SUMMARY / CASE DIGESTS

1.
METROPOLITAN BANK AND TRUST COMPANY VS. S.F. NAGUIAT ENTERPRISES, INC.
G.R. No. 178407, March 18, 2015 LEONEN
SUMMARY
This case calls for the determination of whether the approval and consent of the insolvency court is required under Act
No. 1956, otherwise known as the Insolvency Law, before a secured creditor like petitioner Metropolitan Bank and Trust
Company can proceed with the extrajudicial foreclosure of the mortgaged property. Sometime in April 1997, Spouses
Rommel Naguiat and Celestina Naguiat and S.F. Naguiat Enterprises, Inc. (S.F. Naguiat) executed a real estate mortgage
in favor of Metropolitan Bank and Trust Company (Metrobank) to secure certain credit accommodations obtained from
the latter amounting to P17 million. S.F. Naguiat represented by Celestina T. Naguiat, Eugene T. Naguiat, and Anna N.
Africa obtained a loan from Metrobank in the amount of P1,575,000.00. The loan was likewise secured by the 1997 real
estate mortgage by virtue of the Agreement on Existing Mortgage(s) executed between the parties. S.F. Naguiat filed a
Petition for Voluntary Insolvency with Application for the Appointment of a Receiver pursuant to Act No. 1956, as
amended, before the RTC of Angeles. Among the assets declared in the Petition was one of the properties mortgaged to
Metrobank. RTC judge issued an order declaring S.F. Naguiat insolvent; directing the Deputy Sheriff to take possession of
all the properties of S.F. Naguiat until the appointment of a receiver/assignee; and forbidding payment of any debts due,
delivery of properties, and transfer of any of its properties.] In lieu of a Comment, Metrobank filed a Manifestation and
Motion informing the court of Metrobank's decision to withdraw from the insolvency proceedings because it intended to
extrajudicially foreclose the mortgaged property to satisfy its claim against S.F. Naguiat. Subsequently, S.F. Naguiat
defaulted in paying its loan. Metrobank instituted an extrajudicial foreclosure proceeding against the mortgaged
property and sold the property at a public auction to Phoenix Global Energy, Inc., the highest bidder. Afterwards, Sheriff
Claude B. Balasbas prepared the Certificate of Sale and submitted it for approval to Clerk of Court Vicente S. Fernandez,
Jr. and Executive Judge Bernardita Gabitan-Erum (Executive Judge Gabitan-Erum). However, Executive Judge GabitanErum issued the order denying her approval of the Certificate of Sale in view of the July 12, 2005 Order issued by the
insolvency court. CA rendered its Decision dismissing the Petition on the basis of Metrobank's failure to "obtain the
permission of the insolvency court to extrajudicially foreclose the mortgaged property. CA declared that "a suspension
of the foreclosure proceedings is in order, until an assignee [or receiver,] is elected or appointed [by the insolvency
court] so as to afford the insolvent debtor proper representation in the foreclosure [proceedings]." Hence, the present
Petition for Review was filed. Petitioner contends that the Court of Appeals decided questions of substance in a way not
in accord with law and with the applicable decisions of this court. SC found that the petition has no merit.
DOCTRINE:
Petitioner argues that nowhere in Act No. 1956 does it require that a secured creditor must first obtain leave or
permission from the insolvency court before said creditor can foreclose on the mortgaged property. It adds that this
procedural requirement applies only to civil suits, and not when the secured creditor opts to exercise the right to
foreclose extrajudicially the mortgaged property under Act No. 3135, as amended, because extrajudicial foreclosure is
not a civil suit. Thus, the Court of Appeals allegedly imposed a new condition that was tantamount to unauthorized
judicial legislation when it required petitioner to file a Motion for Leave of the insolvency court. Nonetheless, petitioner
contends that the filing of its Manifestation before the insolvency court served as sufficient notice of its intention and, in
effect, asked the court's permission to foreclose the mortgaged property. [Court looked into history of insolvency] Act
No. 1956 impliedly requires a secured creditor to ask the permission of the insolvent court before said creditor can
foreclose the mortgaged property. When read together, the following provisions of Act No. 1956 reveal the necessity
for leave of the insolvency court. Here, the foreclosure and sale of the mortgaged property of the debtor, without leave
of court, contravene the provisions of Act No. 1956 and violate the Order dated July 12, 2005 of the insolvency court
which declared S.F. Naguiat insolvent and forbidden from making any transfer of any of its properties to any person.
Executive Judge Gabitan-Erum did not unlawfully neglect to perform her duty when she refused to approve and sign the
Certificate of Sale, as would warrant the issuance of a writ of mandamus against her. An executive judge has the
administrative duty in extrajudicial foreclosure proceedings to ensure that all the conditions of Act No. 3135 have been
complied with before approving the sale at public auction of any mortgaged property. Furthermore, Act No. 3135
outlines the notice and publication requirements and the procedure for the extrajudicial foreclosure which constitute a
condition sine qua non for its validity. There was a valid reason for Executive Judge Gabitan-Erum to doubt the propriety
of the foreclosure sale. Her verification with the records of the Clerk of Court showed that a Petition for Insolvency had
been filed and had already been acted upon by the insolvency court prior to the application for extrajudicial foreclosure
of the mortgaged properties. Among the inventoried unpaid debts and properties attached to the Petition for Insolvency
was the loan secured by the real estate mortgage subject of the application for extrajudicial foreclosure sale. With the
pendency of the insolvency case, substantial doubt exists to justify the refusal by Executive Judge Gabitan-Erum to
approve the Certificate of Sale as the extrajudicial foreclosure sale without leave of the insolvency court may contravene
the policy and purpose of Act No. 1956. Act No. 3135 is silent with respect to mortgaged properties that are in custodia
legis, such as the property in this case, which was placed under the control and supervision of the insolvency court. This

court has declared that "[a] court which has control of such property, exercises exclusive jurisdiction over the same,
retains all incidents relative to the conduct of such property. No court, except one having supervisory control or superior
jurisdiction in the premises, has a right to interfere with and change that possession." The extrajudicial foreclosure and
sale of the mortgaged property of the debtor would clearly constitute an interference with the insolvency court's
possession of the property.

2.
RCBC vs ROYAL CARGO
FACTS:
Terrymanila filed a petition for voluntary insolvency with the RTC of Bataan on February 13,
1991.
One of its creditors was RCBC with which it had an obligation of P3 Million that was secured
by a chattel mortgage executed on February 16, 1989. The chattel mortgage was duly
recorded.
Royal Cargo another creditor of Terrymanila, filed an action with RTC Manila for collection of
sum of money and preliminarily attached "some" of Terrymanila's personal properties on
March 5, 1991.
On April 12, 1991, the Bataan RTC declared Terrymanila insolvent.
On June 11, 1991, Manila RTC, rendered judgment in the collection case in favor of Royal
Cargo.
In the meantime, RCBC sought in the insolvency proceedings at the Bataan RTC permission
to extrajudicially foreclose the chattel mortgage which was granted by Order of February 3,
1992.
The provincial sheriff of Bataan thereupon scheduled on June 16, 1992 the public auction sale
of the mortgaged personal properties.
At the auction sale, RCBC was the sole bidder of the properties and purchased them for P1.5
Million. Eventually, RCBC sold the properties to Domingo Bondoc and Victoriano See.
Royal Cargo filed on July 30, 1992 a petition before the RTC of Manila against the Provincial
Sheriff of the RTC Bataan and RCBC, for annulment of the auction sale . Apart from
questioning the inclusion in the auction sale of some of the properties which it had attached,
respondent questioned the failure to duly notify it of the sale at least 10 days before the sale.
ISSUE:
WON Royal Cargo should have been given a ten day prior notice of the foreclosure sale.
RULING:
Section 13 of the Chattel Mortgage Law allows the would-be redemptioner thereunder to redeem the
mortgaged property only before its sale. [T]here is no law in our statute books which vests
the right of redemption over personal property. the right of redemption applies to real properties, not
personal properties, sold on execution. , the redemption cited in Section 13 partakes of an equity of
redemption, which is the right of the mortgagor to redeem the mortgaged property after his default in
the performance of the conditions of the mortgage but before the sale of the property to clear it from
the encumbrance of the mortgage. It is not the same as right of redemption which is the right of the
mortgagor to redeem the mortgaged property after registration of the foreclosure
sale, and even after confirmation of the sale.
While respondent had attached some of Terrymanila's assets to secure the satisfaction of a judgment
what it effectively attached was Terrymanila's equity of redemption. Having thus attached
Terrymanila's equity of redemption, respondent had to be informed of the date of sale of the
mortgaged assets for it to exercise such equity of redemption over some of those foreclosed
properties, as provided for in Section 13.

Recall, however, that respondent filed a motion to reconsider the February 3, 1992 Order of the RTC
Bataan-insolvency court which granted leave to petitioner to foreclose the chattel mortgage. Thus,
even prior to receiving, through counsel, a mailed notice of the auction sale on the date of the auction
sale itself on June 16, 1992, respondent was already put on notice of the impending foreclosure sale
of the mortgaged chattels. It could thus have expediently exercised its equity of redemption, at the
earliest when it received the insolvency court's Order of March 20, 1992 denying its Motion for
Reconsideration of the February 3, 1992 Order.
In any event, even if respondent would have participated in the auction sale and matched petitioner's
bid, the superiority of petitioner's lien over the mortgaged assets would preclude respondent from
recovering the chattels. "the right of those who acquire said properties should not and can not
be superior to that of the creditor who has in his favor an instrument of mortgage executed
with the formalities of the law, in good faith, and without the least indication of fraud
It bears noting that the chattel mortgage in favor of petitioner was registered more than two
years before the issuance of a writ of attachment over some of Terrymanila's chattels in favor of
respondent. Since the registration of a chattel mortgage is an effective and binding notice to other
creditors of its existence and creates a real right or lien that follows the property wherever it may
be, 47 the right of respondent, as an attaching creditor or as purchaser, had it purchased the
mortgaged chattel at the auction sale, is subordinate to the lien of the mortgagee who has in his favor
a valid chattel mortgage.
ISSUES/HELD:(1) WON Royal Cargo should have been notified of the foreclosure sale NO
Petitioner:
Chattel Mortgage Law only allows an attaching creditor or judgment creditor to "redeem the mortgage,
BEFORE the holding of the auction.
SC:
Agrees. Sec. 13 of the Chattel Mortgage Law allows the would-be redemption to redeem the mortgaged
property only BEFORE its sale. The redemption cited in Sec. 13 partakes of an equity of redemption, which is
the right of the mortgagor to redeem the mortgaged property after his default in the performance of
conditions of the mortgage, but before the sale of property, to clear it from encumbrance of the mortgage.
Royal Cargo attached Terry's equity of redemption.
Thus it had to be informed of the date of sale of mortgaged assets for it to exercise such equity of redemption
over some of those foreclosed properties.
Royal Cargo was aware of the auction sale
- It was informed about the Order of the insolvency court that granted leave to RCBC to foreclose the chattel
mortgage.- Its negligence or omission to exercise its equity of redemption within a reasonable time, or even
on the day of auction sale, warrants a presumption that it had either abandoned it or opted not to assert it
Royal Cargo was not prejudiced by the auction sale
- Terry had sufficient, unencumbered assets to cover obligations owing to its other creditors
RCBC had a superior lien over the mortgaged assets
- The right of those who acquire properties should not and cannot be superior to that of a creditor, who has in
his favor an instrument of mortgage, executed with the formalities of law, in good faith, and without the least
indication of fraud- Right of Royal Cargo was subordinate to the lien of the mortgagee, who has in his favor a
valid chattel mortgage
(2) WON RCBC was guilty of constructive fraud in failing to provide Royal Cargo with a10-day notice - NO
Foreclosure suits may be initiated even during insolvency proceedings, as long as leave must first be obtained
from the insolvency court, as what RCBC did.

5.
DE BARRETO, ET. AL. v. VILLANUEVA, ET. AL., (1961)
Special Preferred Credits
(Important: See full text of the Resolution)
Facts: Rosario Cruzado sold all her right, title, and interest and that of her children in the house and lot herein
involved to Villanueva for P19K. The purchaser paid P1,500 in advance, and executed a promissory note for
the balance. However, the buyer could only pay P5,500 On account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva was able to secure a clean
certificate of title and mortgaged the property to appellant Barretto to secure a loan of P30K, said mortgage
having been duly recorded.
Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming final asked for execution. Cruzado filed a motion for
recognition for her "vendor's lien" invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing,
the court below ordered the "lien" annotated on the back of the title, with the proviso that in case of sale
under the foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be
paid pro rata from the proceeds.
Appellants insist that:
1.

The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become
effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .

2.

That the Cruzado is not a true vendor of the foreclosed property.

Article 2242 of the new Civil Code enumerates the claims, mortgage and liens that constitute an encumbrance
on specific immovable property, and among them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and
(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro-rata after the payment of the taxes and assessment
upon the immovable property or real rights.
Held: Application of the above-quoted provisions to the case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the
appellants the proceeds of the foreclosure sale.
Issue: Appellants argument: inasmuch as the unpaid vendor's lien in this case was not registered, it should
not prejudice the said appellants' registered rights over the property.
Held: There is nothing to this argument. Note must be taken of the fact that article 2242 of the new Civil Code
enumerating the preferred claims, mortgages and liens on immovables, specifically requires that. Unlike the
unpaid price of real property sold. mortgage credits, in order to be given preference, should be recorded in
the Registry of Property. If the legislative intent was to impose the same requirement in the case of the
vendor's lien, or the unpaid price of real property sold, the lawmakers could have easily inserted the same

qualification which now modifies the mortgage credits. The law, however, does not make any distinction
between registered and unregistered vendor's lien, which only goes to show that any lien of that kind enjoys
the preferred credit status.
As to the point made that the articles of the Civil Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we
are to interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits would be left without any rules to govern them, and it
would render purposeless the special laws on insolvency.
Resolution on Motion to Consider (1962)
Appellants, spouses Barretto, have filed a motion vigorously urging that our decision be reconsidered and set
aside, and a new one entered declaring that their right as mortgagees remain superior to the unrecorded
claim of herein appellee for the balance of the purchase price of her rights, title, and interests in the
mortgaged property.
We have reached the conclusion that our original decision must be reconsidered and set aside:
Under the system of the Civil Code of the Philippines, only taxes enjoy a similar absolute preference. All the
remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves, but
must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249 provides:
If there are two or more credits with respect to the same specific real property or real rights, they, shall be
satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real
rights."
The full application of Articles 2249 and 2242 demands that there must be first some proceedings where the
claims of all the preferred creditors may be bindingly adjudicated, such as:
1.

insolvency,

2.

the settlement of decedents estate under Rule 87 of the Rules of Court, or

3.

other liquidation proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or pledges
of real or personal property, or liens within the purview of legal provisions governing insolvency.
And the rule is further clarified in the Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by Article
2243. The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be enforced in accordance
with the Insolvency Law."
Rule
Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale
(as in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences
under Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none
of the claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro-

rata dividend corresponding to each, because the rights of the other creditors likewise" enjoying preference
under Article 2242 can not be ascertained.
Held: There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not require the
character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must remain
subordinate to the latter.

6. BETITA V. GANZON EL AL. G. R. NO. L-24137, 49 PHIL. 87,

FACTS:
This action is brought to recover the possession of four carabaos with damages in the sum of P200.
On May 15, 1924, the defendant Alejo de la Flor recovered a judgment against Tiburcia Buhayan for the
sum of P140 with costs. Under this judgment the defendant Ganzon, as sheriff levied execution on the
carabaos in question which were found in the possession of one Simon Jacinto but registered in the
name of Tiburcia Buhayan. The plaintiff, Eulogio Betita, alleged that the carabaos had been mortgaged
to him and as evidence thereof presented a document dated May 6, 1924, but the sheriff proceeded with
the sale of the animals at public auction where they were purchased by the defendant Clemente Perdena
for the sum of P200, and this action was thereupon brought.
RTC: inasmuch as that document was prior in date to the judgment under which the execution was levied, it
was a preferred credit and judgment was rendered in favor of the plaintiff for the possession of the carabaos,
without damages and without costs.
ISSUE: WON there was a valid chattel mortgage or pledge
HELD: NO
It is not a sufficient chattel mortgage; it does not meet the requirements of section 5 of the Chattel
Mortgage Law (Act No. 1508), has not been recorded and, considered as a chattel mortgage, is
consequently of no effect as against third parties.Neither did the document constitute a sufficient pledge
of the property valid against third parties.
Article 1865 of the Civil Code provides that "no pledge shall be effective as against third parties unless
evidence of its date appears in a public instrument."
The document in question is not public, but it is suggested that its filing with the sheriff in connection
with the terceria gave in the effect of a public instrument and served to fix the date of the pledge, and
that it therefore fulfills the requirements of article 1865. Assuming, without conceding, that the filing of
the document with the sheriff had that effect, it seems nevertheless obvious that the pledge only
became effective as against the plaintiff in execution from the date of the filing and did not rise superior
to the execution attachment previously levied (see Civil Code, article 1227).

MANRESA:
ART. 1865. A pledge will not be valid against a third party if the certainty of the date is not expressed in a
public instrument.

Considering the effects of a contract of pledge, it is easily understood that, without this warranty demanded
by law, the case may happen wherein a debtor in bad faith from the moment that he sees his movable
property in danger of execution may attempt to withdraw the same from the action of justice and the reach
of his creditors by simulating, through criminal confabulations, anterior and fraudulent alterations in his
possession by means of feigned contracts of this nature;
for the effectiveness of the pledge, it be demanded as a precise condition that in every case the contract be
executed in a public writing, for, otherwise, the determination of its date will be rendered difficult and its
proof more so, even in cases in which it is executed before witnesses, due to the difficulty to be
encountered in seeking those before whom it was executed.
Our code does not demand in express terms that in all cases the pledge be constituted or formalized in a
public writing, nor even in private document, but only that the certainty of the date be expressed in the first
of the said class of instruments in order that it may be valid against a third party; and, in default of any
express provision of law, in the cases where no agreement requiring the execution in a public writing exists,
it should be subjected to the general rule, and especially to that established in the last paragraph of article
1280, according to which all contracts not included in the foregoing cases of the said article should be made
in writing even though it be private, whenever the amount of the presentation of one or of the two
contracting parties exceeds 1,500 pesetas.
If the mere filing of a private document with the sheriff after the levy of execution can create a lien of
pledge superior to the attachment, the purpose of the provisions of article 1865 as explained by Manresa
clearly be defeated. Such could not have been the intention of the authors of the Code.

The alleged pledge is also ineffective for another reason: the plaintiff pledgee never had actual
possession of the property within the meaning of article 1863 of the Civil Code.
But it is argued that at the time of the levy the animals in question were in the possession of one Simon
Jacinto; that Jacinto was the plaintiff's tenant; and that the tenant's possession was the possession of his
landlord.
It appears, however, from the evidence that though not legally married, Simon Jacinto and Tiburcia
Buhayan were living together as husband and wife and had been so living for many years.
Article 1863 of the Civil Code reads as follows:
In addition to the requisites mentioned in article 1857, it shall be necessary, in order to constitute the
contract of pledge, that the pledge be placed in the possession of the creditor or of a third person
appointed by common consent.
Manresa:
Therefore, in order that the contract of pledge may be complete, it is indispensable that the aforesaid
delivery take place .
the delivery of possession referred to in article 1863 implies a change in the actual possession of the
property pledged and that a mere symbolic delivery is not sufficient. the present case the animals in
question were in the possession of Tiburcia Buhayan and Simon Jacinto before the alleged pledge was
entered into and apparently remained with them until the execution was levied, and there was no actual
delivery of possession to the plaintiff himself. There was therefore in reality no change in possession.
SC REVERSED

On the need for contract of pledge to appear in a public instrument

BETITA vs. GANZON
(49 PHIL. 87 3/29/26)
Ostrand, J
Alejo de la Flor obtained a judgment against Tiburcia Buhayan. Under this judgment, defendant sheriff Ganzon
levied execution on the four carabaos in question which were in possession of Simon Jacinto but registered in
the name of Tiburcia Buhayan.
Plaintiff Betita presented a third party claim alleging that the carabao had been mortgaged to him evidenced
by a document purporting to be the pledge contract
Ganzon proceeded with the sale of the carabao in public auction while Betita brought an action to recover
possession of said carabao
Trial Court rendered judgment in favor of Betita declaring that his was a preferred credit
The document presented by Betita did not constitute a pledge valid against third parties as expressly discusses
in Art. 2096 of the Civil Code
The document in question is not public. The filing of a private document of pledge with the sheriff after the
levy of execution does not create a lien superior to that of the attachment
The alleged pledge is also ineffective because the pledge never had actual possession of the pledged thing
Judgment reversed

7.
CRUZ & SERRANO VS. CHUA A.H. LEE (54 PHIL 10)
Facts: Chua took from Cruz and Serrano a pawn ticket in pledge to secure an obligation. The pledge was lost for
failure of Chua to renew the loan of Cruz and Serrano with the pawnbroker
Issue: WON Chua is bound to renew the ticket from time to time, by the payment of interest or premium
Held: Yes. The ordinary pawn ticket is a document by virtue of which the property in the thing pledged passes
from hand to hand by mere delivery of the ticket. It results that one who takes a pawn ticket in pledge acquired
domination over the pledge. Article 2099 contemplates that the pledge may have to undertake expenses in
order to prevent the pledge from being lost; and these expenses the pledge is entitled to

recover from the pledgor. This follows that where, in a case like this, the pledge is lost by failure of Chua to
renew the loan, he is liable for the resulting damage. This duty of Chua is not destroyed by the fact that he has
obtained a judgment for the debt of Cruz and Serrano which was secured by the pledge. The duty to use the
diligence of good father of a family in caring for the thing pledged as long as the same remains in the power of
the pledge.

9.
China Banking Corporation v CA
Facts:
China Banking Corporation made a 53% equity investment (P16,227,851.80) in the First CBC Capital a
Hongkong subsidiary engaged in financing and investment with deposit-taking function.
It was shown that CBC has become insolvent so China Banking wrote-off its investment as worthless and
treated it as a bad debt or as an ordinary loss deductible from its gross income.
CIR disallowed the deduction on the ground that the investment should not be classified as being worthless. It
also held that assuming that the securities were worthless, then they should be classified as a capital loss and
not as a bad debt since there was no indebtedness between China Banking and CBC.
Issue:
Whether or not the investment should be classified as a capital loss.
Held:
Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming worthless. It conveys that capital
loss normally requires the concurrence of 2 conditions:
a.
there is a sale or exchange
b. the thing sold or exchanges is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems it to be a loss.
These are allowed to be deducted only to the extent of capital gains and not from any other income of the
taxpayer. A similar kind of treatment is given by the NIRC on the retirement of certificates of indebtedness
with interest coupons or in registered form, short sales and options to buy or sell property where no sale or
exchange strictly exists. In these cases, The NIRC dispenses with the standard requirements.
There is ordinary loss when the property sold is not a capital asset.
In the case, CBC as an investee corporation, is a subsidiary corporation of China Banking whose shares in CBC
are not intended for purchase or sale but as an investment. An equity investment is a capital asset of the
investor. Unquestionably, any loss is a capital loss to the investor.
-Additional notes:
*The loss cannot be deductible as bad debt since the shares of stock do not constitute a loan extended by it to
its subsidiary or a debt subject to obligatory repayment by the latter.

10.
TITLE: PEOPLES BANK V DAHICAN LUMBER
SUBJECT MATTER
: Chattel mortgage-subject matter: machinery
FACTS
A.
Dahican lumber company (DAMCO) obtained several loans amounting to 250,000pesos from Peoples bank
(BANK) and ,together with DALCO, another loan amounting to$250,000 from Export-Import bank secured by

five promissory notes through peoples bank. In both loans, DAMCO executed and registered respective
mortgages with inclusion of after acquired properties. DAMCO and DALCO failed to satisfy the fifth
promissory note in favor of Export bank so Peoples bank paid it and subsequently filed an action for the
foreclosure of the mortgaged properties of DAMCO including the after acquired machinery, equipment and
spare parts upon the latter's failure to fulfill its obligation.
B. Contention of the Petitioner
Peoples bank asserted that the after acquired machinery and equipment of DAMCO are subject to the deed
of mortgage executed by DAMCO. Hence, these can be included in the foreclosure proceedings.
C. Contentions of the Respondent
DALCO argued that the mortgages were void as regards the after acquired properties because they were not
registered in accordance with the chattel mortgage law. Moreover, provision of the fourth paragraph of each
of said mortgages did not automatically make subject to such mortgages the "after acquired properties", the
only meaning thereof being that the mortgagor was willing to constitute a lien over such properties.
II.
ISSUES TO BE RESOLVED
Whether the after acquired machinery and equipment of DAMCO are included as subject of the Real Estate
mortgage, thus can be foreclosed.
RULING OF THE SUPREME COURT
Judgment rendered in favor of Plaintiff Peoples bank. The after acquired machinery and equipment are
included in the executed mortgages. It is not disputed in the case at bar that the "after acquired properties"
were purchased by DALCO in connection with, and for use in the development of its lumber concession and
that they were purchased in addition to, or in replacement of those already existing in the premises on July 13,
1950. In Law, therefore, they must be deemed to have been immobilized , with the result that the real estate
mortgages involved herein which were registered as such did not have to be registered a second time as
chattel mortgages in order to bind the "after acquired properties" and affect third parties.
Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all property of every nature and
description taken in exchange or replacement, as well as all buildings, machineries, fixtures, tools,
equipments, and other property that the mortgagor may acquire, construct, install, attach; or use in, to upon,
or in connection with the premises that is, its lumber concession "shall immediately be and become subject
to the lien" of both mortgages in the same manner and to the same extent as if already included therein at the
time of their execution. As the language thus used leaves no room for doubt as to the intention of the parties,
We see no useful purpose in discussing the matter extensively. Suffice it to say that the stipulation referred to
is common, and We might say logical, in all cases where the properties given as collateral are perishable or
subject to inevitable wear and tear or were intended to be sold, or to be used thus becoming subject to the
inevitable wear and tear but with the understanding express or implied that they shall be replaced with
others to be thereafter acquired by the mortgagor. Such stipulation is neither unlawful nor immoral, its
obvious purpose being to maintain, to the extent allowed by circumstances, the original value of the
properties given as security. Indeed, if such properties were of the nature already referred to, it would be poor
judgment on the part of the creditor who does not see to it that a similar provision is included in the contract.
Peoples Bank v. Dahican Lumber
Facts: ATLANTIC sold and assigned all its right in the DALCO for the total sum of P500,000.00 of which only the amount
of $50,000.00 was paid. DALCO obtained various loans from the People's Bank & Trust Company amounting, as of July
13, 1950, to P200,000.00. DALCO also obtained, through the Bank, a loan of $250,000.00 from the Export-Import Bank of
Washington D.C., evidenced by five promissory notes of $50,000.00 each, maturing on different dates, payable to the
BANK or its order. As security for the payment of the abovementioned loans, DALCO executed in favor of the BANK a
deed of mortgage covering live parcels of land situated in the province of Camarines Norte, together with all the buildings
and other improvements existing thereon and all the personal properties of the mortgagor located in its place of business
in the municipalities of Mambulao and Capalonga, Camarines Norte. DALCO executed a second mortgage on the same
properties in favor of ATLANTIC to secure payment of the unpaid balance of the sale price of the lumber concession
amounting to the sum of $450,000.00. Both deeds contained a provision which stated that it included essential
afteracquired properties such as machineries, fixtures, tools and equiptments. Both mortgages were registered in the
Office of the Register of Deeds of Camarines Norte. Upon DALCO's and DAMCO's failure to pay the fifth promissory note
upon its maturity, the BANK paid the same to the Export-Import Bank of Washington D.C. and the latter assigned to the
former its credit and the first mortgage securing it. Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953
to pay the overdue promissory note. DALCO purchased various machineries, equipment, spare parts and supplies in

addition to, or in replacement of some of those already owned and used by it on the date aforesaid. Pursuant to the
provision of the mortgage deeds quoted heretofore regarding "after acquired properties", the BANK requested DALCO to
submit complete lists of said properties but the latter failed to do so. On December 16, 1952, the Board of Directors of
DALCO in a special meeting called for the purpose, passed a resolution agreeing to rescind the alleged sales of
equipment, spare parts and supplies by CONNELL and DAMCO to it. On January 23, 1953, the BANK, in its own behalf
and that of ATLANTIC, demanded that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953, ATLANTIC and the BANK, commenced foreclosure proceedings in the Court of First
Instance of Camarines Norte against DALCO and DAMCO.
Issue: Should the deed also be registered in the Chattel Mortgage Registry in so far as it covered the after acquired
machinery, fixtures, tools and equipments?
Held: No more, since under Articles 415 the new Civil Code, the properties in question being machinery, receptacles,
instruments or replacements intended by the owner of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and shall tend directly to meet the needs of the said industry or works, are classified as
immovable properties, therefore not covered by the Chattel Mortgage Law.
11. LANUZA VS DE LEON