest and then

to the principal. In the second place, the contracting parties used the term mortgage

(hipoteca) in various parts of the contract, thus: (1) "con que hemos hipotecado el

terreno," (2) "El terreno que hipotecamos and (3) "con que hipotecamos el arriba

mencionado terreno." In the third place, the parties agreed that the lenders are not

to pay rentals on the property in consideration of the fact that the borrowers do not

pay interest on the land which they obtained as a loan. Therefore the contract is a

contract of mortgage.



Cotoner-Zacarias v. Revilla

G.R. No. 190901, November 12, 2014

Leonen, J.

Doctrine: Article 2132 of the Civil Code provides that "[b]y the contract of antichresis

the creditor acquires the right to receive the fruits of an immovable of his debtor, with

the obligation to apply them to the payment of the interest, if owing, and thereafter to

the principal of his credit."

Antichresis involves an express agreement between parties such that the creditor will

have possession of the debtor's real property given as security, and such creditor will

apply the fruits of the property to the interest owed by the debtor, if any, then to the

principal amount.

Facts:

Respondents are the owners of an unregistered land,ownership being evidenced by

Tax Declaration No. 7971, s. 1980. Sometime in 1981, plaintiffs needed money for

the travel and deployment of plaintiff Alfredo to Saudi Arabia. Plaintiff Paz Revilla

sought financial help from defendant Cotoner- Zacarias from whom she was able to

obtain a loan but secured with and by way of mortgage of the subject property . The

parties further agreed that defendant Cotoner-Zacarias would take possession of the

subject property and cultivate it with the earnings therefrom to be used to pay-off

the loan and the annual realty taxes on the land. It was their agreement with

defendant Cotoner-Zacarias that the latter will rent the subject property and with

that agreement, the lease started sometime in 1981 and plaintiffs got from

defendant Cotoner-Zacarias the amount of Php3,000.00 as rental for the first year,

1981, with no specific

agreement as to the period covered by such rental. Unknown to the Revilla spouses,

Amada presented a fictitious document entitled "Kasulatan ng Bilihan ng Lupa"

before the Provincial Assessor of Cavite. On August 25, 1984, Amada sold the

property to the spouses Adolfo and Elvira Casorla by "Deed of Absolute Sale-

Unregistered Land." Then Casorla spouses sold the same to Sun spouses.

(Petitioner’s argument)

Petitioner argues that the antichresis claim of the Revilla spouses was not reduced

into writing, thus, it is void under Article 2134 of the Civil Code. 26 She submits that

the allegation of antichresis was only an excuse by the Revilla spouses for their

failure to impugn possession of the property by Amada and her successors-in-interest

for over 16 years.

(Respondent’s argument)

Respondents Revilla spouses counter that the factual issue of whether the "Kasulatan

ng Bilihan ng Lupa" is a falsified document was already conclusively resolved by the

lower courts and, generally, factual findings are beyond this court's power of review.

The Regional Trial Court 22 found the "Kasulatan ng Bilihan ng Lupa" to be a

fictitious document, and ruled in favor of the Revilla spouses.

Issue:

Was the contract between the parties an antichresis?

Ruling:

Yes. Article 2132 of the Civil Code provides that "[b]y the contract of antichresis the

creditor acquires the right to receive the fruits of an immovable of his debtor, with

the obligation to apply them to the payment of the interest, if owing, and thereafter

to the principal of his credit."

Thus, antichresis involves an express agreement between parties such that the

creditor will have possession of the debtor's real property given as security, and such

creditor will apply the fruits of the property to the interest owed by the debtor, if

any, then to the principal amount.

Antichresis requires delivery of the property to the antichretic creditor, but the latter

cannot ordinarily acquire this immovable property in his or her possession by

prescription. Similar to the prohibition against pactum commissorium 83 since

creditors cannot "appropriate the things given by way of pledge or mortgage, or

dispose of them," an antichretic creditor also cannot appropriate the real property in

his or her favor upon the non-payment of the debt.

Antichresis also requires that the amount of the principal and the interest be in

writing for the contract to be valid.

Respondents Revilla spouses' complaint sought "to annul the sales and transfers of

title emanating from Tax Declaration No. 7971 registered in their name. There was

no prayer to declare the purported contract of sale as antichresis. Thus, respondents

Revilla spouses neither discussed nor used the term "antichresis" in their comment

and memorandum before this court. They focused on the nature of their complaint as

one for annulment of titles on the ground of forgery.

The issue before us does not concern the nature of the relationship between the

parties, but the validity of the documents that caused the subsequent transfers of the

property involved.



Pacific Farms, Inc. v. Esguerra

G.R. No. L-21783, November 29, 1969

Castro, J.

Doctrine: Before there can be a pro rata payment of credits entitled to preference as to

the same specific real property, there must first be some proceeding where the claims of

all the preferred creditors may be bindingly adjudicated, such as insolvency, the

settlement of a decedent's estate under Rule 87 of the Rules of Court, or liquidation

proceedings of similar import.

Facts:

Carried Lumber Company sold and delivered lumber and construction materials to

Insular Farms, Inc. which the latter used in the construction of the aforementioned

six buildings at its compound. However, the value of the materials was not paid by

Insular Farms, Inc. Company instituted a civil case with the CFI of Pangasinan to

recover the said unpaid balance from Insular Farms, Inc. The Trial court rendered

judgment sustaining the Company's claim. The judgment debtor did not appeal; so

the corresponding writ of execution was issued. Pacific Farms, Inc. then filed a third

party claim, asserting ownership over levied buildings which it acquired from Insular

Farms, its predecessor-in-interest. Thereafter, the sheriff proceeded with public

auction. Meanwhile, Pacific Farms filed a complaint against the Company and the

sheriff with the court a quo, praying that judgment be rendered, (a) declaring null

and void the levy and judicial sale of the six buildings, and (b) adjudging the

defendants jointly and severally liable to the plaintiff in the sum of P2,000 by way of

actual damages and for such amount as the court may deem proper and just to

impose by way of exemplary damages and for costs of suit Trial court annulled the

levy but denied claim for actual and exemplary damages.

Issue:

Was the credit of defendant-appellant, Carried Lumber Company, against the Insular

Farms, Inc., consisting of the value of lumber and construction materials used in the

buildings which were later acquired by the Pacific Farms, Inc., the appellee, not a

statutory lien on those buildings as decided by the lower court?

Ruling:

NO, the lower court erred in holding that the credit of Carried Lumber Company

against Insular Farms were not statutory lien. The trial court in this case relied

mainly on the resolution promulgated on December 29, 1962 by this Court in De

Barretto, et al. vs. Villanueva, et al. The said case, however, is inapplicable because

it concerned not one but two or more preferred creditors who, pursuant to articles

2242 and 2249 of the Civil Code, must necessarily be convened and the nature and

extent of their respective claims ascertained. Thus, we held that before there can be

a pro rata payment of credits entitled to preference as to the same specific real

property, there must first be some proceeding where the claims of all the preferred

creditors may be bindingly adjudicated, such as insolvency, the settlement of a

decedent's estate under Rule 87 of the Rules of Court, or liquidation proceedings of

similar import. But the case before us does not involve a question of preference of

credits, and is not one where two or more creditors have separate and distinct claims

against the same debtor who has insufficient property. Indeed, it is a matter of

necessity and logic that the question of preference should arise only where the

debtor cannot pay his debts in full.

Hence, the appellant acted correctly in bringing an action against the Insular Farms,

Inc. and enforcing its right of reimbursement through the execution of the final

judgment. It obtained in the said case against the six buildings in the possession of

the appellee who now stands to benefit therefrom. It follows, as a necessary

corollary, that the sale at public auction conducted by the defendant sheriff of the

six buildings described in the Certificate of Sale was valid and effective.

Also, the application by analogy of the rules of accession would suffice for a just

adjudication. Article 447 of the Civil Code provides:

Art. 447. The owner of the land who makes thereon, personally or through another,

plantings, constructions or works with the materials of another, shall pay their value;

and, if he acted in bad faith, he shall also be obliged to the reparation of damages.

The owner of the materials shall have the right to remove them only in case he can

do so without injury to the work constructed, or without the plantings, constructions

or works being destroyed. However, if the landowner acted in bad faith, the owner of

the materials may remove them in any event, with a right to be indemnified for

damages.

The above-quoted legal provision contemplates a principal and an accessory, the

land being considered the principal, and the plantings, constructions or works, the

accessory. The owner of the land who in good faith —whether personally or through

another —makes constructions or works thereon, using materials belonging to

somebody else, becomes the owner of the said materials with the obligation however

of praying for their value. The owner of the materials, on the other hand, is entitled

to remove them, provided no substantial injury is caused to the landowner.

Otherwise he has the right to reimbursement for the value of his materials.



Yngson, Jr. v. Philippine National Bank

G.R. No. 171132, August 15, 2012

Villarama, Jr., J.

Doctrine: The creditor-mortgagee has the right to foreclose the mortgage over a

specific real property whether or not the debtor-mortgagor is under insolvency or

liquidation proceedings. The right to foreclose such mortgage is merely suspended upon

the appointment of a management committee or rehabilitation receiver or upon the

issuance of a stay order by the trial court. However, the creditor-mortgagee may

exercise his right to foreclose the mortgage upon the termination of the rehabilitation

proceedings or upon the lifting of the stay order.

Facts:

In this petition for review a certiorari, petitioner Manuel D. Yngson, Jr., liquidator of

ARCAM & Company, Inc., assails the decision of the CA dismissing its petition for

review of the resolution of the SEC denying his petition to nullify the auction sale of

ARCAM’s mortgaged properties. Action came after ARCAM was granted a loan by

PNB, with a real estate mortgage covering a 350,004 parcel of land being established

as security thereto. ARCAM then defaulted on its obligation to pay to PNB, leading to

the latter initiating foreclosure proceedings against the former. Thereafter, ARCAM

filed with the SEC a petition for the suspension of payments and the initiation of

rehabilitation proceedings. SEC eventually concluded that ARCAM could no longer be

rehabilitated, and ordered the lifting of the suspension of payments, as well as the

corporation be liquidated. PNB then revived the case of foreclosure. Petitioner

assails this, contending that foreclosure of the properties of ARCAM while its

liquidation was ongoing is improper.

Issue:

Is the PNB barred from foreclosing the mortgages?

Ruling:

No. The creditor-mortgagee has the right to foreclose the mortgage over a specific

real property whether or not the debtor-mortgagor is under insolvency or liquidation

proceedings. The right to foreclose such mortgage is merely suspended upon the

appointment of a management committee or rehabilitation receiver or upon the

issuance of a stay order by the trial court. However, the creditor-mortgagee may

exercise his right to foreclose the mortgage upon the termination of the

rehabilitation proceedings or upon the lifting of the stay order. Thus, PNB is not

barred from foreclosing the mortgages in the case at bar.



DBP v. Secretary of Labor

G.R. No. 79351, November 28, 1989

Cortes, J.

Doctrine: Article 110 of the Labor Code establishes not a lien but a preference of credit

in favor of employees where during bankruptcy, insolvency or liquidation proceedings

against the employer, the employees are given the priority in having their claims

proved therein satisfied.

Facts:

Private respondents won a case for illegal dismissal, unfair labor practice, illegal

deductions from salaries and violation of the minimum wage law against Riverside

Mills Corporation. Consequently, a writ of execution was issued, on October 22,

1985, against the goods and chattel of RMC. Said assets however had already been

foreclosed by petitioner Development Bank of the Philippines (DBP) through an

extra-judicial proceedings as early as 1983. Private respondents, in a motion, moved

for the delivery of RMC properties in possession of DBP, relying on the provisions of

Article 110 of the Labor Code giving them first preference over the mortgaged

properties of RMC for the satisfaction of the judgment rendered in their favor. Which

motion was granted. On appeal, the decision was affirmed.

Respondents, in citing the case of PCIB v. NAMAWU-MIF, argue that by virtue of

Article 110 of the Labor Code, an "automatic first lien" was created in favor of

private respondents on RMC properties — a "lien" which pre-dated the foreclosure of

the subject properties by petitioner, and remained vested on these properties even

after its sale to petitioner and other parties.

Article 110. WORKER PREFERENCE IN CASE OF BANKRUPTCY. — In the event of

bankruptcy or liquidation of an employer's business, his workers shall enjoy first

preference as regards wages due them for services rendered during the period

prior to the bankruptcy or liquidation, any provision of law to the contrary

notwithstanding. Unpaid wages shall be paid in full before other creditors may

establish any claim to a share in the assets of the employer.

It is clear from the wording of the law that the preferential right accorded to

employees and workers under Article 110 may be invoked only during bankruptcy

or judicial liquidation proceedings against the employer. The rationale for making

the application of Article 110 of the Labor Code contingent upon the institution

of bankruptcy or judicial liquidation proceedings against the employer is

premised upon the very nature of a preferential right of credit. A preference of

credit bestows upon the preferred creditor an advantage of having his credit

satisfieed first ahead of other claims which may be established against the

debtor. In this jurisdiction, bankruptcy, insolvency and general judicial

liquidation proceedings provide the only proper venue for the enforcement of a

creditor's preferential right such as that established in Article 110 of the Labor

Code, for these are in rem proceedings binding against the whole worldwhere all

persons having any interest in the assets of the debtor are given the opportunity

to establish their respective credits

In this case, It appears on record, and remains undisputed by respondents, that

petitioner had extra-judicially foreclosed the subject properties from RMC as

early as 1983 and purchased the same at public auction, and that RMC had failed

to exercise its right to redeem. Thus, when Officer-in-Charge Young issued on

December 11, 1986 the order which directed the delivery of these properties to

the Ministry (now Department) of Labor and Employment, RMC had ceased to be

the absolute owner thereof Consequently, the order was directed against

properties which no longer belonged to the judgment debtor RMC.

2. No. What Article 110 of the Labor Code establishes is not a lien, but a preference

of credit in favor of employees where during bankruptcy, insolvency or liquidation

proceedings against the employer, the employees are given the priority in having

their claims proved therein satisfied. Unlike a lien, a preference of credit does

not create in favor of the preferred creditor a charge or proprietary interest upon

any particular property of the debtor. Neither does it vest as a matter of course

upon the mere accrual of a money claim against the debtor. Certainly, the debtor

could very well sell, mortgage or pledge his property, and convey good title

thereon, to third parties free from such preference.



DBP v. NLRC

G.R. No. 86227, January 19, 1994

Vitug, J.

Doctrine: Worker preference in case of bankruptcy must be viewed and read in

consonance with the provisions of the civil code on concurrence and preference of

credit.

Facts:

The private respondents were employees of ATLAS, a textile firm, which

hypothecated its certain assets to DBP. After ATLAS defaulted in its obligations,

DBP foreclosed on the mortgage in March 1985. The latter acquired the mortgaged

assets by virtue of the foreclosure sale. The private respondents filed their

aforementioned claim, on 30 October 1985, against both ATLAS and DBP. The Labor

Arbiter ruled for the private respondents. On appeal by DBP, the decision was

sustained by the NLRC. Hence, the instant petition. The petitioner contends that it

is error on the part of the public respondent to consider the workers' preference

under Article 110 of the Labor Code over that of DBP's mortgage lien.

Issue:

Is the petitioner liable for monetary claims of the private respondents?

Ruling:

No. Article 110 of the Labor Code, as amended, must be viewed and read in

conjunction with the provisions of the Civil Code on concurrence and preferences of

credits. Article 110 of the Labor Code cannot be viewed in isolation but must be

read in relation to the Civil Code scheme on classification and preference of credits.

In the same way that the Civil Code provisions on classification of credits and the

Insolvency Law have been brought into harmony, so also must the kindred

provisions of the Labor Law be made to harmonize with those laws. In the event of

insolvency, a principal objective should be to effect an equitable distribution of the

insolvent's property among his creditors. To accomplish this there must first be

some proceeding where notice to all of the insolvent's creditors may be given and

where the claims of preferred creditors may be bindingly adjudicated (De Barreto vs.

Villanueva). The right of first preference as regards unpaid wages recognized by

Article 110 does not constitute a lien on the property of the insolvent debtor in favor

of workers. It is but a preference of credit in their favor, a preference in application.

It is a method adopted to determine and specify the order in which credits should be

paid in the final distribution of the proceeds of the insolvent's assets. It is a right to

a first preference in the discharge of the funds of the judgment debtor." (DBP vs.

Secretary of Labo)

Here, it concerns monetary claims of workers that are not involved in judicial

proceedings in rem in adjudication of claims of creditors vis-a-vis the assets of the

debtor, nor have such claims accrued after the effectivity of Republic Act 6715.

Therefore, the petitioner is not liable for monetary claims of the private respondents.



Associated Labor Unions v. Court of Appeals

G.R. No. 156882. October 31, 2008

Velasco, Jr., J.

Doctrine:. Art. 110 of the Labor Code applies only to cases of bankruptcy and

liquidation. Likewise, Arts. 2242, 2243, and 2244 of the Civil Code on concurrence and

preference of credits properly come into play only in cases of insolvency.

Facts:

The Roman Catholic Archbishop of Palo, Leyte sold to Societas Verbum Dei the

subject 13 parcels of land. The Deed of Sale contained the condition that the lands

and properties shall be used by the SVD for educational purposes, especially and as

far as possible, for the maintenance and further development of the institution

known as the ST. PAUL'S COLLEGE and shall be turned over to the ownership and

possession of the Roman Catholic Bishop of Palo in case there is or are

circumstances which will be beyond the control of the contracting parties forcing

the abandonment of educational and religious work of the Society of the Divine

Word. While the conveying document was not notarized, the SVD was able to secure

the corresponding transfer certificates of title over the subject lots, but the deed

conditions, restrictions, and reversionary right of the RCAP were not annotated on

the new titles. Due to labor unrest, DWUT, run by the SVD, and petitioners engaged

in a protracted legal battle. DWUT was rendered liable to petitioners amounted to

PhP200 million, more or less. RCAP filed a petition before the RTC and prayed for

an order directing the Registry of Deeds of Tacloban City to register the Deed of

Sale and annotate on the corresponding SVD titles the conditions, restrictions, and

a reversionary interest of the RCAP stipulated in the deed. DWUT issued notices to

petitioners' members, advising them of the decision of the DWUT Board of Trustees

to consider themselves dismissed effective at the close of business hours of June

15, 1995.

Meanwhile, National Conciliation and Mediation Board ordered DWUT to pay

PhP163,089,337.57 to the members of petitioner Union as partial satisfaction of the

final resolution of this Court. Prompted by the closure of DWUT and the resulting

termination of its members' services, the Union filed a complaint, against DWUT, its

Board of Trustees, and the RCAP for Unfair Labor Practice, Illegal Dismissal, and

Damages before the Regional Arbitration Branch. The Union alleged in its complaint

that the sale of the subject properties over which the DWUT is located was

incomplete due to the adverted conditions, restrictions, and a reversionary right of

the RCAP over the subject properties and that RCAP did not, despite the sale, sever

its employment relations with DWUT which, thus, rendered the RCAP solidarily liable

with DWUT for the payment of the benefits of the Union members.

Petitioners filed their Motion to Intervene relying on Article 110 of the Labor Code in

relation to Arts. 2242, 2243, and 2244 of the Civil Code on concurrence and

preference of credits, they asserted preferential rights over the subject properties

now owned by and registered under the name of the SVD. RTC dismissed the petition.

Unsatisfied, the RCAP filed a motion for reconsideration which was likewise denied.

Issue:

Do the petitioners have the preferential rights over the subject properties now

owned by and registered under the name of the SVD?

Ruling:

No. A judgment lien over the subject properties has not legally attached and that Art.

110 of the Labor Code, in relation to Arts. 2242, 2243, and 2244 of the Civil Code on

concurrence and preference of credits, does not cover the subject properties. Art. 110

of the Labor Code applies only to cases of bankruptcy and liquidation. Likewise, the

above mentioned articles of the Civil Code on concurrence and preference of credits

properly come into play only in cases of insolvency. Since there is no bankruptcy or

insolvency proceeding to speak of, much less a liquidation of the assets of DWUT, the

Union cannot look to said statutory provisions for support. Moreover, the utter lack

of showing that DWUT has no other assets to answer its obligations. DWUT may have

liquidity problems hampering its ability to meet its judicially-imposed obligations.

The school, however, appears to have other properties it can and in fact did use to

settle its obligations as shown in the February 24, 1997 MOA between DWUT, the

Union, and RCAP. A scrutiny of the MOA readily shows that the subject properties

were not included in the assets or properties earmarked to settle DWUT's obligations.

Thus, petition denied.



Strategic Alliance Development Corporation v Radstock

Securities, Ltd.

G.R. No. 178158. December 4, 2009

Carpio, J.

Doctrine: Articles 2241, 2242 and 2243 of the Civil Code expressly mandate that taxes

and fees due the National Government "shall be preferred" and "shall first be satisfied"

over claims like those arising from the Marubeni loans which "shall enjoy no

preference" under Article 2244.

Facts:

Philippine National Construction Corporation (PNCC) was incorporated with the

name Construction Development Corporation of the Philippines (CDCP). The CDCP

was granted a franchise to construct, operate, and maintain toll facilities in the

North and South Luzon Tollways, and later, in the Metro Manila Expressway.

Sometime between 1978 and 1981, Basay Mining Corporation, a CDCP affiliate,

obtained loans from Marubeni Corporation of Japan, amounting to ¥5,460,000,000

and US$5 million. A CDCP official issued letters of guarantee for the loans, binding

CDCP to pay solidarily for the full amount of the ¥5,460,000,000 loan, and to the

extent of ₱20 million for the US$5 million loan. However, the issuance of the

letters of guarantee was not authorized by CDCP Board Resolution. Later, Basay

Mining changed its name to CDCP Mining Corporation. CDCP Mining secured the

Marubeni loans when CDCP and CDCP Mining were still privately owned and

managed.

CDCP had changed its name to PNCC. Due to its inability to pay off its loans, it had

converted some of these loans into equity. However, the Marubeni loans remained

unpaid. On 20 October 2000, the PNCC Board of Directors passed a resolution

admitting PNCC’s liability to Marubeni for ₱10,743,103,388, and to the Government

of the Republic of the Philippines in the amount of ₱36,023,784,751 in concession

fees, as of 30 September 1999.

Three months later, Marubeni assigned its entire credit against PNCC to Radstock

Securities Limited for US$2 million. Radstock immediately sent a notice and demand

letter to PNCC. Having been unpaid, Radstock filed an action for collection and

damages against PNCC before the RTC of Mandaluyong City. PNCC moved to dismiss

and to have the order of attachment and garnishment set aside. These motions were

denied by the RTC, and such denial was assailed by the PNCC all the way to the

Supreme Court. Meanwhile, the RTC ruled in favor of Radstock on the merits.

Pending appeal of the decision on the merits to the CA, Radstock and PNCC entered a

Compromise Agreement to reduce PNCC’s liability to ₱6,185,000,000. The CA

approved the Compromise Agreement.

Strategic Alliance Development Corporation (STRADEC) intervened, alleging that it

has a claim against PNCC as a bidder of the National Government’s shares in PNCC,

and the matter is subject of a complaint it filed against PNCC with the RTC of Makati.

The CA denied STRADEC’s motion for intervention. Thus, STRADEC filed a petition for

review before the Supreme Court, assailing the validity of the Compromise

Agreement, arguing that the same violates the Constitution, law, and public policy.

One of the issues raised was PNCC’s non-compliance with the rules on preference of

credit under the Civil Code when it chose to give preference to Radstock’s credit over

that of the government.

Issue:

Does the Compromise Agreement contravene the Civil Code’s rules on preference of

credit?

Ruling:

Yes. Articles 2241, 2242, and 2243, all expressly provide that taxes and fees due the

National Government shall be preferred and shall first be satisfied over claims which

enjoy no preference. The rules on preference of credit exist so that creditors may be

protected against any intention by the debtor to defraud them in case of insolvency.

First of these creditors is the National Government on the taxes and fees due to it.

In this case, PNCC expressly admitted that there existed a liability on its part to the

government, to the tune of ₱36 billion. This was admitted at the same time it

admitted its liability to Marubeni for loans which the latter extended to it. Also,

PNCC had already been in a state of insolvency due to its negative net worth in the

billions of pesos, as it had debts that remained unpaid, such as the Marubeni loans,

even though some of its other liabilities had been converted into equity. Being in

such a state of financial embarrassment, PNCC ought to follow the rules on

preference of credit under the Civil Code. However, PNCC opted to prioritize and

prefer the credit which Radstock held against it over the concession fees and taxes

due to the Government when it entered into a Compromise Agreement with Radstock.

With all these in consideration, the Compromise Agreement violated the Civil Code’s

rules on preference of credit.



Republic v. Peralta

GR No. L-56568| May 20, 1987

Feliciano, J.

Doctrine: Claims for unpaid wages do not therefore fall at all within the category of

specially preferred claims established under Articles 2241 and 2242 of the Civil Code,

except to the extent that such claims for unpaid wages are already covered by Article

2241, number 6. "claims for laborers' wages, on the goods manufactured or the work

done;" or by Article 2242, number 3: "claims of laborers and other workers engaged in

the construction, reconstruction or repair of buildings, canals and other works, upon

said buildings, canals or other works.

Facts:

Private respondent Quality Tobacco Corporation instituted voluntary insolvency

proceedings with the CFI of Manila. Among its creditors were two unions (USTC and

FOITAF) who wanted to collect separation pay for their members.

The CFI held that the said claims of the unions embodied in final awards of the

National Labor Relations Commission were to be preferred over the claims of the

Bureau of Customs and the Bureau of Internal Revenue. The CFI relied primarily upon

Article 110 of the Labor Code in its ruling.

In the instant petition for certiorari, however, the Supreme Court emphasized that in

order to resolve the issue at hand, Article 110 of the Labor Code must be read in

relation to the provisions of the Civil Code concerning the classification, concurrence

and preference of credits, which provisions find particular application in insolvency

proceedings where the claims of all creditors, preferred or non-preferred, may be

adjudicated in a binding manner.

Issue:

Are the claims for unpaid wages fall within the category of specially preferred claims

established under Articles 2241 and 2242 of the Civil Code?

Ruling:

No. Article 110 of the Labor Code does not purport to create a lien in favor of

workers or employees for unpaid wages either upon all of the properties or upon any

particular property owned by their employer. Claims for unpaid wages do not

therefore fall at all within the category of specially preferred claims established

under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims

for unpaid wages are already covered by Article 2241, number 6. "claims for laborers'

wages, on the goods manufactured or the work done;" or by Article 2242, number 3:

"claims of laborers and other workers engaged in the construction, reconstruction or

repair of buildings, canals and other works, upon said buildings, canals or other

works." To the extent that claims for unpaid wages fall outside the scope of Article

2241, number 6 and 2242, number 3, they would come within the ambit of the

category of ordinary preferred credits under Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for

separation pay of their members constitute liens attaching to the processed leaf

tobacco, cigars and cigarettes and other products produced or manufactured by the

Insolvent, but not to other assets owned by the Insolvent. And even in respect of

such tobacco and tobacco products produced by the Insolvent, the claims of the

Unions may be given effect only after the Bureau of Internal Revenue's claim for

unpaid tobacco inspection fees shall have been satisfied out of the products so

manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other

real property of the Insolvent in favor of workmen who constructed or repaired such

building or other real property. Article 2242, number 3, does not however appear

relevant in the instant case, since the members of the Unions to whom separation

pay is due rendered services to the Insolvent not (so far as the record of this case

would show) in the construction or repair of buildings or other real property, but

rather, in the regular course of the manufacturing operations of the Insolvent. The

Unions' claims do not therefore constitute a lien or encumbrance upon any

immovable property owned by the Insolvent, but rather, as already indicated, upon

the Insolvent's existing inventory (if any of processed tobacco and tobacco products).



Development Bank of the Philippines v. National Labor

Relations Commission

G.R. No. 82763-64, March 19, 1990

Melencio-Herrera, J.

Doctrine: A distinction should be made between a preference of credit and a lien. A

preference applies only to claims which do not attach to specific properties. A lien

creates a charge on a particular property. The right of first preference as regards

unpaid wages recognized by Article 110 does not constitute a lien on the property of

the insolvent debtor in favor of workers. It is but a preference of credit in their favor, a

preference in application. It is a method adopted to determine and specify the order in

which credits should be paid in the final distribution of the proceeds of the insolvent’s

assets. It is a right to a first preference in the discharge of the funds of the judgment

debtor.

Facts:

Lirag Textile Mills, Inc. started terminating the services of its employees on the

ground of retrenchment. The employees dismissed filed against LIRAG seeking

separation pay, 13th month pay, gratuity pay, sick leave and vacation leave pay and

emergency allowance. The labor arbiter ordered LIRAG to pay the individual

complainants. The NLRC affirmed the same and the judgment became executory. A

Writ of Execution was subsequently issued. On the same day, DBP extrajudicially

foreclosed the mortgaged properties for failure of LIRAG to pay its mortgage

obligation with DBP as the only bidder. Due to the foreclosure, the Writ of

Execution issued in favor of complainants remained unsatisfied. LAND filed a

motion for Writ of Execution and Garnishment of the proceeds of the foreclosure

sale. The labor arbiter granted the Writ of Garnishment and directed DBP to remit to

the NLRC the sum of P6,292,380 out of the proceeds of the foreclosed properties of

LIRAG sold at public auction in order to satisfy the judgment previously rendered.

DBP appealed. The NLRC affirmed the appealed order and dismissed the DBP

appeal.

Issue:

Can the ordinary preference granted to labor claims, be given priority against the

order of preference of special preferred credits such as a mortgage credit in this

case?

Ruling:

No. The Supreme Court held that Article 110 of the Labor Code cannot be viewed in

isolation but must be read in relation to the Civil Code scheme on classification and

preference of credits. A distinction should be made between a preference of credit

and a lien. A preference applies only to claims which do not attach to specific

properties. A lien creates a charge on a particular property. The right of first

preference as regards unpaid wages recognized by Article 110 does not constitute a

lien on the property of the insolvent debtor in favor of workers. It is but a preference

of credit in their favor, a preference in application. It is a method adopted to

determine and specify the order in which credits should be paid in the final

distribution of the proceeds of the insolvent’s assets. It is a right to a first preference

in the discharge of the funds of the judgment debtor.

In this case, the DBP anchors its claims on a mortgage credit. A mortgage directly

and immediately subjects the property upon which it is imposed, whoever the

possessor may be, to the fulfillment of the obligation for whose security it was

constituted. It creates a real right which is enforceable against the whole world. It is

a lien on an identified immovable property, which a preference is not. A recorded

mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code

on classification of credits. The preference given by Article 110, when not falling

within Article 2241(6) and Article 2242 (3) of the Civil Code and not attached to any

specific property, is an ordinary preferred credit although its impact is to move it

from second priority to first priority in the order of preference established by Article

2244 of the Civil Code. Thus, the right to preference given to workers under Article

110 of the Labor Code cannot exist in any effective way prior to the time of its

presentation in distribution proceedings. It will find its application when, in

proceedings such as insolvency, such unpaid wages shall be paid in full before the

“claims of the Government and other creditors” may be paid. But, for an orderly

settlement of debtors assets, all creditors must be convened, their claims ascertained

and inventoried, and thereafter the preferences determined in the course of judicial

proceedings which have for their object the subjection of the property of the debtor

to the payment of his debts and other lawful obligations. Therefore, there must be a

declaration of bankruptcy or liquidation proceedings before the preference for labor

claims may be applied.



Philippine Deposit Insurance Corporation v. Bureau of Internal

Revenue

G.R. No. 172892, June 13, 2013

Leonardo-De Castro, J.

Doctrine: The law expressly provides that debts and liabilities of the bank under

liquidation are to be paid in accordance with the rules on concurrence and preference

of credit under the Civil Code.

Facts:

The Monetary Board of the BSP prohibited the Rural Bank of Tuba (Benguet), Inc.

(RBTI) from doing business in the Philippines, placed it under receivership and

designated the Philippine Deposit Insurance Corporation (PDIC) as receiver. PDIC

conducted an evaluation of RBTI’s financial condition and determined that RBTI

remained insolvent. Monetary Board issued Resolution directing PDIC to proceed

with the liquidation of RBTI.

Accordingly and pursuant to Section 30 of the New Central Bank Act, PDIC filed in

the Regional Trial Court (RTC) of La Trinidad, Benguet a petition for assistance in the

liquidation of RBTI.

The Bureau of Internal Revenue (BIR) intervened and prayed that the proceedings be

suspended until PDIC has secured a tax clearance required under Section 52(C) of

Republic Act No. 8424, otherwise known as the “Tax Reform Act of 1997” or the “Tax

Code of 1997.” The purpose of a tax clearance requirement under Section 52(C) of

the Tax Code of 1997 is to ensure the collection of income taxes due to the

government by imposing upon a corporation undergoing liquidation the obligation of

reporting the income it earned, if any, for the purpose of determining the amount of

imposable tax.

PDIC argues that Section 52(C) of the Tax Code of 1997 does not cover closed

banking institutions as the liquidation of closed banks is governed by Section 30 of

the New Central Bank Act. As opposed to the liquidation of all other corporations,

the Monetary Board, not the Securities and Exchange Commission (SEC), has the

power to order or approve the closure and liquidation of banks. Section 52(C) of the

Tax Code of 1997 applies only to corporations under the supervision of the SEC.

RTC found merit in BIR’s motion. After partial reconsideration initiated by PDIC, the

appellate court agreed with the trial court that banks under liquidation by PDIC are

covered by Section 52(C) of the Tax Code of 1997. Hence, this petition for review on

certiorari.

Issue:

Does the PDIC need to comply with the tax liabilities of RBTI first?

Ruling:

Section 30 of the New Central Bank Act provides:

If the receiver determines that the institution cannot be rehabilitated or permitted to

resume business xxxx The receiver shall:

Xxx

(2) convert the assets of the institution to money, dispose of the same to creditors

and other parties, for the purpose of paying the debts of such institution in

accordance with the rules on concurrence and preference of credit under the Civil

Code of the Philippines

Duties, taxes, and fees due the Government enjoy priority only when they are with

reference to a specific movable property, under Article 2241(1) of the Civil Code, or

immovable property, under Article 2242(1) of the same Code. However, with

reference to the other real and personal property of the debtor, sometimes referred

to as “free property,” the taxes and assessments due the National Government, other

than those in Articles 2241(1) and 2242(1) of the Civil Code, such as the corporate

income tax, will come only in ninth place in the order of preference.

The position of the BIR is contrary to both the letter and intent of the law on

liquidation of banks by the PDIC. In order to secure a tax clearance which will serve

as proof that the taxpayer had completely paid off his tax liabilities, PDIC will be

compelled to settle and pay first all tax liabilities and deficiencies of the bank,

regardless of the order of preference under the pertinent provisions of the Civil

Code. Following the BIR’s stance, therefore, only then may the project of distribution

of the bank’s assets be approved and the other debts and claims thereafter settled,

even though under Article 2244 of the Civil Code such debts and claims enjoy

preference over taxes and assessments due the National Government. Such a stance

disregards both Sec. 30 of the NCBA and Article 2244 of the New Civil Code, which

the court cannot allow.



Cordoba v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices

G.R. NO. 146555

Corona, J.

Doctrine: As to an ordinary creditor, Article 2245 provides that: Credits of any other

kind or class, or by any other right or title not comprised in the four preceding articles,

shall enjoy no preference.

Facts:

Sometime in 1977 and 1978, petitioner Jose Cordova bought from Philippine

Underwriters Finance Corporation (Philfinance) certificates of stock of Celebrity

Sports Plaza Incorporated (CSPI) and shares of stock of other various corporations.

Thus, a confirmation of sale was issued to him. The CSPI shares were physically

delivered to Philfinance and Philtrust Bank, as custodian banks, to hold the shares in

behalf of and for the benefit of petitioner.

In 1981, Philfinance was placed under receivership by SEC. Thereafter, private

respondents Reyes Daway Lim Bernardo Lindo Rosales Law Offices and Atty. Wendell

Coronel were appointed as liquidators. However, without the knowledge and consent

of petitioner and without authority from SEC, private respondents withdrew the CSPI

shares from the custodian banks and were sold to Northeast Corporation. The

proceeds of such sale were included in the funds of Philfinance.

Petitioner later learned about the unauthorized sale of his shares and filed a

complaint against private respondents in the receivership proceedings with the SEC.

The SEC initially rendered judgment dismissing the petition, but later on

reconsidered its decision and granted the claims of petitioner. It was held that

petitioner was the owner of the CSPI shares by virtue of a confirmation of sale issued

to him. Private respondents were ordered to pay petitioner P5,062,500, representing

the 15% monetary value of the CSPI shares plus interest at the legal rate from the

time of their unauthorized sale since the shares had already been sold and the

proceeds commingled with other assets of Philfinance, petitioner’s status was

converted into an ordinary creditor for the value of such shares.

On appeal, the CA affirmed the SEC. It agreed that petitioner was indeed the owner

of the CSPI shares but the recovery of the shares were impossible. Hence, this

petition.

Petitioner is seeking the return of his CSPI shares. However, such is no longer

possible since the shares were already sold by respondents and the proceeds

commingled with the assets of Philfinance. Hence, petitioner is now a claimant for

the value of those shares.

Issue:

Can the petitioner be considered as a preferred and secured creditor of Philfinance?

Ruling:

NO, petitioner is an ordinary creditor of Philfinance and not a preferred and secured

creditor.

Art. 2241, upon which petitioner based his argument that he was a preferred creditor,

is not applicable to him. Art. 2241 refers only to specific movable property.

In this case, petitioner’s claim for the payment of money is generic property and not

specific or determinate.

Considering that petitioner did not fall under any of the provisions applicable to

preferred creditors, he was deemed an ordinary creditor under Art 2245 which

provides that,

“Credits of any other kind or class, or by any other right or title not comprised in the

four preceding articles, shall enjoy no preference.”

Therefore, Art. 2251(2) applies in this case. Art. 2251(2) states that:

“Common credits referred to in Art. 2245 shall be paid pro rata regardless of dates.”

In sum, petitioner is not a preferred and secured creditor of Philfinance, but rather

an ordinary creditor. As an ordinary creditor, he is entitled to a rate of recovery of

only 15% of his money claim and not the payment of the value of his shares.



Philippine Export and Foreign Loan Guarantee Corp. v. Court of

Appeals

G.R. No. 118701. December 12, 1995.

Vitug, J.

Doctrine: Article 110 of the Labor Code cannot be viewed in isolation but must be read

in relation to the Civil Code scheme on classification and preference of credits.

Facts:

Private respondent Diehl, a resident alien, lodged a complaint for illegal dismissal

against the Philippine German Wire Mesh Reinforcing Corp. (FILFORCE) with the

National Labor Relations Commission. 5 years earlier, FILFORCE had mortgaged its

plant and other property located at EPZA, Bataan, in favor of herein petitioner

Philippine Export and Foreign Loan Guarantee Corporation (PHILGUARANTEE), to

secure a guarantee which the latter executed in favor of Kuwait Asia Bank. The

mortgage in PHILGUARANTEE’s favor was duly registered with the Register of Deeds

of Bataan.

December 21, 1990, a judgment favorable to respondent Diehl was rendered by Labor

Arbiter Pangan.

Labor Arbiter Pangan then issued a writ of execution directing NLRC Sheriff Estrada

to execute the judgment against FILFORCE. Failing to collect the sum due, the

Sheriff was directed to cause the satisfaction of the award by levying on the property

of FILFORCE. Estrada effected the levy and scheduled a public auction sale. Since

the assets had previously been mortgaged to it, PHILGUARANTEE filed a third party

claim which resulted in the suspension of the scheduled auction sale. Diehl

submitted an indemnity bond issued by Plaridel Surety and Insurance company and

the Deputy Sheriff issued a notice resetting the auction sale. PHILGUARANTEE filed a

petition before the Labor Arbiter questioning the integrity of the indemnity bond and

asserting its superior right and prior lien over the levied property. Deputy Sheriff

Estrada proceeded, nonetheless, with the auction sale at which Diehl was declared

the sole and winning bidder. Forthwith, a Certificate of Sale was issued by the

Deputy Sheriff in favor of respondent Diehl.

PHILGUARANTEE went to the RTC of Makati and filed a complaint for annulment of

sale and recovery of possession. The RTC granted PHILFGUARANTEE’s application.

Separate motions to dismiss were filed by Diehl, the Labor Arbiter and the Deputy

Sheriff on the ground that RTC had no jurisdiction over the case. But the motions

were denied.

Diehl brought it to the Court of Appeals and the appellate court found the petition to

be impressed with merit.

Issue: Is the right to preference given to workers under Article 110 of the Labor Code

cannot exist in any effective way prior to the time of its presentation in distribution

proceedings?

Ruling: Yes. The right to preference given to workers under Article 110 of the Labor

Code cannot exist in any effective way prior to the time of its presentation in

distribution proceedings.

It will find application when, in proceedings such as insolvency such unpaid wages

shall be paid in full before the claims of the Government and other creditors' may be

paid. But, for an orderly settlement of a debtor's assets, all creditors must be

convened, their claims ascertained and inventoried, and thereafter the preferences

determined in the course of judicial proceedings which have for their object the

subjection of the property of the debtor to the payment of his debts or other lawful

obligations. Thereby, an orderly determination of preference of creditors' claims is

assured (Philippine Savings Bank vs. Lantin); the adjudication made will be binding

on all parties-in-interest, since those proceedings are proceedings in rem; and the

legal scheme of classification, concurrence and preference of credits in the Civil

Code, the Insolvency Law, and the Labor Code is preserved in harmony."

Even if Article 110 and its Implementing Rule, as amended, should be interpreted to

mean 'absolute preference,' the same should be given only prospective effect in line

with the cardinal rule that laws shall have no retroactive effect, unless the contrary

is provided (Article 4, Civil Code). Thereby, any infringement on the constitutional

guarantee on non-impairment of the obligation of contracts (Section 10, Article III,

1987 Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated

by several years the amendatory law, RA No. 6715. To give Article 110 retroactive

effect would be to wipe out the mortgage in DBP's favor and expose it to a risk

which it sought to protect itself against by requiring a collateral in the form of real

property.

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