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February 14 Amparo subject to disposition.

The loan application of respondent


spouses was nevertheless eventually approved by DBP in
REAL ESTATE MORTGAGE the sum of P140, 000.00, despite the aforesaid certification
It is a contract whereby the debtor secures to the of the bureau.
creditor the fulfillment of a principal obligation,
specially subjecting to such security immovable To secure payment of the loan, respondent spouses
property OR real rights over immovable property executed a real estate mortgage over the land on March
which obligation shall be satisfied with the proceeds 17, 1982, which document was registered in the Registry of
of sale of said property or rights in case the principal Deeds pursuant to Act No. 3344. However, DBP did not
obligation is not complied with at the time release the entire amount of the loan ostensibly because
stipulated. the release of the land from the then Ministry of Natural
This is one of the contracts of real security. Resources had not been obtained. On July 7, 1983,
respondent spouses, as plaintiffs, filed a complaint against
Characteristics: DBP in the trial court seeking the annulment of the subject
a) It is a contract of real security deed of absolute sale on the ground that it belongs to the
b) It is an accessory contract lands of the public domain.
o Its existence and validity depends upon the
principal obligation. RTC rendered judgment in favor of respondent spouses,
c) As a contract, it has to have the elements of consent, annulling the deed of absolute sale. CA affirmed.
object and consideration.
o It may have a different consideration from the ISSUES:
principal contract. (1) WON private respondent spouses Celebrada and Abner
Mangubat should be ordered to pay petitioner DBP their
o But even if it does not have a different loan obligation due under the mortgage contract executed
consideration, it will still have the same between them and DBP.
consideration as that of the principal contract from (2) WON petitioner should reimburse respondent spouses
which it receives its life and without which it the purchase price of the property and the amount of P11,
cannot exist as an independent contract, although 980.00 for taxes and expenses for the relocation Survey.
the obligation is secured or incurred by a third
person. HELD 1: YES
Considering that neither party questioned the legality and
o So even if we have a third person that acts as a correctness of the judgment of the court a quo, as affirmed
mortgagor who is allowed under Art. 2085, even if by respondent court, ordering the annulment of the deed
there is no separate consideration in favor of that of absolute sale, such decreed nullification of the
third person-mortgagor, still such mortgage is valid document has already achieved finality.
provided all the other elements are present. The
consideration will be that of the principal contract. In its legal context, the contract of loan executed between
It will be valid if the principal obligation is valid and the parties is entirely different and discrete from the deed
cannot be avoided on the ground of lack of of sale they entered into. The annulment of the sale will
consideration. not have an effect on the existence and demandability of
the loan. One who has received money as a loan is bound
to pay to the creditor an equal amount of the same kind
DBP VS. CA and SPS. MANGUBAT and quality.
(G.R. No. 110053, October 16, 1995)
The fact that the annulment of the sale will also result in
FACTS: On April 27, 1965, Pacifico Chica mortgaged the the invalidity of the mortgage does not have an effect on
land to DBP to secure a loan of P6, 000.00. However, he the validity and efficacy of the principal obligation, for even
defaulted in the payment of the loan, hence DBP caused an obligation that is unsupported by any security of the
the extrajudicial foreclosure of the mortgage. debtor may also be enforced by means of an ordinary
In the auction sale held on September 9, 1970, DBP action. Where a mortgage is not valid, as where it is
acquired the property as the highest bidder and was issued executed by one who is not the owner of the property, or
a certificate of sale on September 17, 1970 by the sheriff. the consideration of the contract is simulated or false, the
Pacifico Chica failed to redeem the property, and DBP principal obligation, which it guarantees, is not thereby
consolidated its ownership over the same. rendered null and void. That obligation matures and
becomes demandable in accordance with the stipulations
On October 14, 1980, respondent spouses offered to buy pertaining to it.
the property for P18, 599.99. DBP made a counter- offer of
P25, 500.00 which was accepted by respondent spouses. Under the foregoing circumstances, what is lost is only the
The parties further agreed that payment was to be made right to foreclose the mortgage as a special remedy for
within six months thereafter for it to be considered as cash satisfying or settling the indebtedness, which is the
payment. principal obligation. In case of nullity, the mortgage deed
remains as evidence or proof of a personal obligation of
On July 20, 1981, the deed of absolute sale, which is now the debtor, and the amount due to the creditor may be
being assailed herein, was executed by DBP in favor of enforced in an ordinary personal action.
respondent spouses. Thereafter, respondent spouses
applied for an industrial tree-planting loan with DBP. The HELD 2: DBP should reimburse the spouses for the
latter required the former to submit a certification from purchase price but not for taxes and expenses for
the Bureau of Forest Development that the land is relocation.
alienable and disposable. However, on October 29, 1981,
said office issued a certificate attesting to the fact that the A contract, which the law denounces as void, is necessarily
said property was classified as timberland, hence not no contract whatever, and the acts of the parties in an

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effort to create one can in no wise bring about a change of b) Unilateral- the obligation is only on the part of the
their legal status. creditor who must free the property from the
encumbrance once the obligation is fulfilled.
As a general rule, if one buys the land of another, to which
the latter is supposed to have a good title, and, in Three kinds of Mortgages:
consequence of facts unknown alike to both parties, he has 1. Voluntary Mortgage
no title at all, equity will cancel the transaction and cause A conventional mortgage agreed between the
the purchase money to be restored to the buyer, putting parties and constituted with the will of the
both parties in status quo. owner of the property of which it is created
2. Legal Mortgage
Thus, on both local and foreign legal principles, the return Such required by the law to be executed in
by DBP to respondent spouses of the purchase price, plus favor of certain persons.
corresponding interest thereon, is ineluctably called for. 3. Equitable Mortgage
However, despite that admission of respondent spouses Article 1602 gives the circumstances. Such
list of damages as evidence, the Court agrees with equitable mortgage lacks the proper formalities
petitioner that the same cannot constitute sufficient legal or other requisites of a mortgage required by
basis for an award of P4, 000.00 and P7, 980.00 as law. Nevertheless, it reveals the intention of
reimbursement for land taxes and expenses for the the parties to burden a real property as a
relocation survey, respectively. Respondent spouses security for a debt (inaudible) its nothing
prepared the list of damages extrajudicially by themselves impossible or contrary to law.
without any supporting receipts as bases thereof or to
substantiate the same. That list, per se, is necessarily self- Valid objects of a Real Estate Mortgage
serving and, on that account, should have been declared
inadmissible in evidence as the factum probans. Article 2124. Only the following property may be the
object of a contract of mortgage:
Notwithstanding that the mortgage is null and void since (1) Immovables;
the mortgagor thereof was not the owner of the (2) Alienable real rights in accordance with the
property. What could be the use of said Real Estate laws, imposed upon immovables.
Mortgage? Does the REM still have relevance? Nevertheless, movables may be the objects of a
SC said that such mortgage would nevertheless be used as chattel mortgage. (1874a)
an evidence of the obligation.
(1) Immovables;
Discussion:
Here, there was no valid sale because the sale In your Law on Property, the following shall be considered
involved a timberland, which is an inalienable property of immovables:
the public domain and not a valid subject matter of a sale.
By the nullity of said sale, ownership would not have Article 415. The following are immovable property:
transferred to Sps. Mangubat here, and therefore, they
could not have executed a valid mortgage in favor of DBP. (1) Land, buildings, roads and constructions of all kinds
So null and void ang sale, null and void din yung mortgage. adhered to the soil;

However, the SC emphasized that the principal (2) Trees, plants, and growing fruits, while they are
obligation of the contract of loan supposedly secured by attached to the land or form an integral part of an
the REM is separate and distinct from the nullity of the immovable;
sale.
(3) Everything attached to an immovable in a fixed manner,
The fact that the sale will also result in the invalidity in such a way that it cannot be separated therefrom
of the mortgage does not have an effect on the validity and without breaking the material or deterioration of the
the efficacy of the principal obligation, for even an object;
obligation that is unsupported by any security of the
debtor may also be enforced by means of an ordinary (4) Statues, reliefs, paintings or other objects for use or
action. Why? Because in the end, nakahiram parin nang ornamentation, placed in buildings or on lands by the
pera yung Sps. Mangubat. So no valid mortgage but the owner of the immovable in such a manner that it reveals
loan is nevertheless valid. The principal obligation, which it the intention to attach them permanently to the
guarantees, is not thereby rendered null and void by the tenements;
nullity of the mortgage.
(5) Machinery, receptacles, instruments or implements
What is lost is only the right to foreclose the mortgage intended by the owner of the tenement for an industry or
as a special remedy for satisfying or settling the works which may be carried on in a building or on a piece
indebtedness, which is the principal obligation. While the of land, and which tend directly to meet the needs of the
mortgage is null and void, it remains as evidence or proof said industry or works;
of a personal obligation of the debtor, and the amount due
to the creditor may be enforced in an ordinary personal (6) Animal houses, pigeon-houses, beehives, fish ponds or
action. breeding places of similar nature, in case their owner has
placed them or preserves them with the intention to have
Additional characteristics of a mortgage aside from being them permanently attached to the land, and forming a
accessory in nature, it is: permanent part of it; the animals in these places are
a) Subsidiary- similar to the other security contracts we included;
have discussed.
(7) Fertilizer actually used on a piece of land;

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(8) Mines, quarries, and slag dumps, while the matter mortgage for the building would still be considered
thereof forms part of the bed, and waters either running or immovable property even if dealt with separately and
stagnant; apart from the land.

(9) Docks and structures which, though floating, are In this case, considering that what was sold by virtue of the
intended by their nature and object to remain at a fixed writ of execution issued by the trial court was merely the
place on a river, lake, or coast; storehouse and bodega constructed on the parcel of land
covered by Transfer Certificate of Title No. T- 40785, which
(10) Contracts for public works, and servitudes and other by themselves are real properties of respondent spouses,
real rights over immovable property. (334a) the same should be regarded as separate and distinct from
the conveyance of the lot on which they stand.
SORIANO vs. SPOUSES GALIT
(G.R. No. 156295, September 23, 2003) (2) YES. No reason has been offered how and why the
questioned entry was subsequently intercalated in the
FACTS: Respondent Ricardo Galit contracted a loan from copy of the certificate of sale subsequently registered with
petitioner Marcelo Soriano amounting to P480,000.00. the Registry of Deeds. Absent any satisfactory explanation
This loan was secured by a REM over a parcel of land as to why said entry was belatedly inserted, the
covered by OCT. No. 569. When respondent defaulted in surreptitiousness of its inclusion coupled with the furtive
his obligation, Soriano filed a complaint for sum of money manner of its intercalation casts serious doubt on the
against him with the RTC of Balanga City. authenticity of petitioners copy of the Certificate of Sale.
Thus, it has been held that while a public document like a
Upon failure of the respondent spouses Galit to file their notarized deed of sale is vested with the presumption of
answer, the trial court declared the spouses in default and regularity, this is not a guarantee of the validity of its
it thereafter rendered judgment in favor of petitioner contents.
Soriano ordering the respondents to pay. The judgment
became final and executory. Deputy Sheriff Renato E. It must be pointed out in this regard that the issuance of a
Robles levied on the following real properties of the Galit Certificate of Sale is an end result of judicial foreclosure
spouses: where statutory requirements are strictly adhered. Among
(1) A parcel of land covered by OCT No. T-569 these requirements is an explicit enumeration and correct
(Homestead Patent No. 14692) description of what properties are to be sold stated in the
(2)STORE/HOUSE CONSTRUCTED on Lot No. notice. An incorrect title number together with a correct
1103; and technical description of the property to be sold and vice
(3)BODEGA constructed on Lot 1103. versa is deemed a substantial and fatal error, which results
in the invalidation of the sale.
On December 23, 1998, petitioner emerged as the highest
and only bidder with a bid price of P483,000.00. Thus, on The certificate of sale is an accurate record of what
February 4, 1999, Deputy Sheriff Robles issued a Certificate properties were actually sold to satisfy the debt. The
of Sale of Execution of Real Property. On April 23, 1999, strictness in the observance of accuracy and correctness in
petitioner caused the registration of the Certificate of Sale the description of the properties renders the enumeration
on Execution of Real Property with the Registry of Deeds. in the certificate exclusive. Thus, subsequently including
properties, which have not been explicitly mentioned
10 months from the time the Certificate of Sale on therein for registration purposes under suspicious
Execution was registered with the Registry of Deeds, circumstances smacks of fraud. The explanation that the
petitioner moved for the issuance of a writ of possession, land on which the properties sold is necessarily included
which was granted by the RTC. This was, however, and, hence, was belatedly typed on the dorsal portion of
subsequently nullified by the Court of Appeals because it the copy of the certificate subsequently registered is at
included a parcel of land (OCT No. T-40785) which was not best a lame excuse unworthy of belief.
among those explicitly enumerated in the Certificate of
Sale issued by the Deputy Sheriff, but on which stand the The appellate court correctly observed that there was a
immovables (the BODEGA and STORE/HOUSE) covered by marked difference in the appearance of the typewritten
the said Certificate. Petitioner contends that the sale of words appearing on the first page of the copy of the
these immovables necessarily encompasses the land on Certificate of Sale registered with the Registry of Deeds
which they stand. and those appearing at the dorsal portion thereof.

ISSUES: Underscoring the irregularity of the intercalation is the


(1) WON the land on which the buildings levied upon in clearly devious attempt to let such an insertion pass
execution is necessarily included. unnoticed by typing the same at the back of the first page
(2) WON the cert. of sale on execution of real property and instead of on the second page which was merely half-filled
the writ of possession are null and void despite the fact and could accommodate the entry with room to spare.
that they enjoy the presumption of regularity being public
documents. Discussion:
Here, the SC emphasized that in the foreclosure of a
HELD: mortgage and the subsequent sale thereof, it must include
(1) NO. Art. 415 of the Civil Code enumerates land and an explicit enumeration and correct description of what
buildings separately. This can only mean that a building is, properties are sold. This must be stated in the notice of
by itself, considered immovable. Thus, it has been held foreclosure.
that while it is true that a mortgage of land necessarily
includes, in the absence of stipulation of the In fact, an incorrect title number together with a
improvements thereon, buildings, still a building by itself correct technical description of the property to be sold and
may be mortgaged apart from the land on which it has vice versa is deemed a substantial and fatal error, which
been built. Such mortgage would be still a real estate results in the invalidation of the sale. Here, subsequently

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including properties, which have not been explicitly
mentioned therein for registration purposes under On March 9, 1981, he wrote a letter to respondent PNB
suspicious circumstances smacks of fraud. requesting for the restructuring of his past due accounts
into a five-year term loan and for an additional LC/TR line
Also in this case, the land itself is separate from the of P2, 000,000.00. He reasoned that because of the
building and vice versa. What was subject in the mortgage shutdown of his end-user companies and the huge amount
here is the storehouse and the bodega, and hindi kasama spent for the expansion of his business, petitioner failed to
yung land. SC emphasized that a mortgage of land pay to respondent bank his LC/TR accounts as they became
necessarily includes, in the absence of stipulation of the due and demandable. PNB Mandaluyong replied on behalf
improvements thereon, buildings. But still a building by of the respondent bank and required petitioner to submit
itself, like in this case a bodega and a storehouse, may be documents: Audited Financial Statements for 1979 and
mortgaged apart from the land on which it has been built. 1980; Projected cash flow (cash in - cash out) for 5 years
Such mortgage would be still a real estate mortgage for the detailed yearly; and the List of additional machinery and
building would still be considered an immovable property equipment and proof of ownership thereof.
even if dealt with separately and apart from the land.
On September 25, 1981, petitioner sent another letter
What was sold by virtue of the writ of execution was addressed to PNB Vice-President Jose Salvador, regarding
merely the storehouse and bodega constructed on the his request for restructuring of his loans. He offered
parcel of land which by themselves are real properties of respondent PNB the following proposals:
respondent spouses, the same should be regarded as 1) The disposal his house and lot and a vacant lot
separate and distinct from the conveyance of the lot on in order to pay the overdue trust receipts;
which they stand. 2) Capitalization and conversion of the balance
into a 5-year term loan payable semi-annually or on annual
(2) Alienable real rights in accordance with the laws, installments;
imposed upon immovables. 3) a new P2,000,000.00 LC/TR line in order to
Rights over the immovables; right to use such enable Atlantic Exchange Philippines to operate at full
property such as usufruct. capacity.
It is not the property itself but your right over the
property. Fernando Maramag, PNB Executive Vice- President,
A real right over a real property can be a subject disapproved the proposed release of the mortgaged
of a mortgage properties and reduced the proposed new LC/TR line
P1,000,000.00. Petitioner claimed that he was forced to
Also, under Art. 2124 what does the word ONLY mean? agree to these changes and that the respondent PNB
These 2 objects mentioned are the only valid approved his proposal. He further claimed that he and his
subject matters of a mortgage. wife were asked to sign 2 blank promissory note forms.
Meaning the list under said article is EXCLUSIVE. And that they were made to believe that the blank
promissory notes were to be filled out by respondent PNB
However, if what you have are movable properties, then to conform with the 5-year restructuring plan allegedly
what you have there is a chattel mortgage. agreed upon.

In relation to Art. 2085, one of the essential requisites to Petitioner testified that respondent PNB allegedly
the contract of mortgage is that the mortgagor must be contravened their verbal agreement by affixing dates on
the absolute owner of the thing mortgaged, so: the 2 subject promissory notes to make them mature in 2
years instead of 5 years as supposedly agreed upon.
General Rule: Future property cannot be a valid subject
matter of a mortgage. Because if it is not yet in existence, Upon their failure to make good of the said loans PNB
how could one possibly own the same. extra-judicially foreclosed the real and chattel mortgages,
and the mortgaged properties were sold at public auction
MENDOZA, also doing business under the name and style to respondent PNB, as highest bidder, for a total of P3,
of ATLANTIC EXCHANGE PHILIPPINES, vs. CA, PNB. Et.al 798,719.50.
(G.R. No. 116710, June 25, 2001)
ISSUE: WON the foreclosure sale was proper.
FACTS: Danilo D. Mendoza is engaged in the domestic and HELD: YES
international trading of raw materials and chemicals. He The court found out that PNB did not
operates under the business name Atlantic Exchange categorically agree to petitioners proposal to extend the
Philippines (Atlantic). credit line to five years.

Sometime in 1978 he was granted by respondent PNB a On the substantive issue of mortgage:
500,000.00 credit line and a 1,000,000.00 Letter of Petitioner did not present any proof as to when he
Credit/Trust Receipt (LC/TR) line. acquired the subject movables and hence it is not to be
believe that the same were "after acquired" chattels not
As security for the credit accommodations and covered by the chattel and real estate mortgages.
for those that may thereinafter be granted, petitioner
mortgaged to respondent PNB 3 parcels of land with In asserting its rights over the subject movables,
improvements; his house and lot and several pieces of respondent PNB relies on a common provision in the 2
machinery and equipment in his Pasig cocochemical plant. subject Promissory Notes which is clear, however that
respondent bank is authorized, in case of default, to sell
Petitioner executed in favor of respondent PNB 3 "things of value" belonging to the mortgagor "which may
promissory notes covering the P500, 000.00 credit line. be on its hands for deposit or otherwise belonging to
Petitioner made use of his LC/TR line to purchase raw me/us and for this purpose."
materials from foreign importers.

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Besides, the petitioner executed not only a chattel
mortgage but also a real estate mortgage to secure his loan Also, it is an established rule that a mortgage
obligations to respondent bank. constituted on an immovable includes not only the land
but also the buildings, machinery and accessories installed
A stipulation in the mortgage, extending its scope and at the time the mortgage was constituted as well as the
effect to after-acquired property is valid and binding where buildings, machinery and accessories belonging to the
the after-acquired property is in renewal of, or in mortgagor, installed after the constitution thereof. So even
substitution for, goods on hand when the mortgage was if you have machinery, which you can describe as a
executed, or is purchased with the proceeds of the sale of movable property, still, go back to what are considered as
such goods. immovable properties under the law. If bolted yung
movable, yung intention dyan, magiging immovable na sya
More importantly, respondent bank makes a valid by destination.
argument for the retention of the subject movables. PNB
asserts that those movables were in fact "immovables by Pledge Real Estate Mortgage
destination" under Art. 415 (5) of the Civil Code. It is an Involves personal Involves real properties
established rule that a mortgage constituted on an property
immovable includes not only the land but also the Requires delivery for its Does not require delivery
buildings, machinery and accessories installed at the time perfection for perfection
the mortgage was constituted as well as the buildings, Pledgee has possession of It is not required that the
machinery and accessories belonging to the mortgagor, the thing pledge mortgagee will possess
installed after the constitution thereof. the real property
Extrajudicial foreclosure Judicial or extrajudicial
What is the intention of the parties here? foreclosure
Those properties will secure the mortgage and authorizing Pledgee has the right to Such right is not available
the bank to sell the same in case there is failure to pay. receive the fruits and to the mortgagee in the
apply the same to the REM unless otherwise
What are after-acquired properties? obligation stipulated by the parties
Those properties acquired after the execution of the
mortgage. General Rule: The mortgagor retains possession of the
property mortgaged as security for the payment of the
Can this be a valid subject of a mortgage? sum borrowed from the mortgagee.
Yes, where the after-acquired property is in renewal of, or The debtor merely subjects the property to a lien but
in substitution for, goods on hand when the mortgage was ownership is not parted with.
executed, or is purchased with the proceeds of the sale of
such goods. XPN: The parties may stipulate that pending the
performance or payment of the obligation, the mortgagee
Is this definition of after-acquired properties applicable in will have possession of the mortgaged property.
this case? So pwede by stipulation but not required for validity
Yes these properties according to the SC are immovables. ha.
Under Article 415, if these machineries are intended by the The reason for this is that it is not an essential
owner of the tenement for an industry or works which may requisite of the contract of mortgage that the
be carried on in a building or on a piece of land, and which property remains in possession of the mortgagor.
tend directly to meet the needs of the said industry or The mortgagor may deliver the property to the
works, then it is considered as an immovable by mortgagee without altering the nature of the
destination. contract.

Discussion: Article 2085. xxx


Here, the bank was authorized to sell "things of value" Third persons who are not parties to the principal
belonging to the mortgagor "which may be on its hands for obligation may secure the latter by pledging or mortgaging
deposit or otherwise belonging to me/us and for this their own property. (1857)
purpose." The petitioner here executed not only a chattel
mortgage but also a real estate mortgage to secure his loan
So, a third person can act as a mortgagor. Sometimes,
obligations to respondent bank.
what will happen is that, this owner will execute an SPA in
favor of the principal debtor to which the principal debtor
The SC emphasized that after-acquired properties or
is the one who will sign the REM. Pwede ba yan? Actually,
properties acquired after the execution of a mortgage may
YES.
still be valid subject matter of a mortgage where the after-
acquired property is in renewal of, or in substitution for,
What do you have to make sure, especially if you are a
goods on hand when the mortgage was executed, or is
creditor, it must be clearly stipulated therein that he signs
purchased with the proceeds of the sale of such goods.
the same for and in behalf of the owner mortgagor.
With that definition, this more pertains to movable or
Because even if the said debtor is actually authorized by
personal properties.
the owner-mortgagor, if the REM signed by the debtor not
indicating that he is only acting in behalf of said third
For example: Inventory sa tindahan. Those goods that are
person who is the owner-mortgagor or as an agent, who is
part of the inventory could be a subject of a chattel
considered as the mortgagor is still the principal debtor not
mortgage. What will happen? Since part sya sa tindahan,
the true owner of the property.
mabenta sya then i-replenish naman ng inventory.
Notwithstanding that you have used stocks in the
EFFECT: The mortgagor is not the true owner of the
inventory, the fact that you have stipulated that the said
property mortgaged, so there is no valid mortgage to speak
inventory of the store would constitute or form part of the
of.
mortgage, it is still a valid subject matter thereof.

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SPOUSES VIOLA vs. EQUITABLE "Penalty fee" is entirely different from "bank charges." The
(2008) phrase "bank charges" is normally understood to refer to
compensation for services. A "penalty fee" is likened to a
FACTS: March 31, 1997 Spouses Viola of Leo-Mers compensation for damages in case of breach of the
Commercial, Inc. obtained a loan through a credit line obligation. Being penal in nature, such fee must be specific
facility in the maximum amount of P 4,700,000.00 from and fixed by the contracting parties, unlike in the present
Equitable PCI Bank, Inc. The Agreement stipulated that the case which slaps a 3% penalty fee per month of the
loan would bear interest at the "prevailing PCI Bank outstanding amount of the obligation.
lending rate" per annum on the principal obligation and a
"penalty fee of three percent (3%) per month on the Moreover, the "penalty fee" does not belong to the species
outstanding amount." of obligation enumerated in the mortgage contract,
namely: "loans, credit and other banking facilities obtained
To secure the payment of the loan, an REM over their 2 x xx from the Mortgagee, . . . including the interest and
parcels of land in favor of PCI Bank was executed. Spouses bank charges, . . . the costs of collecting the same and of
Viola made partial payments which totaled P 3,669,210.67; taking possession of and keeping the mortgaged
PCI Bank contends however, that Spouses Viola made no properties, and all other expenses to which the Mortgagee
further payments since Nov. 24, 2000 despite demand they may be put in connection with or as an incident to this
failed to pay their outstanding obligation which as of mortgage . . ."
September 30, 2002.
In Philippine Bank of Communications v. Court of Appeals,
Thus, PCI Bank extrajudicially foreclosed the mortgage which raised a similar issue, this Court held:
before the Regional Trial Court (RTC) and that the
mortgaged properties were sold at a public auction. The court held, indeed, a mortgage must sufficiently
describe the debt sought to be secured, which description
Respondent contended that the absence of stipulation in must not be such as to mislead or deceive, and an
the mortgage contract securing the payment of 15% obligation is not secured by a mortgage unless it comes
interest per annum on the principal loan, as well as the 3% fairly within the terms of the mortgage.
penalty fee per month on the outstanding amount, is
immaterial since the mortgage contract is "a mere Under the rule of ejusdem generis, where a description of
accessory contract which must take its bearings from the things of a particular class or kind is "accompanied by
principal Credit Line Agreement." words of a generic character, the generic words will usually
be limited to things of a kindred nature with those
ISSUE: WON the mortgage contract also secured the particularly enumerated . . . " A penalty charge does not
penalty fee per month on the outstanding amount as belong to the species of obligations enumerated in the
stipulated in the Credit Line Agreement. mortgage, hence, the said contract cannot be understood
to secure the penalty.
HELD: NO. A mortgage must "sufficiently describe the debt
sought to be secured, which description must not be such Regarding Respondents contention that absence of
as to mislead or deceive, and an obligation is not secured stipulation for the penalty fee in the mortgage contract is
by a mortgage unless it comes fairly within the terms of of no consequence as the deed of mortgage is merely an
the mortgage. accessory contract that "must take its bearings from the
principal Credit Line Agreement,".
The Real Estate Mortgage contract states its coverage,
thus: That for and in consideration of certain loans, credit Such absence is significant as it creates an ambiguity
and other banking facilities obtained x xx from the between the two contracts, which ambiguity must be
Mortgagee, the principal amount of which is PESOS FOUR resolved in favor of petitioners and against respondent
MILLION SEVEN HUNDERED THOUSAND ONLY who drafted the contracts. Again, as stressed by the Court
(P4,700,000.00) Philippine Currency, and for the purpose of in Philippine Bank of Communications:
securing the payment thereof, including the interest and
bank charges accruing thereon, xxx A mortgage and a note secured by it are deemed parts of
one transaction and are construed together, thus, an
The immediately quoted provision of the mortgage ambiguity is created when the notes provide for the
contract does not specifically mention that, aside from the payment of a penalty but the mortgage contract does not.
principal loan obligation, it also secures the payment of "a Construing the ambiguity against the petitioner, it follows
penalty fee of three percent (3%) per month of the that no penalty was intended to be covered by the
outstanding amount to be computed from the day mortgage. Plainly, the petitioner can be as specific as it
deficiency is incurred up to the date of full payment wants to be, yet it simply did not specify nor even allude to,
thereon, that the penalty in the promissory notes would be secured
by the mortgage. This can then only be interpreted to
Since an action to foreclose "must be limited to the mean that the petitioner had no design of including the
amount mentioned in the mortgage" and the penalty fee penalty in the amount secured.
of 3% per month of the outstanding obligation is not
mentioned in the mortgage, it must be excluded from the Therefore, the "penalty fee" per month of the outstanding
computation of the amount secured by the mortgage. obligation is excluded in the computation of the amount
secured by the Real Estate Mortgage executed by
Regarding CA decision that the phrase "including the petitioners in respondents favor.
interest and bank charges" in the mortgage contract
"refers to the penalty charges stipulated in the Credit Line Discussion:
Agreement" is unavailing. The SC here emphasized that a mortgage must
sufficiently describe the debt sought to be secured, which
description must not be such as to mislead or deceive, and

6
an obligation is not secured by a mortgage unless it comes
fairly within the terms of the mortgage. G.R. No. L-38745 August 6, 1975
TAN vs. VALDEHUEZA
Clearly, there was a distinction between what was
provided under the Credit Line Agreement and under the Facts:
REM. While it is true that the Spouses here agreed to pay
the obligation, collection expenses, and the penalty of 3% The Valdehuezas have executed two documents of DEED
per month, it does not automatically mean that they have OF PACTO DE RETRO SALE (Deed of Sale with right to
the same coverage under the REM. Because the REM here repurchase) in favor of the LUCIA TAN of two portions of a
only states that the sale was for the purpose of securing parcel of land.
the payment of the principal obligation including the
interest and bank charges. So it was not mentioned in the Despite the execution of the Deed of Sale with right to
REM that it would cover the 3% per month penalty. repurchase, the Valdehuezas remained in the possession of
the land; that land taxes to the said land were paid by the
An action to foreclose must be limited to the amount same said defendants. As such, the contracts which
mentioned in the mortgage and the penalty fee of 3% per purported to be pacto de retro transactions are presumed
month of the outstanding obligation is not mentioned in to be equitable mortgages. At issue is the equitable
the mortgage, it must be excluded from the computation mortgage that was not registered.
of the amount secured by the mortgage.
The controversy arose when a suit was filed by Tan to
Also, in this case, the SC differentiated bank charges foreclose the unregistered mortgage.
and penalty fee since bank charges were included in the
REM. The Valdehuezas argued that no suit lies to foreclose an
unregistered (equitable) mortgage.
Bank Charges Penalty fee
Compensation for Compensation for Issue:
services. damages in case of break; Whether or not an unregistered mortgage may be
foreclosed
It is penal in nature;
Whether or not an unregistered mortgage is binding
Such fee must be specific between the parties
and fixed by the
contracting parties. Ruling:

In this case, there such stipulation for penalty fee in An order for foreclosure cannot be refused on the ground
the REM is absent. So the effect is that the penalty fee that the mortgage had not been registered. The
should be excluded from the computation of the amount unregistered mortgage is still binding between the parties
secured by the Real Estate Mortgage executed by provided no innocent third parties are involved.
petitioners in respondents favor.
An order for foreclosure cannot be refused on the ground
that the mortgage had not been registered. The registered
February 21 Pabalan or unregistered mortgage is binding between the parties.

Art. 2124. Only the following property may be the object We have to compare this case to the earlier case of
of a contract of mortgage: Hechanova vs. Adil where the Court held that no valid
(1) Immovables; mortgage is constituted where the alleged deed of
(2) Alienable real rights in accordance with the mortgage is a mere private document and, therefore, is not
laws, imposed upon immovables. registered.

If a mortgage is in a private document, it could not be


Nevertheless, movables may be the object of a chattel registered. The creditor may nevertheless recover the loan,
mortgage. (1874a) although the mortgage evidenced in the loan was not
registered being a private document. However the
Art. 2125. In addition to the requisites stated in Article creditor has the right to compel the debtor to execute a
2085, it is indispensable, in order that a mortgage may be contract of mortgage in a public document.
validly constituted, that the document in which it
appears be recorded in the Registry of Property. If the If the mortgage is in a public instrument but the mortgage
instrument is not recorded, the mortgage is is not registered, the mortgage is nevertheless binding on
nevertheless binding between the parties. the parties as provided in Article 2125, and the registration
will only operate as a notice on the mortgage to third
The persons in whose favor the law establishes a mortgage persons but it neither adds to the validity nor does it
have no other right than to demand the execution and the convert a valid mortgage into a valid one.
recording of the document in which the mortgage
is formalized. (1875a) In relation to mortgages, we also have to consider the
Doctrine of a Mortgagee in Good Faith.
You have to distinguish mortgage from a contract of
pledge. In a contract of pledge, registration is not needed Doctrine of mortgagee in good faith:
to bind third parties.
A mortgagee has a right to rely in good faith on the
certificate of title of the mortgagor of the property given as
CASE: security and in the absence of any sign that might arouse

7
suspicion, has no obligation to undertake further State Investment, on the other hand averred that unless
investigation. Hence, even if the mortgagor is not the Solid pays the redemption price, it has a right to hold on to
rightful owner of, or does not have a valid title to, the the foreclosed properties. However, HLURB ordered State
mortgaged property, the mortgagee in good faith is to execute a deed of conveyance in favor of complainants
nonetheless entitled to protection. and deliver the title to the land.

EXCEPTIONS: Issue:
(This was discussed by Atty. Sarona in the later part of the
lecture. I just placed it here for a better flow.) Who has a better right over the property?
(Spouse Oreta who were the buyers of the subject
1.Where the purchaser or mortgagee has knowledge of a property but the sale was unregistered OR State
defect or lack of title in the vendor Investment holding a registered mortgage against Solid
Homes)
2.The mortgagee does not directly deal with the registered
owner of real property. or
Ruling:
3.The mortgagee was aware of sufficient facts to induce a
reasonably prudent man to inquire into the status of a Spouses Oreta have the better right over the subject
property in litigation. property.

4. When the purchaser or mortgagee is a bank or financing State Investments registered mortgage right over the
institution, the general rule that a purchaser or mortgagee property is inferior to that of respondents' unregistered
of land is not required to look further than what appears right. The unrecorded sale is preferred for the reason that
on the face of the title does not apply. A mortgagee-bank is if the original owner (Solid) had parted with the ownership
expected to exercise greater care and prudence before of the thing sold, he would no longer have the free
entering into a mortgage contract even those involving disposal of it and would not be able to mortgage it.
registered lands in its dealings than private individuals as Registration of the mortgage is not important since it is
their business is impressed with public interest. understood to be without prejudice to the rights of third
persons.

CASE: As a general rule, where there is nothing in the title to


indicate any cloud or vice in the ownership thereof, the
G.R. No. 115548. March 5, 1996 purchaser is not required to explore further.
STATE INVESTMENT HOUSE INC vs. CA
An exception to this is when the mortgagee or purchaser
Facts: has knowledge of a defect or lack of title on the part of the
vendor or that he was aware of sufficient facts to induce a
A contract to sell was executed between Spouses Oreta, reasonably prudent man to inquire further.
and Solid Homes. The sale involved a parcel of land (511
sq. m.). In this case, State Investment knows full well that Solid
Holmes is engaged in selling subdivision lots. Therefore, as
Upon signing of the contract, Spouses Oreta made founded on jurisprudence, it should have taken necessary
payment with the agreement that the balance shall be paid precautions to ascertain any flaw.
in installments. The sale of the property was however not
registered. Moreover, the uniform practice of financing institutions is
to investigate, examine, and assess real property offered as
Meanwhile. Solid Homes executed several mortgages in security. State Investment is therefore not a mortgagee in
favor of State Investment over its subdivided parcels of good faith.
land, including the subject of land of the mentioned
contract to sell with the Spouses Oreta. The mortgage STATEs registered mortgage right over the property is
executed by Solid Homes was registered under Torrens. inferior to that of respondents-spouses unregistered right.
The unrecorded sale between respondents-spouses and
Such mortgage was foreclosed upon failure of Solid to SOLID is preferred for the reason that if the original owner
comply with its obligations. Thereafter, Solid through a (SOLID, in this case) had parted with his ownership of the
MOA, negotiated for the deferment of consolidation of thing sold then he no longer had ownership and free
ownership over the foreclosed properties. It further disposal of that thing so as to be able to mortgage it again.[
committed itself to redeem the properties.
Registration of the mortgage is of no moment since it is
Spouses Oreta after a few years filed a complaint before understood to be without prejudice to the better right of
the HLURB against Solid and State for failure on the part of third parties.
Solid to execute the necessary absolute deed of sale as
well as to deliver title to property subject of the contract to As a general rule, where there is nothing in the certificate
sell despite full payment. of title to indicate any cloud or vice in the ownership of the
property, or any encumbrance thereon, the purchaser is
Solid alleged that its obligations under the contract have not required to explore further than what the Torrens Title
become so difficult for performance. upon its face indicates in quest for any hidden defect or
inchoate right that may subsequently defeat his right
Solid, in effect, asked to be partially released from its thereto.
obligations by delivering another parcel of land in
substitution to the subject of the sale. This rule, however, admits of an exception as where the
purchaser or mortgagee, has knowledge of a defect or lack

8
of title in his vendor, or that he was aware of sufficient land, the cancellation of TCTs 63262, 63466, and 63528,
facts to induce a reasonably prudent man to inquire into and the reinstatement of TCT 32815 in her name.
the status of the title of the property in litigation.
Issue:
In this case, petitioner was well aware that it was dealing
with SOLID, a business entity engaged in the business of Whether or not petitioner PNB is a mortgagee in good faith
selling subdivision lots.
Ruling:
State Investments constructive knowledge of the defect in
the title of the subject property, or lack of such knowledge As discussed by Atty. Sarona:
due to its negligence, takes the place of registration of the No. As a rule, the Court would not expect a mortgagee to
rights of respondents-spouses. Respondent court thus conduct an exhaustive investigation of the history of the
correctly ruled that petitioner was not a purchaser or mortgagors title before he extends a loan..
mortgagee in good faith; hence petitioner cannot solely
rely on what merely appears on the face of the Torrens But petitioner PNB is not an ordinary mortgagee; it is a
Title. bank.

Banks are expected to be more cautious than ordinary


CASE: individuals in dealing with lands, even registered ones,
since the business of banks is imbued with public interest.
G.R. No. 180945 February 12, 2010
PHILIPPINE NATIONAL BANK vs. CORPUZ It is of judicial notice that the standard practice for banks
before approving a loan is to send a staff to the property
* FACTS are from full text, in toto offered as collateral and verify the genuineness of the title
to determine the real owner or owners.
Facts:
In this case is that in the course of its verification,
On October 4, 1974 respondent Mercedes Corpuz petitioner PNB was informed of the previous TCTs covering
delivered her owners duplicate copy of Transfer Certificate the subject property.
of Title (TCT) 32815 to Dagupan City Rural Bank as security
against any liability she might incur as its cashier. She later It is evident from the faces of those titles that the
left her job and went to the United States. ownership of the land changed from Corpuz to Bondoc,
from Bondoc to the Palaganases, and from the Palaganases
On October 24, 1994 the rural bank where she worked to the Songcuans in less than three months and mortgaged
cancelled its lien on Corpuzs title, she having incurred no to PNB within four months of the last transfer.
liability to her employer. Without Corpuzs knowledge and
consent, however, Natividad Alano, the rural banks The above information in turn should have driven the PNB
manager, turned over Corpuzs title to Julita Camacho and to look at the deeds of sale involved. It would have then
Amparo Callejo. discovered that the property was sold for ridiculously low
prices: Yet the PNB gave the property an appraised value
Conniving with someone from the assessors office, Alano, of P781,760.00.
Camacho, and Callejo prepared a falsified deed of sale,
making it appear that on February 23, 1995 Corpuz sold Anyone who deliberately ignores a significant fact that
her land to one Mary Bondoc for P50,000.00. They caused would create suspicion in an otherwise reasonable person
the registration of the deed of sale, resulting in the the cannot be considered as an innocent mortgagee for value.
issuance of a TCT in Bondocs name. About a month later or
on March 27, 1995 the trio executed another fictitious
deed of sale with Mary Bondoc selling the property to the CASE:
spouses Rufo and Teresa Palaganas for only P15,000.00.
This sale resulted in the issuance of TCT 63466 in favor of G.R. No. 196118 July 30, 2014
the Palaganases. LEONARDO C. CASTILLO vs. SECURITY BANK
CORPORATION
Nine days later or on April 5, 1995 the Palaganases
executed a deed of sale in favor of spouses Virgilio and Facts:
Elena Songcuan for P50,000.00, resulting in the issuance of
TCT 63528. Leonardo and Leon Castillo are siblings. Leon and his wife
own a poultry business. The spouses later on obtained a
Finally, four months later or on August 10, 1995 the loan from Security Bank. As a security of such loan, they
Songcuans took out a loan of P1.1 million from petitioner mortgaged 11 parcels of land co-owned by the Castillo
Philippine National Bank (PNB) and, to secure payment, siblings, including Leonardo. Eventually, the spouses failed
they executed a real estate mortgage on their title. Before in their obligation to Security Bank, thus the mortgages
granting the loan, the PNB had the title verified and the involving the 11 parcels of land were foreclosed. The
property inspected. spouses however were able to redeem the properties
except the portion which was supposed to be the share of
Leonardo.
On November 20, 1995 respondent Corpuz filed, through
an attorney-in-fact, a complaint before the Dagupan Leonardo then filed an action to annul the real estate
Regional Trial Court (RTC) against Mary Bondoc, the mortgage. Leonardo asserts that his signature in the SPA
Palaganases, the Songcuans, and petitioner PNB, asking for authorizing his brother, Leon, to mortgage his property was
the annulment of the layers of deeds of sale covering the forged/falsified. He claims that he was in America at the
time of its execution. As proof of the forgery, he focuses on

9
his alleged CTC used for the notarization of the SPA on May collaterals. A 200k check was released, and Canlas received
5, 1993 and points out that it appears to have been issued it as payment of the parcels of land he sold to Maosca.
on January 11, 1993 when, in fact, he only obtained it on
May 17, 1993. The loan was not paid so the mortgage was foreclosed.
Canlas wrote to ASB, saying that the execution of the
Issue: mortgage was without their authority, so steps should be
taken to annul the mortgage. Canlas also wrote the sheriff
Whether or not Security Bank is a mortgagee in good faith? to cancel the auction sale; however, the sale pushed
through.
Ruling: Sps. Canlas instituted a case for annulment of deed
of real estate mortgage [REM], with prayer for the issuance
Yes. of a writ of preliminary injunction. RTC issued an order
restraining the sheriff from issuing the Certificate of
Allegations of forgery, like all other allegations, must be Sheriffs Sale, and it annulled the REM. CA reversed RTC,
proved by clear, positive, and convincing evidence by the holding that the REM was valid, that Sps. Canlas are not
party alleging it. It should not be presumed, but must be entitled to relief because of their negligence. CA said ASB
established by comparing the alleged forged signature with exercised due diligence in granting loan application, and
the genuine signatures.11 Here, Leonardo simply relied on that it did not act with bad faith.
his self-serving declarations and refused to present further
corroborative evidence, saying that the falsified document Issue:
itself is the best evidence.12 He did not even bother
comparing the alleged forged signature on the SPA with Whether or not the bank is a mortgagee in good faith
samples of his real and actual signature. What he
consistently utilized as lone support for his allegation was Whether the Doctrine of Last Clear Chance is applicable
the supposed discrepancy on the date of issuance of his
CTC as reflected on the subject SPAs notarial Ruling:
acknowledgment.
As stated by Atty Sarona from the case in toto:
Thus, failing to prove such forgery, the presumption of
regularity applies to the SPA. The efforts exerted by the bank to verify the identity of the
couple posing as Osmundo Canlas and Angelina Canlas fell
Atty. Sarona reads a part of the ruling in toto: short of the responsibility of the bank to observe more
than the diligence of a good father of a family.
True, banks and other financing institutions, in entering
into mortgage contracts, are expected to exercise due The negligence of respondent bank was magnified by the
diligence. The ascertainment of the status or condition of a fact that the previous deed of mortgage (which was used
property offered to it as security for a loan must be a as the basis for checking the genuineness of the signatures
standard and indispensable part of its operations. In this of the supposed Canlas spouses) did not bear the tax
case, however, no evidence was presented to show that account number of the spouses, as well as the Community
SBC was remiss in the exercise of the standard care and Tax Certificate of Angelina Canlas.
prudence required of it or that it was negligent in
accepting the mortgage. SBC could not likewise be faulted But such fact notwithstanding, the bank did not require
for relying on the presumption of regularity of the the impostors to submit additional proof of their true
notarized SPA when it entered into the subject mortgage identity.
agreement.
Under the doctrine of last clear chance, which is applicable
CASE: here, the respondent bank must suffer the resulting loss. In
essence, the doctrine of last clear chance is to the effect
G.R. No. 112160 February 28, 2000 that where both parties are negligent but the negligent act
OSMUNDO S. CANLAS and ANGELINA CANLAS, vs. COURT of one is appreciably later in point of time than that of the
OF APPEALS and ASIAN SECURITY BANK (ASB) other, or where it is impossible to determine whose fault
or negligence brought about the occurrence of the
Facts: incident, the one who had the last clear opportunity to
avoid the impending harm but failed to do so, is
Canlas and Maosca decided to venture in business. To chargeable with the consequences arising therefrom.
raise capital, Canlas executed an SPA authorizing Maosca Stated differently, the rule is that the antecedent
to mortgage 2 parcels of land. Eventually, Canlas agreed to negligence of a person does not preclude recovery of
sell these to Maosca for 850k. Canlas delivered the TCTs, damages caused by the supervening negligence of the
and Maosca issued postdated checks (40k, 460k), but the latter, who had the last fair chance to prevent the
check for 460k was not sufficiently funded. impending harm by the exercise of due diligence.
Maosca was able to mortgage the parcels of land
to an Atty. Magno with the help of impostors who
misrepresented themselves as Sps. Canlas [fake couple]. Here the court emphasized that the degree of diligence
Maosca was granted a 500k loan by Asian Savings Bank required of banks is more than that of a good father of a
[ASB] with the involvement of the fake couple. [TOWARDS family; in keeping with their responsibility to exercise the
THE END OF THE CASE, it was said that Canlas was with necessary care and prudence in dealing even on a
Maosca when the latter submitted documents for the registered or titled property. The business of a bank is
loan application. Maosca showed Canlas several TCTs, affected with public interest, holding in trust the money of
which were collaterals for the loan, and Canlas was the depositors, which bank deposits the bank should guard
confident that his parcels of land were not involved. against loss due to negligence or bad faith, by reason of
However, Maosca used Sps. Canlas parcels of land as which the bank would be denied the protective mantle of

10
the land registration law, accorded only to purchasers or Again, take note of the Doctrine of Mortgagee in Good
mortgagees for value and in good faith. Faith. This does not apply when the title is in the name of
the lawful or rightful owner and the mortgagor is a person
In the case under consideration, from the evidence on different, pretending to be the owner of the property.
hand it can be gleaned unerringly that respondent bank
did not observe the requisite diligence in ascertaining or EXCEPTIONS to the Doctrine of Mortgagee in Good Faith:
verifying the real identity of the couple who introduced
themselves as the spouses Osmundo Canlas and Angelina 1.Where the purchaser or mortgagee has knowledge of a
Canlas. It is worthy to note that not even a single defect or lack of title in the vendor
identification card was exhibited by the said impostors to
show their true identity; and yet, the bank acted on their 2.The mortgagee does not directly deal with the registered
representations simply on the basis of the residence owner of real property. or
certificates bearing signatures which tended to match the
signatures affixed on a previous deed of mortgage to a 3.The mortgagee was aware of sufficient facts to induce a
certain Atty. Magno, covering the same parcels of land in reasonably prudent man to inquire into the status of a
question. property in litigation.

4. When the purchaser or mortgagee is a bank or financing


As stated by Atty Sarona from the case in toto:
institution, the general rule that a purchaser or mortgagee
of land is not required to look further than what appears
The efforts exerted by the bank to verify the identity of the
on the face of the title does not apply. A mortgagee-bank is
couple posing as Osmundo Canlas and Angelina Canlas fell
expected to exercise greater care and prudence before
short of the responsibility of the bank to observe more
entering into a mortgage contract even those involving
than the diligence of a good father of a family.
registered lands in its dealings than private individuals as
their business is impressed with public interest.
The negligence of respondent bank was magnified by the
fact that the previous deed of mortgage (which was used
With regard to REGISTRATION OF MORTGAGE:
as the basis for checking the genuineness of the signatures
of the supposed Canlas spouses) did not bear the tax
Registration of mortgage does not to its validity.
account number of the spouses, as well as the Community
Proceedings for registration do not determine validity of
Tax Certificate of Angelina Canlas.
mortgage or its effect.
But such fact notwithstanding, the bank did not require
the impostors to submit additional proof of their true Once a mortgage has been signed in due form, the
identity. mortgagee is entitled to its registration as a matter of right.
So we have the case of

As applied in this case, in the DOCTRINE OF LAST CLEAR G.R. No. L-13313 April 28, 1960
CHANCE
AGRICULTURAL CREDIT COOPERATIVE ASSOCIATION OF
The respondent bank must suffer the resulting loss. In HINIGARAN vs. ESTANISLAO YULO YUSAY
essence, the doctrine of last clear chance is to the effect
that where both parties are negligent but the negligent act Facts:
of one is appreciably later in point of time than that of the Rafaela Yulo executed in favor of Agricultural a mortgage.
other, or where it is impossible to determine whose fault or A motion was presented to the court by Agricultural
negligence brought about the occurrence of the incident, demanding the surrender of the owner's duplicate
the one who had the last clear opportunity to avoid the certificate of title that he may annotate said mortgage at
impending harm but failed to do so, is chargeable with the the back of the certificate. And register it. Estanislao Yusay,
consequences arising therefrom. a part owner of the lot, opposed the petition on the
ground that he is owner of a part of the property in
Stated differently, the rule is that the antecedent question; that the granting of the motion or the
negligence of a person does not preclude recovery of registration of the mortgage would operate to his
damages caused by the supervening negligence of the prejudice, as he has not participated in the mortgage cited
latter, who had the last fair chance to prevent the in the motion.
impending harm by the exercise of due diligence.
Issue: Whether or not he registration and annotation of
A contract of mortgage must be constituted only by the the mortgage passes on its invalidity or effect
absolute owner on the property mortgaged; a mortgage,
constituted by an impostor is void. Ruling: as discussed by Atty. Sarona
No. The proceeding to register the mortgage does not
Considering that it was established indubitably that the purport to determine the supposed invalidity of the
contract of mortgage sued upon was entered into and mortgage or its effect. Registration is a mere ministerial act
signed by impostors who misrepresented themselves as by which a deed, contract or instrument is sought to be
the spouses Osmundo Canlas and Angelina Canlas, the inscribed in the records of the Office of the Register of
Court is of the ineluctible conclusion and finding that Deeds and annotated at the back of the certificate of title
subject contract of mortgage is a complete nullity. covering the land subject of the deed, contract or
instrument.
Atty. Sarona reviews:
The registration of a lease or mortgage, or the entry of a
memorial of a lease or mortgage on the register, is not a
declaration by the state that such an instrument is a valid

11
and subsisting interest in land; it is merely a declaration A: Within 10 years during the execution of the contract and
that the record of the title appears to be burdened with during the existence of the marriage.
the lease or mortgage described, according to the priority
set forth in the certificate. Q: So in this instance, did the wife give her consent to the
mortgage?
The mere fact that a lease or mortgage was registered A: No maam.
does not stop any party to it from setting up that it now
has no force or effect.
Again noh, take into consideration that mortgage is
February 23 Andrea regarded as an encumbrance. In this case the Civil Code
was applied because the encumbrance took place before
Recap: the effectivity of the Family Code. The Civil Code provides
Doctrine of a mortgagee in good faith. Take note of that the husband cannot alienate or encumber any
the general rule and the exceptions therein. Among which, property without the consent express or implied of the
remember the diligence observed by banking institutions, wife. Should the husband do so, the contract is voidable.
more that of a good father of a family (inaudible). Now
with regard to registration, again, we also have to Again noh, make a distinction between the civil code
emphasize that it is a mere ministerial act, since again noh, and the family code. In this case, do also take note that the
the register of deeds has no discretion to refuse wife or the spouse who did not give consent can go to
registration on such mortgage. Moreover, registration is court within:
not a requirement for the validity of the mortgage. Even if
its registered, it can still be subsequently questioned if all 1.) 10 years within the execution of the contract; and
the essential requisites for a valid mortgage are not 2.) During the existence of the marriage.
present.
However, in this instance, the Supreme Court ruled that
Now as discussed in persons and sales. If you recall the documents were acknowledged by the notary public
your person under the family code, whether its absolute and therefore there is a prima facie evidence of a valid
community or conjugal partnership of gains, the execution thereof and cannot be disproved by the mere
requirement for any disposition or encumbrance requires denial of the wife. Moreover, the petitioners also admitted
the written consent of the other spouse or the authority of in their memorandum that Ross forged the wifes
the court otherwise the sale will be considered void. signature, to which Ross cannot use that as a defense for
Notice there the phrase noh, any disposition or the nullity of the contract because remember the spouses
encumbrance. So disposition, mahulog yung sale. What were who questioned and filed for the annulment of the
about encumbrance? It will include mortgages. So in other mortgage.
words, if what was involved is a conjugal property or
covered by absolute community, there must be written Now, what about if the husband already died? What is
consent of the other spouse, otherwise the said the right of the wife with regard to the property? Can she
encumbrance will be void. So we have the case of Ross vs. mortgage the same? Under the laws on succession, she
PNB. can validly mortgage, alienate, or encumber her
proportionate share therein. So remember this is a
ROSS vs. PNB conjugal property. At the time of the death, the surviving
spouse is entitled to her share. To which she can subject
Q: Oh since what you have here is an encumbrance, what her undivided share or interest in the property, encumber
is required here under the law? it and have it mortgaged and subsequently have it
A: The consent of the wife. registered to bind 3rd persons. Now do take note in these
instances, without the consent of the wife or absence of
Q: What kind of consent? Is it required to be in writing? the consent of the other spouse, the status that is affected
What was applicable here? is the accessory contract. What is considered void is only
A: At that time, the Civil code was applied. the accessory contract that is the mortgage and not the
loan. The principal obligation/loan is still valid and
Q: Why? standing. What is lost is the right of the creditor to
A: The mortgage took place on 1983. foreclose the mortgage. And in fact, the mortgage
executed by the other spouse can be used as an evidence
Q: What is required under the civil code for a valid of the existence of the obligation.
mortgage?
A: The husband may alienate the conjugal property with Article 2126. The mortgage directly and immediately
the consent of the wife subjects the property upon which it is imposed,
whoever the possessor may be, to the fulfillment of the
Q: Were not talking about alienation here. Alienation obligation for whose security it was constituted. (1876)
lang ba?
A: And encumbrance.
Okay. So again noh, a registered mortgage creates a
Q: What is the effect if the wife will not give her consent real right. It is inseparable from the property and therefore
to such encumbrance? being a real right it is enforceable against the whole world.
A: It will only be voidable. Meaning it is valid until The mortgage itself attaches to the property and therefore
annulled. the mortgage follows the property wherever it goes
notwithstanding any change in the ownership. The
personality of the owner is disregarded and whoever
Q: What are the requisites for it to be annulled..without
acquires or subsequently acquires the property carries
the consent of the wife? When can you question it?
with him the obligation to observe the mortgage of course
provided the mortgage is registered. Subsequent

12
purchasers must then respect the registered mortgage
even in the absence of registration but has personal Facts: Excelsa applied for a credit advance with
knowledge of such mortgage. So there is no prohibition for Producers which was supported by a letter of credit
the mortgagor to sell his property to another person issued by Kwang Ju Bank. Producers later approved the
because in a mortgage again walang transfer of ownership. credit line. Prior to this, Excelsahad already obtained a
Now, if he sells it to another person and prior to the sale, loan with Produces secured by a real estate mortgage
the property was mortgaged which was duly registered. If over the properties of Excelsa. Thereafter, Excelsa
the mortgagor fails to pay his obligation, the creditor presented to Producers drafts drawn under the letter or
mortgagee will be entitled to foreclose the property and credit from Kwang Ju. Producer purchased the drafts
the subsequent purchaser cannot question the said and export documents. Producers demanded for the
foreclosure. He cannot say hindi na yan sa payment for the equivalent of the export documents
mortgagor/debtor ang may ari akin na ito. Again, as long they have already purchased. Excelsa was not able to
as the mortgage was registered, the subsequent purchaser pay so Producers extrajudicially foreclosed the
must respect the mortgage to which the mortgagee is mortgaged real properties. Excelsa argues that the REM
entitled to foreclose the same notwithstanding that the over their properties was merely to secure the existing
property was already sold to another person. debts and not their future debts they have
accumulated.
However, of course the subsequent buyer cannot be
personally liable for any subsequent (inaudible) Kung baga Issue: WON the real estate mortgage also served as
yung sa kanya lang, to the extent lang nung property na security for the drafts from Kwang Ju Bank, or future
nasa kanya. Hindi na siya pwede habulin for any deficiency debts.
of the principal debtor as to the obligation unless of course Ruling: Yes, there was a dragnet clause.
there is a novation wherein the subsequent purchaser, will The court held that dragnet clause operates
now be the one who will pay the principal obligation. as convenience to the parties so that there would be no
need to execute an additional security. As to the validity
Article 2127. The mortgage extends to the natural of the foreclosure, it was held to be valid. The
accessions, to the improvements, growing fruits, and requirement of publication was complied with. Xxx
the rents or income not yet received when the
obligation becomes due, and to the amount of the PRUDENTIAL vs. ALVIAR
indemnity granted or owing to the proprietor from the
insurers of the property mortgaged, or in virtue of Facts: Spouses Alviar are the registered owners of a
expropriation for public use, with the declarations, piece of land and they executed a REM in favor of
amplifications and limitations established by law, Prudential to secure the payment of a loan worth
whether the estate remains in the possession of the Php250,000. For this, they executed a promissory note
mortgagor, or it passes into the hands of a third person. secured by a REM containing a dragnet clause.
(1877)
Alviar executed another promissory note signifying that
Ok so this is another provision showing that a it was secured by a hold-out agreement. Another one
mortgage is inseparable from the property. This provision was executed by the spouses with a clean face-out deed
tells us what the extent of this mortgage is. The mortgage of assignment. The spouses paid the first loan for
extends to all its accessions, improvements, income, as Php250,000 covering the first security which was
well as proceeds of insurance if the property is secured by the REM. The bank then moved for the
subsequently destroyed. It also extends to the just extrajudicial foreclosure of the property since according
compensation received if it is subsequently expropriated. to them, the spouses had a total obligation of Php1M
How about the fruits? If the fruits were harvested before for their obligations covered under the 3 promissory
the obligation is due and demandable it will not be part of notes executed by the spouses.
the mortgage that will be foreclosed. But if it is still
attached to the property when the obligation becomes due Spouses Alviar filed for a writ of preliminary injunction
then part siya sa mortgage. To exclude the fruits, claiming that they have already paid the principal loan
accessions, etc among others there must be an express of Php250,000 and thus the foreclosure was invalid. The
stipulation in the mortgage contract. Otherwise the bank maintains that because of the dragnet clause in
following are deemed included. Accrued and paid interest the REM, it expressly covers not only the Php250,000
etc. belonging to the mortgaged debtor installed. Also but also the 2 other promissory notes.
includes all objects permanently attached even if placed
after the execution of the mortgage. Now in this instance, Issue: WON the dragnet clause applies even in the
included in the foreclosure unless otherwise excluded. subsequent advancement for which other securities
were intended
Now we also have to distinguish this becayse 2127
tells us what is the extent of the mortgage. Ano yung Ruling: The dragnet clause will not be applied using the
pwede iforlcose. So I think before we mentioned after reliance on security test. The parties having conformed
acquired properties, improvements subsequently attached to the blanket mortgage clause or dragnet clause, it is
to the property. So again no we apply 2127. What are the reasonable to conclude that they also agreed to an
obligations covered by the mortgage. As a general rule noh implied understanding that subsequent loans need not
an action to foreclose the mortgage must be limited to the be secured by other securities, as the subsequent loans
amount mentioned therein. However, as an exception, the will be secured by the first mortgage.
amount as a consideration in a contract of mortgage do no
limit the amount for which the mortgage may stand as long In other words, the sufficiency of the first security is a
as there is an intention to secure the fulfillment of future corollary component of the dragnet clause. But of
loans, advancements, and other indebtedness. course, there is no prohibition, as in the mortgage
contract in issue, against contractually requiring other
PRODUCERS BANK vs. EXCEALSA securities for the subsequent loans. Thus, when the

13
mortgagor takes another loan for which another tickets obtained by Galang.
security was given it could not be inferred that such
loan was made in reliance solely on the original security Issue: WON there was a dragnet clause in the
with the dragnet clause, but rather, on the new security REM
given. Ruling: No. It is clear in the mortgage
executed that it only covered the Php450,000 amount
of the tickets obtained by Galang. It was found in the
records that this was already paid by Galang, as
Q: Did the Supreme Court say that the dragnet clause will supported also by testimonies of the PCSO officers. This
not apply to subsequent securities? What is the means that the mortgaged property no longer covers as
exception? Isnt it that the Supreme Court discussed 2 security for future debts that may incurred by Galang.
schools of thought? Which one did the Supreme Court
hold as controlling?
A: The Supreme Court relied on the Security Test.
Q: What provision was considered by the court in stating
Q: What is this test? that there was no dragnet clause but covered a specific
A: According to this test maam, the parties conform to a obligation?
certain dragnet clause which implies an understanding that A: That part where Upon the full payment of the tickets,
subsequent loans need not be secured by other securities. they will be discharged from their obligation The use of
The subsequent loans would be secured by the first the terms outstanding unpaid militate against PCSOs
mortgage covered by the dragnet clause. However, there claim that future ticket purchases are also secured. The
was no prohibition for them to secure the subsequent ambiguity and the phrase after each draw and other
loans with other securities. provisions which mention with particularity the amount
450,000 php outstanding balance secured by the subject
Q: So does that mean that it will not be covered by the mortgage should be construed against PCSO. Anent the
dragnet clause because it was covered by separate issue regarding the cancellation that was argued by PCSO,
securities? the court ruled also that there was no need for the
A: The Supreme Court did not say that it will not be cancellation of the said mortgage because at that time it
applicable to subsequent loans secured by different was registered, there was no mortgage to speak of. It was
properties. The SC further held that the party must first already terminated when they paid the 450,000 php.
exhaust the corresponding securities and if such security is
insufficient, then that is the time that dragnet clause will Q: Alright. So with that who has a better right over the
be used as a defense to foreclose the property. property?
A: New Dagupan has a better right.
Okay. So take note of the 2 schools of thought that
were discussed here by the Supreme Court. Again, what So first we take into consideration. Did the mortgage
are the facts here? There was initially a real estate contract here executed in favor of PCSO cover future
mortgage containing a blanket mortgage clause. The obligations? The Supreme Court said theres no dragnet
Supreme Court upheld its validity and existence. clause here. The use of the terms outstanding and unpaid
Subsequent to that mortgage contract, there subsequent again militate against the claim that future purchases are
contracts and securities entered into like hold out likewise construed. And since this was also a contract of
agreements, different deeds of assignment, chattel adhesion, it was really construed against PCSO. So with
mortgage. The Supreme Court here discussed, that such that, since there was already full payment of the obligation
dragnet clause may still apply to subsequent loans even if in that real estate mortgage contract, it did not cover
they are secured by different properties. However, as subsequent obligations of Peralta in favor of PCSO.
mentioned, the Supreme Court emphasized na before
habulin yung mortgage contract under the dragnet clause, Now with regard to registration, again noh, do take note
there must first be exhaustion the properties used as that PCSO also did not mortgage the said property until
collateral specifically for this separate obligations. Kung thereafter. It was only on May 20 1992 that PCSO
kulang, and there is a deficiency thats the time that you registered its mortgage and the at that time New Dagupan
can foreclose the mortgage containing the dragnet clause. had already purchased said property under a conditional
So with that take note of the security test which was more sale. So here, New Dagupan was considered as a purchaser
preferred by the Supreme Court. You have a valid mortgage in good faith and therefore had a better right that PCSO.
clause, and then subsequent loans are entered into with
separate collaterals or security. So again noh take note of the purpose of the dragnet
clause also known as blanket mortgage clause provides
PCSO vs NEW DAGUPAN continuing dealings avoiding the expense and
inconvenience of executing new security of each new
Facts: Purita Peralta is a registered owner of a transaction. It is specifically phrased to subsume all debts
parcel of land. To secure payment for lottery tickets, she from the past and future. This is actually similar to
mortgaged the land. There was a stipulation that it continuing guaranty or continuing suretyship. For its
cannot be sold during the lifetime of the mortgage. interpretation, it is strictly construed and carefully
However, Peralta sold her property to New Dagupan. scrutinized more so if what you have is a contract of
When PCSO found out about this, it caused the adhesion prepared by the mortgagee.
annotation of the mortgaged lien on the TCT of the
property. It also applied for extrajudicial foreclosure ASIA TRUST V. CARMELO TUBLE
over the land and obtained a certification that the land
belonged to it. New Dagupan filed for the annulment of FACTS: Carmelo Tube, who served as the vice
TCT in the name of PCSO and contended that it was a president of Asiatrust Development Bank,
buyer in good faith. PCSO argues that it had the availedhimself of the car incentive plan and loan
authority to foreclose the property in lieu of the unpaid privileges offered by the bank. The arrangement was

14
made to appear as a lease agreement requiringonly the
payment of monthly rentals. Accordingly, the lease So here, first there was a loan. With the mortgage
would be terminated in case of employees resignation containing the dragnet clause and the dragnet clause is
or retirement prior to full payment of the price. valid. Subsequent to that other loans were entered into
Meanwhile, as for theloans, he obtained 3 separate such as the construction loan. Now with the first loan, the
loans. debtor in that instance failed to pay his obligation, the
mortgage covering the first loan was foreclosed. And when
The first loan involved a real estate mortgage the property was thereafter sold, nag bayad ng redemption
loan evidenced by a promissory note 0142. The second price, notwithstanding that by virtue of the forclosure the
loan was a consumption loan (P/N 0143) and the third REM was extinguished because that foreclosure had the
loan a salary loan. When he resigned, he was given the purpose of extinguishing the principal obligation. So
option to either return the vehicle without any further accessory follows the principal. With the extinguishment of
obligation or retain the unit and pay its remaining book the mortgage, wala na rin yung dragnet clause which could
value. His obligations, aside from the purchase or return have covered the consumption loan. With the the
of the vehicle, are the Php100,000.00 as consumption consumption loan or the same property cannot again
loan, Php421,800.00 as real estate loan and Php16,250 answer for the obligation in a subsequent consumption
as salary loan. loan.

On the other hand, the petitioner owed Tuble In foreclosure, the mortgaged property is subjected to
hispro-rata share in the DIP, which was to be issued the proceedings for the satisfaction of the obligation. The
after the bank had given the resigned employees mortgage was extinguished with the foreclosure and sale
clearance, and Php25,797.35 representing his final of the mortgaged property and what remains is the right of
salary and corresponding 13thmonth pay. redemption provided by law. Since the mortgaged contract
is already extinguished, the bank can no longer rely on its
Tuble claimed that since he and the bank provisions even if it included the dragnet clause. The bank
were debtors and creditors of each other, theoffsetting cannot refer to the % on interest which was allegedly
of loans could legally take place. However, the bank covered by the terms of the contract. Neither can the bank
sent him a demand letter obliging him to pay his debts use the consummated contract on the rest of the
and to return the vehicle. As for the real estate loan, a obligations which are not included when there was a
petition for extra- judicial foreclosure was filed but was foreclosure proceeding. It cannot be allowed to use the
redeemed by Tuble for Php1,318,401.91. After payment same security to collect from the other loans for to do so
of such amount, Tuble questioned how the foreclosure would be akin to foreclosure of an already foreclosed
basis of Php421,800.00 ballooned to Php1,318,401.91 property. Rather than relying on an expired contract, the
in a matter of 1 year. bank should have collected on the excluded loans by
instituting the proper actions by action to recover sums of
ISSUE/S: money. Petitioner should have ran after Tuble separately
1. W/N Asiatrust should recover the other instead of the property used to secure the debts. The bank
obligations of Tuble to the real estate mortgage. here cannot alter that right by imposing additional charges
2. W/N Asiatrust is justified in reposing the and the power to decide whether or not to foreclose is
18% annual interest of the redemption price by way of also the prerogative of the mortgagee. But one a decision
the dragnet clause. is made, which is to have the property mortgaged
foreclosed, the act shall be governed by mortgage laws.
HELD: In Spouses Romero v. Court of Appeals,
SC held that the mortgage indebtedness was The dragnet clause does not justify the imposition of
extinguished with the foreclosure and sale of the the 80% interest but in this instance there was no specific
mortgaged property, and that what remained was the mention of interest to be added in case of either default or
right of redemption granted by law. redemption. Also take note again the Supreme Court
discussed the reliance on the security test.
Consequently, since the Real Estate Mortgage
Contract is already extinguished, petitioner can no ARTICLE 2128. The mortgage credit may be alienated
longer rely on it or invoke its provisions, including the or assigned to a third person, in whole or in part, with
dragnet clause stipulated therein. It follows that the the formalities required by law. (1878)
bank cannot refer to the 18% annual interest charged in
Promissory Note No. 0143, an obligation allegedly
covered by the terms of the Contract. So the subject in this article is the mortgaged credit. The
right of the mortgagee itself over the property may be
Neither can the bank use the consummated alienated or assigned to a 3rd person in whole or in part.
contract to collect on the rest of the obligations, which
were not included when it earlier instituted the If the creditor mortgagee assigns his right to a 3 rd person
foreclosure proceedings. It cannot be allowed to use what is the effect? It transfers his right to a 3 rd person. If
the same security to collect on the other loans. To do so the debtor fails to pay when the obligation it due, the
would be akin to foreclosing an already foreclosed assignee can foreclose the property subject of the
property. mortgage. Do remember here that alienation or transfer of
the mortgaged credit is valid even if it is not registered.

Now how about the mortgaged property itself? Can the


Q: So with that we have a valid mortgage with dragnet mortgagor alienate the same? Can he sell it? Yes. We have
clause? seen that in the cases because again in a mortgage there is
A: Yes. Issue is won they may still use the same security in no transfer of ownership, in fact as we will see later on, a
order to cover the other loans. stipulation saying that upon non-payment the property will
be automatically forfeited in favor of the mortgagee is

15
Void. Moreover, as we will see later, a stipulation which So you take note of this case because this is very
prohibits a mortgagor from transferring property to common with regard to financial institutions like those
another person would also be considered void. persons who borrow from pag-ibig or sss then they
execute a REM in favor of said institutions however later
VEGA vs. SSS on it turns out di pala nila kaya bayaran. So what they do is
that they enter into a contract of sale with the assumption
FACTS: Magdalena Reyes owned a piece of titled land. of mortgage in favor of a 3rd person, which is what
On August 17, 1979, she got a housing loan from SSS for happened in this case. Now, notice also here that there
which she mortgaged her land. Late 1979, Reyes asked was a provision in the mortgage contract that consent of
the Sps. Vega to assume the loan and buy her house sss (mortgagee) was required for the sale thereof. This
and lot since she was to emigrate. An employee at SSS cannot be interpreted as absolutely.
said, however, that SSS did not approve of members
transferring their mortgaged homes.
February 28 Kadz
But the Sps Vega (Vegas) could make a private
arrangement with Reyes provided that they pay the REVIEW: We already discussed Article 2130.
monthly amortizations on time. Vegas agreed for Reyes
to execute in their favor a deed of assignment of real Article 2130. A stipulation forbidding the owner from
property with assumption of mortgage and paid Reyes alienating the immovable mortgaged shall be void. (n)
P20,000 after she undertook to update the
amortizations before leaving the country. The Vegas Any stipulation forbidding the owner from alienating the
took possession of the house in January 1981. Reyes did mortgaged property will be void. We have emphasized this
not execute the deed of assignment. in the case of SSS vs. Vega, a stipulation requiring the
consent will circumvent what is required in Art. 2130 to
She left the country and left her sister (Julieta Ofilada) a which, in effect, nevertheless the said sale will be valid as
special power of attorney to convey ownership of held in the case of Vega vs SSS.
property. Sometime between 1983 and 1984, Ofilada
executed the deed of assignment in favor of the Vegas, Now also, we have pointed out a second mortgagor is
kept the original and gave the Vegas two copies, one to entitled to purchase the property or pay the first
be given to the Home Development Mortgage Fund and mortgagee for the release of the first mortgage. Usually,
kept the other. A storm in 1984 resulted in flood and the second mortgagee, if he is really interested with the
destroyed their personal copy. property will pay the first mortgagee so that he
would now be the preferred mortgagor.
ISSUE/S: Whether Reyes validly sold her SSS mortgaged
property to the Vegas given a provision in the mortgage Remember the second mortgage is still valid although it
agreement that she could not do so without the written does not usually happen that often because the mortgagee
consent of SSS. will hesitate to have a property that has already been
previously mortgaged. Pero pa rin siya and being a
HELD: Yes. The Vegas were able to present adequate mortgagee, he will be considered as one having an interest
proof of Reyes sale of the property to them. The Vegas to the obligation to which he can force the creditor to
proved the loss of the deed of assignment in their favor accept the payment.
and what it contained, they offered strong
corroboration of the fact of Reyes sale of the property Now Art. 2130, a stipulation forbidding the owner from the
to them. They took possession of the house and lot selling the property shall be void. Any agreement with
after they bought it. regard to the right to first refusal is valid. If the mortgagor
would want to sell the property, and then there is an
They also paid for the amortizations to the SSS. And agreement with the mortgagee that if he decides to do so
when SSS wanted to foreclose the property, the Vegas he may first offer it to the creditor-mortgagee, then such is
sent a managers check for the balance of the loan. considered as a valid stipulation and that is not contrary to
Article 1237 of the Civil Code cannot apply in this case Art. 2130.
since the debtor (Reyes) consented to the transfer of
ownership of the mortgaged property to the Vegas. Now, we have also emphasized last time that the
registration of the mortgage is required to bind third
Although Paragraph 4 of the mortgage agreement which persons. Such registration serves as a constructive notice
states that Reyes must secure the consent of SSS before to the whole world and as a General Rule he is not obliged
selling the property, is valid and binding in the sense to look beyond the title. Of course we have to take note of
that SSS cannot be compelled to recognize the sale the exceptions. If the same is not registered, the mortgage
before the loan is completely paid, it does not can nevertheless become valid between the parties but
absolutely forbid her, as owner, from selling the not as against third person.
property while the loan remained unpaid. Such
stipulation is against public policy, being an undue It is also possible that mortgages are not registered but
impediment or interference on the transmission of third persons would still be bound by such mortgage if they
property. have actual knowledge. Now we have the case of Pineda.

Article 2129 of the Civil Code gives SSS the option of


Pineda vs CA, GR 114172, August 25, 2003
collecting from the third person in possession of the
Reporter: Suico
mortgaged property.
Facts (from cdasia): On 4 January 1982, the Spouses
Virgilio and Adorita Benitez mortgaged a house and
lotcovered by TCT 8361 in favor of Juanita P. Pineda and
Leila P. Sayoc. Spouses Benitez delivered TCT 8361 to

16
Pineda, but did not register the said mortgage with the Q: What was the allegation regarding the second owners
Register of Deeds. Later, with the consent of Pineda, duplicate title, it was in the name of?
Spouses Benitez sold the houseto Olivia G. Mojica. Mojica, A: In the name of Spouses Pinedas, maam.
in turn, filed a petition for the issuance of a second
owner's duplicate of TCT 8361 by alleging that it was lost. Q: How did Mojica acquire the said title?
Thus, the trial court granted the petition. A: On February 9 mam, when the lot was sold to him,
Mojica alleged that the owners duplicate of title was
On 12 December 1983, spouses Benitez sold the delivered to him. However, in acquiring the second owners
lotcovered by TCT 8361 to Mojica, and TCT 13138 in duplicate, Mojica alleged that it was lost.
replacement of TCT 8361 was issued in the name of
Mojica. On 22 February 1985, Mojica mortgaged the said Q: Where is the title?
property to Teresita A. Gonzales. The latter caused the A: It was with Pineda and Sayoc, Maam.
annotation of said mortgage on TCT 13138. On 8 May
1985, Pineda and Sayoc filed a complaint for the Q: What is the effect of the void title in relation to the
cancellation of the second owner's duplicate of TCT 8361. sale in favor of Mojica?
On 18 August 1986, they caused an annotation of notice of A: The SC held that the nullity of the said title does not
lis pendens on the original of TCT 8361 with the Register of affect the validity of the sale in favor of Mojica since there
Deeds. Thereafter, the trial court rendered judgment was an execution of a deed of sale which serves as an
declaring the second owner's duplicate of TCT 8361 as null actual or physical delivery in favor of Mojica so there is a
and void. transfer of ownership.

Meanwhile, Mojica defaulted in paying her obligation to Q: Now since the title was void and the mortgage of
Gonzales, hence, the latter extrajudicially foreclosed the Gonzales was registered in the said void title, did it not
mortgage, purchased the said property at public auction, affect the mortgage in favor or Gonzales?
and for failure of Mojica to redeem, consolidated its title. A: The SC held maam that the annotation of the mortgage
Consequently, the Register of Deeds cancelled TCT 13138 on the void title does not mean that the mortgage was also
and issued TCT 16084 in the name of Gonzales. On appeal, void but to be considered as a valid mortgage the
the Court of Appeals affirmed the trial court's decision. annotation of the mortgage was considered an annotation
However, the writ of execution was returned unsatisfied in good faith.
since the Register of Deeds had already cancelled TCT 8361
and issued TCT 16084 in the name of Gonzales. Later, the Atty. Jazzie: So here, take note, Benitez mortgaged the
trial court issued an order declaring void the original and property in favor of Pineda and Sayoc and title was
the owner's duplicate of TCT 16084 in the name of delivered to Pineda. Thereafter, Benitez sold the property
Gonzales. When Gonzales raised this issue to the Court of to Mojica. The sale is valid because the mortgage was
Appeals, the appellate court declared the said order of the merely an encumbrance and it does not divest the
trial court as null and void. Hence, this petition. mortgagor to sell the property. Now do take note that the
mortgage in favor of Pineda and Sayoc was not registered.
So when Mojica applied for the issuance of a new title in
Issue1: WON Pineda can still validly sell the subject
favor of the alleged lost one, but actually hindi naman siya
property in favor of Mojica considering that it was
mortgaged. YES nawala, the new title that was issued was actually void
because the court had no jurisdiction to issue the said title
because the title was not actually lost.
Held1: SC said that Spouses Pineda still have the right to
sell the property since a mortgage is simply an
Notwithstanding such fact, SC emphasized that the sale is
encumbrance on the property. It is still the spouses Pineda
nevertheless valid because you also have to consider that
who are the owners of the property
what is void is only the TCT and not the title over the
property. Title in favor of Mojica was validly transferred by
Issue2: Can Gonzales be considered a purchaser in good virtue of the execution of the deed of sale as Certificate of
faith? YES. Title is not equivalent to title itself. So there was a valid
transfer of ownership to Mojica to which since Mojica is
Held2: SC said that Gonzales is a purchaser in good faith the owner, she can now validly mortgage the property in
because Gonzales does not have any knowledge of the favor of Gonzales.
mortgage and also that the said mortgage was not
registered. Since it was not registered, it cannot bind 3 rd The prior mortgage in favor of Pineda and Sayoc did not
persons as registration is required to bind third persons. prevent the spouses Benitez to sell the property to Mojica
because a mortgage is merely an encumbrance and thus
Q: But isnt it that the title that was issued by Mojica was will not extinguish the title of a debtor who does not lose
declared void by the court? his principal attribute as the owner. Pointing out Art. 2130,
A: Yes, maam. the law even considers void a stipulation prohibiting the
owner from selling the mortgaged immovable. However,
Q: Why was it declared void? the nullity of the second owners title did not affect the
A: Because in acquiring the title, Mojica presented the validity of the sale between Benitez and Mojica. The rule is
second owners duplicate copy which that a mortgage annotated in a void title is valid.

Q: Again again now, why is it considered void? Why is the So the mortgage is valid if it was registered in good faith.
title in favor of Mojica wherein the same title was Gonzales registered the mortgage in good faith as he had
presented to Gonzales for the Mortgage considered void? no knowledge of the previous mortgage in favor of Pineda
A: It is void maam because in acquiring the same TCT, and Sayoc considering that the same was not registered. To
Mojica presented the deed of sale and the second owners bind third parties to an unregistered encumbrance, the law
duplicate copy which Mojica acquired through fraud. requires valid notice. In this instance, no registration, no
actual notice.

17
You may have notice that there are only few Civil Code
When Gonzales purchased the property in the action sale, provisions with respect to REM. So, with regard to
Pineda already annotated the lis pendens. However, the extrajudicial foreclosure, we have a special law, Act. 3135.
mortgage was validly registered prior to the annotation of We also have the General Banking Law of 2000. We could
the lis pendens. Pineda and Sayoc were considered also apply the Land Registration Law and with regard to
negligent in not registering their mortgage. Gonzales on judicial foreclosure, we have Rule 68 of the Rules of Court.
the other diligently exercised her right to foreclose the
property. The unregistered mortgage of Pineda and Sayoc Now what happens if the debtor fails to pay his obligation?
was extinguished upon foreclosure of Gonzales mortgage.
The creditor of mortgagee has two rights:
Even assuming assuming for the sake of argument that the 1. He can foreclose the property; or
latter mortgage was unregistered. Between two 2. He can file a collection for sum of money.
unregistered mortgagees both being in good faith, the first Now these remedies are alternative in nature. Of
to foreclose mortgage prevails over the other. Of course course the foreclosure may be extrajudicial or judicial
while Pineda and Sayoc cannot foreclose the property depending on the circumstances of each case. But once he
anymore, the mortgage is deemed extinguished, the chooses foreclosure, he cannot file an action for collection
principal obligation still exists to which said Pineda and of sum of money because again these are alternative in
Sayoc can still go after Benitez for the unpaid principal nature. Otherwise if may collection and foreclosure,
obligation. The TCT issued in the name of Gonzales is applying your civil procedure, you can file a motion to
considered as valid. dismiss for splitting the cause of action.

So again registration is required to bind third persons. With So with that, we have foreclosure. Foreclosure is a remedy
regard to the sale, it is valid despite the mortgage even if available to the mortgagee by which he subjects the
the mortgage was registered and the sale was not mortgaged property to the satisfaction of the obligation to
registered. But if the sale is registered, the subsequent secure which the mortgage has given (sic). Mortgage may
purchaser must the sale. And what if the effect if the be foreclosed only when the debt remains unpaid at the
property is subsequently foreclosed? If it is registered, the time it is due. Do take note that foreclosure proceedings
property will be foreclosed and the mortgagee will have a have in their favor the presumption of regularity and the
better right over the subsequent purchaser but of course burden of evidence to rebut the same is within the party
the purchaser cannot be held be held liable for any further that seeks to challenge the said proceedings.
deficiency.
We have two (2) kinds of foreclosure:
With regard to dragnet clause which we discussed last time 1. Judicial Foreclosure - is a foreclosure filed before
and with the dragnet clause, we have a mortgage which the court and is governed by Rule 68 of Special
can cover future obligations which must be clearly Civil Actions.
stipulated in the Real Estate Mortgage (REM). Do not 2. Extrajudicial Foreclosure - we will take more of
confuse dragnet clause from after acquired properties. extrajudicial foreclosure under Act 3135. This
Dragnet clause, and scope niyan, future obligations with foreclosure is done without the aid of the court.
the same property mortgaged, but it can cover past and Meaning walang hearing at judge, this is through
future obligations. With regard to after acquired the clerk of court or the sheriff.
properties, ang scope ng mortgage, ano ang pwedeng I-
foreclose ng mortgage? However, let us take into consideration judicial foreclosure
so that we can be able to distinguish it from extrajudicial
General Rule: After acquired properties cannot be foreclosure. Under judicial foreclosure we have Rule 68.
mortgaged because the requirement is that at the time of What is important and what I want you to take note in
the mortgage, you must be the absolute owner thereof. judicial foreclosure is what we have there which is what we
You cannot execute a REM that any property that I own call Equity of Redemption. We have have the case of
from this day forward will be and can be used as a security Spouses Rosales.
for my obligation to you. Hindi pwede. You must specify
the property. Spouses Rosales vs Spouses Suba, GR 137792, August 12,
Exception: However, if what you have as your mortgage are 2003
inventories, that could be a valid subject matter for Reporter: Campaner
mortgage wherein the inventory will be replenished from
time to time. But these are chattel mortgage kasi personal Facts: There was this final decision by the RTC of Manila
property man siya. So at the time that you executed the which required the Spouses Rosales to deposit to the Clerk
mortgage, siyempre iba man yung inventories mo. When of Court payment to Macaspac. From Cdasia Synopsis -
the time it was already due and demandable, nabenta na After the petitioners-judgment debtors failed to pay the
yung stocks at the time that the mortgage was executed judgment debt, the trial court issued a writ of execution
but nevertheless, if is provided that the inventory will ordering the sale of the property subject of litigation for
cover whatever you have in your store, that would be the satisfaction of the judgment. The property was sold at
considered valid under after acquired properties. public auction and the Spouses Suba were the highest
bidders. The trial court issued an order confirming the sale
And we have also discussed last time, what is the extent. of the property to the Spouses Suba and subsequently
di ba fruits, improvements among others. Lets have granted respondent's prayer for a writ of
Article 2131. possession.

Article 2131. The form, extent and consequences of a The Spouses Rosales filed a motion for reconsideration of
mortgage, both as to its constitution, modification and the trial court's orders, but were denied. The CA dismissed
extinguishment, and as to other matters not included in their petition for certiorari for lack of merit, holding that
this Chapter, shall be governed by the provisions of the there is no right of redemption in case of judicial
Mortgage Law and of the Land Registration Law. foreclosure of mortgage. Hence, this petition for review.

18
Issue: WON Spouses Rosales can still redeem the property General Banking law wherein the mortgagee is a bank,
even through this was a judicial foreclosure. NO. then the mortgagor has a right of redemption - the one
year redemption period.
Held: In denying the petition, thereby affirming the CA
decision on appeal, the Supreme Court ruled that since the So in this case of Sps. Rosales, it was a judicial foreclosure
parties' transaction is an equitable mortgage and the trial after the court upheld that the mortgage was an equitable
court ordered its foreclosure, execution of judgment is one. When the foreclosure is judicially effected, no
governed by Sections 2 and 3, Rule 68 of the 1997 Rules of equivalent right of redemption exists. No such right is
Civil Procedure, as amended. There is no right of recognized in a judicial foreclosure except only when the
redemption in case of a judicial foreclosure of a mortgage. mortgagee is the PNB or a bank or a banking institution.

The only exemption is when the mortgagee is the Phil. The right of redemption is not recognized in a judicial
National Bank or a bank or a banking institution. Since the foreclosure. The right of the defendant mortgagor to
mortgagee in this case is not one of those mentioned, no extinguish the mortgage and retain ownership is by paying
right of redemption exists in favor of petitioners. They the secured debt within the 90-day period after the
merely have an equity of redemption which is their right, judgment becomes final or even after the foreclosure sale
as mortgagor, to extinguish the mortgage and retain but prior to its confirmation. This is the mortgagors equity
ownership of the property by paying the secured debt not right of redemption which may be exercised by him
prior to the confirmation of the foreclosure sale. even beyond the 90-day period from date of the service of
Petitioners, in this case, failed to exercise this equity of order even after foreclosure sale provided again it is before
redemption. the order of confirmation.

In this instance they only had an equity of redemption. It is


Q: What is the difference between right of redemption
simply their right to extinguish the mortgage and retain
and equity of redemption? What happens in right of
ownership by paying the secured obligation prior to the
redemption?
confirmation of the sale. However, instead of exercising
A: In right of redemption maam, there is already a
this equity of redemption, petitioners chose to delay the
foreclosure which has been held. However in equity of
proceedings by filing several manifestations (?) in the
redemption, the original owners can only take their
court. So take note of the General Banking Law which
property again if they exercise this right before the
provides for the exception - 1 year redemption period as
confirmation of the foreclosure sale
long as the mortgagee is a banking institution.
Q: Only before the confirmation? What is the period
So essentially, what happens in a judicial foreclosure? You
provided under Rule 68?
file an action/petition with the court. Court ito ha which
A: 90 days maam after the judgment becomes final.
has jurisdiction over the location of the subject matter.
Court can order the payment within the 90-120 days. In
Q: How is it different from right of redemption?
the meantime, tatakbo na ang equity of redemption. If no
A: In right of redemption, the original owners may redeem
payment, the court orders the sale of the subject matter to
the property even after foreclosure for a 1 year period.
the highest bidder after which the parties will be called for
a confirmation of the sale. Now once there has been a
Q: What about the exemption that you mentioned? What
confirmation of the sale, the mortgagor cannot anymore
is that?
enforce or demand that his payment be received.
A: The only exemption is when the mortgagee is the PNB
or a bank or
Now, in this instance of judicial foreclosure, there is a
hearing for the confirmation of the sale. Why is that
Q: That is an exemption with regard to what type of
required? So that the mortgagor has the opportunity to
foreclosure?
assail the validity of the action sale. So again, in judicial
A: Judicial foreclosure maam.
foreclosure, it is possible that even after the sale, equity of
redemption is available as long as there is no confirmation.
Atty. Jazzie: Under judicial foreclosure,
If you want to exercise this Equity of Redemption, you have
General Rule: Equity of Redemption
to pay the amount of the debt/obligation an not the
Exception as provided in the General Banking Law: When
purchase price.
the mortgagee is a bank or a banking institution
Who can redeem? Under the the Rules of Court:
What do we mean by Equity of Redemption? After the
1. The mortgagor or one who is in privity of title with
entry of judgment of foreclosure wherein you file a
the mortgagor
petition for foreclosure before the court and now the court
2. The successors-in-interest; it could be
says that the foreclosure is proper, the order becomes final
a) The person whom which the debtor has
and there is now an entry of judgment. Under Rule 68,
transferred his right
Redeem but not less than 90 days but more than 120 days
b) The person whom the debtor conveyed his
from the entry of judgment, mortgagor or debtor is
interest for the subject matter
ordered by the court to pay the obligation, interests and
c) The one who succeeds to interest of the debtor
expenses incurred.
d) The joint debtors or joint owners of the subject
matter
Under Section 2 of Rule 68, Even if the rule says not more
e) Compulsory heirs
than 120 days, you may still exercise this equity of
redemption as long as the sale is not yet confirmed. That
What happens if there is a deficiency? If the property was
would also mean that if you have judicial foreclosure is
judicially foreclosed and sold but nevertheless the
available. When you say right of redemption, the
proceeds are not sufficient to pay the obligation.
redemption period is 1 year. In judicial foreclosure after the
- The creditor can still recover within 10 years (the
sale has been confirmed, the mortgagor cannot anymore
prescriptive period under the Civil Code from the
redeem the property. The exemption is provided in the

19
time right of action accrues.) He may recover even a REM in favor of San Diego. Sometime thereafter, they
within the period of Equity of Redemption. He may made several payments, however it was not yet complete.
also pray that the deficiency judgment be A subsequent loan was made by spouses Landrito, this
incorporated in the judicial foreclosure. Just take time amounting to P1,000,000. To secure the payment of
note of that because you will discuss more on the loan, they executed an amended REM stipulating that
Judicial Foreclosure in your Special Civil Action. the loan be paid within 6 months from Sept. 16, 1991 and
if not paid within the said period, the mortgagee will have
Now let us take into consideration extrajudicial foreclosure the right to declare the debt to and immediately foreclose
under Act 3135. As I mentioned, if you have the book by de the REM either judicially or extrajudicially in accordance
Leon, you have copy at the appendix. Otherwise you with law.
should have a copy of this special law. It is an old law but
this is still the same law that is applied today but of course It appears here that the Sps. Landrito defaulted in payment
there are slight deviations specially with regard to fees and despite the notice sent by San Diego, they still failed to
pero with regard to the more important provisions, it is the pay which prompted San Diego to send a final notice of
same. demand. Now this time the obligation already amounted
to P1.9M and they still failed to pay which prompted
How does extrajudicial foreclosure take place? Of course Carmencita to file an extrajudicial foreclosure of the
the mortgagor would have to execute a deed of real estate property which they used to acquire the said loan.
mortgage (REM). For an extrajudicial foreclosure to be
availed of by the mortgagee, the mortgage contract must Subsequenty, the sheriff sent several notices to the parties
contain an authorization by the mortgagor given to the announcing the sale. On August 11, 1993, the date of sale,
mortgagee to extrajudicially foreclose the property. So the the Sps. Landrito did not attend the foreclosure sale and a
Deed of REM must contain a special power authorizing the certificate of sale was given to San Diego being the highest
mortgagee, that in case the obligation is not paid, the bidder. The amount of the property became P2M.
property will be sold and the proceeds will be applied to
pay for the obligation. Now this is very important because On October 29, 1993, San Diego registered the Certificate
if you executed a REM and it does not contain this of the Sale after that within the 1 year redemption period,
authority, this clause or this special power given to the still the Spouses Ladrito failed to redeem the said property.
mortgagee, then you cannot extrajudicially foreclose the Instead On November 1994, the spouses sought for the
property. So what is the remedy of the creditor? Judicial annulment to the said foreclosure sale. They allege that it
foreclosure or mag-file siya ng collection for sum of money. was null and void because it failed to comply with the
requirement of Act 3135 of the publication and notice and
This would also be relevant in the sense that extrajudicial that the foreclosure should have been limited to the
foreclosure proceeding is faster kasi hindi ka magdaan ng amount of the debt. In this case, it should only have been
hearing, hindi ka magdaan ng court. Simply file a petition 1M but the sale already amounted to P1.95M.
in the office of the Clerk of Court and the sheriff. Walang
hearing but you have to comply with the requirements of The husband of San Diego gave the Spouses Landrito an
notice of sale and publication, public action takes place. extension which allowed them to pay the obligation until
Ganun lang. Mas mabilis siya. And, it does not require November 11, 1994. Spouses San Diego here sought for
lawyers. So lesser fees, no more filing fees and faster time the dismissal of the case which was granted by the RTC and
to the advantage of the creditor-mortgagee. upheld by the CA.

Do remember that this authorization is essentially an Issue: Can Spouses Landrito still redeem the property? NO.
agency wherein the mortgagor is the principal and the
mortgagee is the agent. Under the rules of agency, the Held: SC held that Spouses Landrito can no longer redeem
general rule is that when the principal dies, the agency is the property because as found by the CA, even if the
extinguished. So what happens if the obligation has amount of the foreclosure sale should be limited to the
already become due and demandable but the at time of amount of the debt secured by the REM, because of the
the application for foreclosure, namatay na si mortgagor, several notice and the publication, they still failed to raise a
will that be ground to question the REM? Hindi. No such question or attend the foreclosure sale
extinguishment because the power given to the mortgagee
to foreclose the property covered by the REM is for the
benefit of the mortgagee. It is not for the interest of the Q: What time is the redemption period counted?
mortgagor but rather the mortgagee. So notwithstanding A: From October 29, 1993 because it was the registry of
the death of the mortgagor or debtor, the mortgagee may the sale.
still extrajudicially foreclose the property wherein the
agency or authorization given therein is not extinguished Q: Was there sufficient evidence showing that indeed
for this is considered to be an agency coupled with there was an extension given to the petitioners in this
interest. case?
A: No, maam.
Now sabi natin, what is available in judicial foreclosure is
equity of redemption as a general rule. But what about Q: Assuming that there was an agreement for an
extra judicial foreclosure? We have the right of extension, will it stop the running of the one year
redemption. Naferteri, what happened in the case of redemption period?
Spouses Landrito? A: It will not stop the one year redemption period maam.

Spouses Landrito vs CA, GR 133079, August 9, 2005 Q: Why not? Because this is provided under the law. With
Reporter: Kuit regard to the period of redemption, it must be 1 year
from the date of?
Facts: Spouses Landrito obtained a loan of P350,000 from A. The registration maam.
Carmencita San Diego. To secure such loan, they executed

20
Q: In this instance was there are offer to pay or redeem registration of foreclosure or 3 months after the
on the part of Spouses Landrito? foreclosure whichever is earlier. You take note of that ha
A: According to the the SC, Spouses Landrito never which is under the General Banking Law. This is sometimes
exercised their right to redeem the property. referred to as equity of redemption, but this is different
from the equity of redemption under Rule 68.
Q: What about any action filed for the annulment of the
foreclosure proceeding would it stop the one year
redemption period? March 2 Pastor
A: No, maam.
The general rule for judicial foreclosure is equity of
Q: So what happens if the 1 year period already expired? redemption. The period as provided in Rule 68, however as
A: After the 1 year period already expired, the party who is an exception, if the mortgagee is a bank or a banking
redeeming the property is barred from redeeming it institution, we have the 1 year right of redemption
maam. counted from the date of registration. For extrajudicial
foreclosure, the general rule is that there is right of
Atty. Jazzie: Very important dito ang redemption because redemption and the one year period is counted from the
when you say redemption, the mortgagor may force the registration of the sale. So between the two, in
mortgagee or the highest bidder to sell back the property extrajudicial foreclosure, you have lesser expenses and it is
to the mortgagor. But once na nag-lapse na yan, absolute easier than judicial foreclosure.
na ang ownership. You cannot again force the highest How to go about the extrajudicial foreclosure:
bidder to sell it to the mortgagor. 1. File an application or petition for foreclosure
with the clerk of court who has jurisdiction over
Here, you have an extrajudicial foreclosure, they applied the property;
Act 3135. 2. Comply, through the office of the clerk of court,
and the sheriffs, with the requirements of notice
In Extrajudicial Foreclosure: and publication;
General Rule: Right of Redemption 3. The application will thereafter be raffled among
Exception: if the mortgagor is juridical entity, such as a the sheriffs; and
corporation, the 1 year period does not apply 4. Public auction will take place.
5. The highest bidder will be declared as the
What you need to take note of here, huwag I-partner ang purchaser.
dalawang E. Kapag extrajudicial, Right. Kapag judicial,
Equity of Redemption. Ang right of redemption under Act The mortgagor, as a general rule, is entitled to his right of
3135, ang nakalagay diyan date of sale. But jurisprudence redemption. However, under RA 8791, there is also the
has been consistent that the one year period shall start General Banking Law, we have to take note of the period
from the registration of the sheriffs certificate of sale. Act provided therein if the mortgagor is a juridical person.
3135 says 1 year from and after the date of sale which
should be interpreted from the time the certificate of sale Section 47, General Banking Law. Juridical persons whose
is registered. properties are being sold can redeem until the registration
of the certificate of foreclosure or 90 days or 3months after
In this instance, there was no sufficient evidence that the foreclosure, whichever is earlier.
redemption was made or that there was an extension.
Even if there was, you cannot circumvent the right of G.R. No. 195540 March 13, 2013
redemption available under Act 3135. When the period Goldenway v Equitable PCI Bank
allowed to redeem will lapse, the action to enforce
redemption will not prosper anymore even if the action is DOCTRINE: Section 47 did not divest juridical persons of
brought within the prescriptive period. the right to redeem their foreclosed properties but only
modified the time for the exercise of such right by
Period of redemption is not a prescriptive period but a reducing the one-year period originally provided in
condition precedent provided by law to restrict the right of Act No. 3135. The new redemption period
the person exercising the redemption. If the person commences from the date of foreclosure sale, and
exercising this right has offered to redeem the property expires upon registration of the certificate of sale or
within the period fixed, he is considered to have complied three months after foreclosure, whichever is earlier.
with this condition. There is likewise no retroactive application of the new
redemption period because Section 47 exempts from its
Moreover, the period is not suspended by the institution of operation those properties foreclosed prior to its
an action to foreclose/annul the foreclosure sale. effectivity and whose owners shall retain their
Petitioner have lost any right or interest over the subject redemption rights under Act No. 3135.
property primarily because of their failure to redeem the
same in the manner and within the period prescribed by FACTS: On November 29, 1985, petitioner Goldenway
law. Just take note the general rule on the right of Merchandising Corporation executed a Real Estate
redemption, if you want to redeem the property, pay the Mortgage in favor of Equitable PCI Bank over three
mortgagee this time the purchase price plus expenses and parcels of land as security for a Php2,000,000 loan
interest incurred. Again from the date of the confirmation granted to the petitioner.
of sale ang 1 year period. Petitioner eventually failed to settles its loan obligation,
leading respondent to extrajudicially foreclose the
Do take note that of the exception under the general mortgage on December 13, 2000. Subsequently, a
banking law wherein even if the mortgagee is a bank, if the Certificate of Sale was issued to respondent on January
mortgagor is juridical entity, such as a corporation, the 1 26, 2001.
year period does not apply. Under section 47, juridical
persons whose properties are sold can redeem until the In a letter dated March 7, 2001, petitioner offered

21
to redeem the foreclosed properties by tendering a in the ownership of property and enable mortgagee-
check. Petitioner and respondent met on March 12, banks to dispose sooner of these acquired assets.
2001. However, petitioner was told that redemption
was no longer possible since the certificate of sale It must be underscored that the General Banking Law of
had already been registered; the title to the 2000, crafted in the aftermath of the 1997 Southeast
foreclosed properties were consolidated in favor of the Asian financial crisis, sought to reform the General
respondent on March 9, 2001. Banking Act of 1949 by fashioning a legal framework for
maintaining a safe and sound banking system. In
Petitioner filed a complaint for specific performance this context, the amendment introduced by Section
and damages contending that the 1-year period of 47 embodied one of such safe and sound practices
redemption under Act 3135 should apply, and not aimed at ensuring the solvency and liquidity of our
the shorter redemption period under RA 8791 as banks. It cannot therefore be disputed that the said
applying RA 8791 would result in the impairment of provision amending the redemption period in Act
obligations of contracts and would violate the equal 3135 was based on a reasonable classification and
protection clause under the constitution. germane to the purpose of the law.

The RTC dismissed the action of the petitioner The right of redemption being statutory, it must be
ruling that redemption was made belatedly and exercised in the manner prescribed by the statute, and
that there was no redemption made at all. The Court within the prescribed time limit, to make it effective.
of Appeals affirmed the RTC. Furthermore, as with other individual rights to contract
and to property, it has to give way to police power
ISSUE: Whether or not the redemption period exercised for public welfare.
should be the 1-year period provided under Act
3135, and not the shorter period under RA 8791 as The concept of police power is well-established in this
the parties expressly agreed that foreclosure would be jurisdiction. It has been defined as the "state authority
in accordance with Act 3135 to enact legislation that may interfere with personal
liberty or property in order to promote the general
RULING: The shorter period under RA 8791 should welfare." Its scope, ever-expanding to meet the
apply. exigencies of the times, even to anticipate the future
where it could be done, provides enough room for an
The one-year period of redemption is counted from the efficient and flexible response to conditions and
date of the registration of the certificate of sale. In this circumstances thus assuming the greatest benefits.
case, the parties provided in their real estate
mortgage contract that upon petitioners default The freedom to contract is not absolute; all contracts
and the latters entire loan obligation becoming due, and all rights are subject to the police power of the
respondent may immediately foreclose the mortgage State and not only may regulations which affect them
judicially in accordance with the Rules of Court, or be established by the State, but all such regulations
extrajudicially in accordance with Act No. 3135, as must be subject to change from time to time, as the
amended. But under Sec 47 of RA 8791, an general well-being of the community may require,
exception is thus made in the case of juridical or as the circumstances may change, or as
persons which are allowed to exercise the right of experience may demonstrate the necessity. Settled is
redemption only "until, but not after, the registration of the rule that the non-impairment clause of the
the certificate of foreclosure sale" and in no case more Constitution must yield to the loftier purposes targeted
than three (3) months after foreclosure, whichever by the Government. The right granted by this provision
comes first. must submit to the demands and necessities of the
States power of regulation.
Section 47 did not divest juridical persons of the
right to redeem their foreclosed properties but only
modified the time for the exercise of such right by Such authority to regulate businesses extends to the
reducing the one-year period originally provided in banking industry which, as this Court has time and
Act No. 3135. The new redemption period again emphasized, is undeniably imbued with public
commences from the date of foreclosure sale, and interest. Having ruled that the assailed Section 47 of
expires upon registration of the certificate of sale or R.A. No. 8791 is constitutional, we find no reversible
three months after foreclosure, whichever is earlier. error committed by the CA in holding that petitioner
There is likewise no retroactive application of the new can no longer exercise the right of redemption over
redemption period because Section 47 exempts from its its foreclosed properties after the certificate of sale in
operation those properties foreclosed prior to its favor of respondent had been registered
effectivity and whose owners shall retain their
redemption rights under Act No. 3135. Q: What is this provided period in the General Banking
Law?
We agree with the CA that the legislature clearly A: In the case of juridical persons which are allowed to
intended to shorten the period of redemption for exercise the right of redemption, the period is only "until,
juridical persons whose properties were foreclosed and but not after, the registration of the certificate of
sold in accordance with the provisions of Act No. 3135. foreclosure sale" and in no case more than three (3)
The difference in the treatment of juridical persons months after foreclosure, whichever comes first.
and natural persons was based on the nature of
the properties foreclosed whether these are used as Q: Is Goldenway correct in its contention?
residence, for which the more liberal one-year A: No since Goldenway is a juridical person what should
redemption period is retained, or used for industrial or apply is the ____. In this case, the period within which the
commercial purposes, in which case a shorter term is right of redemption was exercised was way beyond the
deemed necessary to reduce the period of uncertainty allowable period.

22
Q: What about the Constitutional issues that were raised Sometimes this provision in sec. 47 can be technically
by Goldenway here? referred to as Equity of Redemption but the period
A: The Supreme Court said that it was not unconstitutional. provided under sec. 47 is different from the 90 to 120 days
period provided under the Rules of Courts Equity of
Q: Would it not be a violation of the equal protection Redemption in case of judicial foreclosure. For right of
clause? redemption, the period is one year from the date of
A: There is no violation of the equal protection clause registration.
because Goldenway as a juridical person was given an
opportunity to redeem the property its just that as to G.R. No. 171033 August 3, 2010
juridical persons the period is shorter. CITY MAYOR, CITY TREASURER, CITY ASSESSOR, ALL OF
QUEZON CITY, and ALVIN EMERSON S. YU vs. RIZAL
Q: Why is there a necessity to treat juridical persons COMMERCIAL BANKING CORPORATION
differently from natural persons? What is the basis for it
to be shorter? Facts: The spouses Roberto and Monette Naval
A: The difference in the treatment of juridical persons obtained a loan from respondent Rizal Commercial
and natural persons was based on the nature of the Banking Corporation, secured by a real estate mortgage
properties foreclosed whether these are used as of properties covered by Transfer Certificate of Title
residence, for which the more liberal one-year redemption (TCT) Nos. N-167986, N167987, and N-167988. In 1998,
period is retained, or used for industrial or commercial the real estate mortgage was later foreclosed and the
purposes, in which case a shorter term is deemed properties were sold at public auction with respondent
necessary to reduce the period of uncertainty in the as the highest bidder. The corresponding Certificates of
ownership of property and enable mortgagee-banks to Sale were issued in favor of respondent on August 4,
dispose sooner of these acquired assets. 1998. However, the certificates of sale were allegedly
registered only on February 10, 2004.
The exemption with regard to an extrajudicial foreclosure
where the mortgagor is a juridical person even if the Meanwhile, on May 30, 2003, an auction sale of tax
mortgagee is a bank, as long as the mortgagor is a juridical delinquent properties was conducted by the City
person, we apply Sec. 47 of RA 8791, the General Banking Treasurer of Quezon City. Included in the properties
Law of 2000 which states that: Notwithstanding Act 3135, that were auctioned were two (2) townhouse units
juridical persons whose property is being sold pursuant to covered by TCT Nos. N-167986 and N-167987 and the
an extrajudicial foreclosure, shall have the right to redeem parcel of land covered by TCT No. N-167988. For these
the property in accordance with this provision until, but delinquent properties, Alvin Emerson S. Yu was
not after, the registration of the certificate of foreclosure adjudged as the highest bidder. Upon payment of the
sale with the applicable Register of Deeds which in no case tax delinquencies, he was issued the corresponding
shall be more than 3 months after foreclosure, whichever Certificate of Sale of Delinquent Property.
is earlier. Owners of property that has been sold in a
foreclosure sale prior to the effectivity of this Act shall On February 10, 2004, the Certificate of Sale of
retain their redemption rights until their expiration. Delinquent Property was registered with the Office of
the Register of Deeds of Quezon City.
There was no violation of the non-impairment clause.
There is an impairment if a subsequent law changes the On June 10, 2004, respondent tendered payment for all
terms of the contract between the parties. In this case, of the assessed tax delinquencies, interest, and other
Section 47 did not divest juridical persons of the right to costs of the subject properties with the Office of the
redeem their foreclosed properties but only modified the City Treasurer, Quezon City. However, the Office of the
time for the exercise of such right by reducing the one-year City Treasurer refused to accept said tender of
period originally provided in Act No. 3135. payment.

With regard to the alleged violation of the equal protection Undeterred, on June 15, 2004, respondent filed before
clause The difference in the treatment of juridical the Office of the City Treasurer a Petition for the
persons and natural persons was based on the nature acceptance of its tender of payment and for the
of the properties foreclosed whether these are used as subsequent issuance of the certificate of redemption in
residence, for which the more liberal one-year redemption its favor. Nevertheless, respondents subsequent tender
period is retained, or used for industrial or commercial of payment was also denied.
purposes, in which case a shorter term is deemed
necessary to reduce the period of uncertainty in the Consequently, respondent filed a Petition for
ownership of property and enable mortgagee-banks to Mandamus with Prayer for Issuance of a Temporary
dispose sooner of these acquired assets. Restraining Order and a Writ of Preliminary Injunction3
before the RTC. Petitioners contended, among other
A corporation has limited liability. The stockholders, the things, that it had until February 10, 2005, or one (1)
directors, cannot be personally liable for the unpaid year from the date of registration of the certificate of
subscription. But if you are a natural person, you can be sale on February 10, 2004, within which to redeem the
held personally liable, the shorter period is fair because it subject properties, pursuant to Section 78 of
will be easier for the corporation to dispose of properties Presidential Decree (P.D.) No. 464 or the Real Property
because of its limited feature of liability. Tax Code.

SC also took into consideration when the General Banking After the parties filed their respective pleadings, the
Law was crafted, and in essence, the right of redemption RTC initially denied the petition in the Order4 dated
that is provided under Section 47 is therefore December 6, 2004. In denying the petition, the RTC
constitutional. opined that respondents reliance on Section 78 of P.D.
No. 464 as basis of the reckoning period in counting the
one (1) year period within which to redeem the subject

23
properties was misplaced, since P.D. No. 464 has been return to the latter the entire amount paid by him plus
expressly repealed by Republic Act (R.A.) No. 7160, or interest of not more than two percent (2%) per month.
the Local Government Code. Thereafter, the property shall be free from all lien of
such delinquent tax, interest due thereon and expenses
It has to be noted that in this case Quezon City has an of sale.
ordinance which provides that he one-year redemption
period should be counted from the date of the From the foregoing, the owner of the delinquent real
annotation of the sale of the property at the proper property or person having legal interest therein, or his
registry. representative, has the right to redeem the property
within one (1) year from the date of sale upon payment
ISSUE: of the delinquent tax and other fees.
1. What law applies for the determination of the
correct redemption period? Verily, the period of redemption of tax delinquent
2. What was involved here was foreclosure due properties should be counted not from the date of
to non-payment of property taxes. registration of the certificate of sale, as previously
provided by Section 78 of P.D. No. 464, but rather on
RULING: the date of sale of the tax delinquent property, as
explicitly provided by Section 261 of R.A. No. 7160.
The owner or any person holding a lien or claim over a
tax delinquent property sold at public auction has one However since in the case at bar, there is an ordinance
(1) year from the date of registration of sale to redeem involved. At first glance, this provision runs counter to
the property. However, since the passing of R.A. No. that of Section 261 of R.A. No. 7160 which provides that
7160, such is no longer controlling. The issue of the one year redemption period shall be counted from
whether or not R.A No. 7160 or the Local Government the date of sale of the tax delinquent property. There is,
Code, repealed P.D. No. 464 or the Real Property Tax therefore, a need to reconcile these seemingly
Code has long been laid to rest by this Court. conflicting provisions of a general law and a special law.

Jurisdiction thrives to the effect that R.A. No. 7160 To harmonize the provisions of the two laws and to
repealed P.D. No. 464. From January 1, 1992 onwards, maintain the policy of the law to aid rather than to
the proper basis for the computation of the real defeat the owners right to redeem his property, Section
property tax payable, including penalties or interests, if 14 (a), Paragraph 7 of City Ordinance No. SP-91, S-93
applicable, must be R. A. No. 7160. should be construed as to define the phrase one (1)
year from the date of sale as appearing in Section 261
Inasmuch as the crafter of the Local Government Code of R.A. No. 7160, to mean one (1) year from the date of
clearly worded the above-cited Section to repeal P.D. the annotation of the sale of the property at the proper
No. 464, it is a clear showing of their legislative intent registry.
that R.A. No. 7160 was to supersede P.D. No. 464. As
such, it is apparent that in case of sale of tax delinquent Consequently, the counting of the one (1) year
properties, R.A. No. 7160 is the general law applicable. redemption period of property sold at public auction
Consequently, as regards redemption of tax delinquent for its tax delinquency should be counted from the date
properties sold at public auction, the pertinent of annotation of the certificate of sale in the proper
provision is Section 261 of R.A. No. 7160, which Register of Deeds. Applying the foregoing to the case at
provides: bar, from the date of registration of the Certificate of
Sale of Delinquent Property on February 10, 2004,
Section 261. Redemption of Property Sold. Within one respondent had until February 10, 2005 to redeem the
(1) year from the date of sale, the owner of the subject properties. Hence, its tender of payment of the
delinquent real property or person having legal interest subject properties tax delinquencies and other fees on
therein, or his representative, shall have the right to June 10, 2004, was well within the redemption period,
redeem the property upon payment to the local and it was manifest error on the part of petitioners to
treasurer of the amount of delinquent tax, including the have refused such tender of payment.
interest due thereon, and the expenses of sale from the
date of delinquency to the date of sale, plus interest of Absent an ordinance in any other case involving real
not more than two percent (2%) per month on the property tax delinquency, RA 7160 applies.
purchase price from the date of sale to the date of
redemption. Such payment shall invalidate the Section 7. In any sale made under the provisions of this
certificate of sale issued to the purchaser and the Act, the purchaser may petition the Court of First
owner of the delinquent real property or person having Instance of the province or place where the property or
legal interest therein shall be entitled to a certificate of any part thereof is situated, to give him possession
redemption which shall be issued by the local treasurer thereof during the redemption period, furnishing bond
or his deputy. in an amount equivalent to the use of the property for a
period of twelve months, to indemnify the debtor in
From the date of sale until the expiration of the period case it be shown that the sale was made without
of redemption, the delinquent real property shall violating the mortgage or without complying with the
remain in the possession of the owner or person having requirements of this Act. Such petition shall be made
legal interest therein who shall remain in the possession under oath and filed in form of an ex parte motion in
of the owner or person having legal interest therein the registration or cadastral proceedings if the property
who shall be entitled to the income and other fruits is registered*, or in special proceedings in the case of
thereof. property registered under the Mortgage Law or under
section one hundred and ninety-four of the
The local treasurer or his deputy, upon receipt from the Administrative Code, or of any other real property
purchaser of the certificate of sale, shall forthwith encumbered with a mortgage duly registered in the

24
office of any register of deeds in accordance with any matter and thus conflict with the special act, the special
existing law, and in each case the clerk of the court must prevail, since it evinces the legislative intent more
shall, upon the filing of such petition, collect the fees clearly than that of the general statute and must be taken
specified in paragraph eleven of section one hundred as intended to constitute an exception to the rule.
and fourteen of Act Numbered Four hundred and
ninety-six, as amended by Act Numbered Twenty-eight Furthermore, the law protects the original owner. It is the
hundred and sixty-six, and the court shall, upon policy of the law to aid rather than to defeat the owners
approval of the bond, order that a writ of possession right. Therefore, redemption should be looked upon with
issue, addressed to the sheriff of the province in which favor and where no injury will follow, a liberal construction
the property is situated, who shall execute said order will be given to our redemption laws, specifically on the
immediately exercise of the right to redeem.

DISCUSSION Take note of the law or ordinance applicable to a specific


city or municipality. In the absence of any ordinance similar
Q: What period is provided under the Local Government to this in Quezon City, the redemption period fora tax
Code (LGC)? delinquent sale of property should be 1 year from the date
A: Under the LGC it is now 1 year from the date of the sale. of sale as provided in the LGC.

Q: Does it have the same interpretation in ACT 3135 G.R. No. 129572 June 26, 2000
wherein even if the provision stated that it is to be
reckoned from the date of sale, it should be interpreted PHILBANCOR FINANCE, INC. AND VICENTE HIZON, JR.
as from the date of the registration of the sale? vs. COURT OF APPEALS, THE HONORABLE
A: No. It is to be reckoned from the date of the sale itself. DEPARTMENT OF AGRARIAN REFORM ADJUDICATION
BOARD (DARAB), ALFREDO PARE, PABLO GALANG and
Q: In this case was the tender of payment made within AMADO VIE
the said period, 1 year from the date of sale?
A: In this case, the ordinance states that it should be FACTS: Private respondents Alfredo Pare, Pablo Galang
reckoned from the date of the annotation and Amado Vie, as plaintiffs, filed with the Provincial
Agrarian Reform Adjudication Board (PARAB) a
Q: Is that not contrary to what is provided in the LCG? complaint for maintenance of possession with
Which will prevail the ordinance of the LGC? redemption and tenancy right of pre-emption against
A: NO. The interpretation of the ordinance because aside petitioners Philbancor Finance, Inc. and Vicente Hizon,
from the liberal construction in order to protect the rights Jr. Private respondents alleged, inter alia, that petitioner
of the redemptioner, the rule in Statutory Construction is Vicente Hizon, Jr. is the owner of the disputed
that if there is a general law and a special law, the special agricultural lands and that they (private respondents)
law should prevail. In this case, since the ordinance of are the legitimate and bona fide tenants thereof; that
Quezon City is a specific law then it should prevail over the on October 13, 1983, petitioner Hizon, without their
LGC. knowledge, mortgaged the disputed lots to petitioner
Philbancor Finance, Inc.; that petitioner Hizon failed to
The first thing to take note is that this involves not a pay his obligations to petitioner Philbancor, which
judicial foreclosure sale but a tax delinquency sale for eventually led to the sale of the mortgaged lots to the
failure to pay the real property taxes which gives the local latter; that they came to know of the transaction only
government the right to sell tax delinquent properties to when they were notified by petitioner Philbancor to
pay off the unpaid taxes. I decided to include this so you vacate the lots; that they have been tenants on the lots
will not get confused with the redemption period. for more than fifty (50) years; that petitioner Philbancor
threatened to take from them the actual or physical
First thing that was alleged was the provision in PD 464, 1 possession of the agricultural lots; that unless the
year from the date of registration. However, inasmuch as in threatened acts of petitioner are restrained, they will
the LGC there is a showing that the legislative intent of RA suffer substantial and irreparable injury.
7160 was to supersede PD 464 in case of sale of tax
delinquent properties. RA 7160 is now the general law In his answer, petitioner Hizon admitted that private
applicable to which sec. 261 shall be applied within 1 year respondents are his bonafide and legitimate tenants
from the date of sale. The phrase within 1 year from the but he averred, by way of affirmative defenses, that he
date of sale should not be interpreted in the same way as is not threatening to take possession of the disputed
we interpret ACT 3135. This is from the date of actual sale lots as he is no longer the owner thereof after said lots
and not of registration. were foreclosed by petitioner Philbancor; that private
respondents were aware when he mortgaged the lots
Why is it that in this case, redemption was still allowed 1 as they were with him when he tried to negotiate for
year from the date of annotation or registration? payment of his loan to petitioner Philbancor.

It is because of the city ordinance which explicitly stated Philbancor alleged, among others, that it has no
that the one year period should be counted as within 1 tenancy or agricultural relationship with private
year from the annotation of the sale of the property at the respondents considering that it acquired ownership
property registry. over the disputed lots by virtue of an extra-judicial
foreclosure sale pursuant to Act 3135, as amended; that
The SC discussed the statutory construction. A general it is not an agricultural lessor as contemplated in
law and a special law on the same subject should be Section 10 of Republic Act (RA) No. 3844, as amended;
accordingly read together and harmonized, if possible, that assuming private respondents have the right to
with a view to giving effect to both. Where there are two redeem the lots in question, such right has already
acts, one of which is special and particular and the other expired in accordance with Section 12 of R.A. 3844,
general which, if standing alone, would include the same which states that the right of redemption may be

25
exercised within two (2) years from the registration of is not extinguished by the alienation or transfer of the legal
the sale. possession of the landholding.

Provincial adjudicator rendered a decision in favor of Here, do take note that the procedure to be followed in
the private respondents. Petitioners filed with the Court relation to extrajudicial foreclosure proceedings must be
of Appeals a petition for review of the decision of the strictly complied with. The importance of notice and
DARAB. CA dismissed said petition. publication, in an extrajudicial proceeding is emphasized.
For example, the property must be clearly identified, if in
ISSUE: Whether or not the private respondents could the as publication, the title number or description of
still exercise their right of redemption of the parcels of boundaries is wrong, then the foreclosure proceedings will
land sold at public auction due to foreclosure of the not be valid.
mortgages thereon considering that they invoked their
right to redeem only on July 14, 1992, seven years after
the date of registration of the certificate of sale with G.R. No. 125838. June 10, 2003
the Register of Deeds.
DEVELOPMENT BANK OF THE PHILIPPINES, vs. CA and
HELD: Yes. Republic Act No. 3844, Section 12, provides
EMERALD RESORT HOTEL CORPORATION
as follows:

In case the landholding is sold to a third person without FACTS: ERHC failed to pay its loan, DBP filed with the
the knowledge of the agricultural lessee, the latter shall Office of the Sheriff, Regional Trial Court of Iriga City,
have the right to redeem the same at a reasonable and an Application for Extra-judicial Foreclosure of Real
price and consideration. Provided, that the entire Estate and Chattel Mortgages.
landholding sold must be redeemed. Provided further,
that where there are two or more agricultural lessees, Deputy Provincial Sheriffs Abel Ramos and Ruperto
each shall be entitled to said right of redemption only Galeon issued the required notices of public auction
to the extent of the area actually cultivated by him. The sale of the personal and real properties. However,
right of redemption under this section may be exercised Sheriffs Ramos and Galeon failed to execute the
within two (2) years from the registration of the sale corresponding certificates of posting of the notices. On
and shall have priority over any other right of legal 10 July 1986, the auction sale of the personal properties
redemption. proceeded.

In this case, the certificate of sale of the subject The Office of the Sheriff scheduled on 12 August 1986
property, which was sold at public auction, was the public auction sale of the real properties. The Bicol
registered with the Register of Deeds of Pampanga on Tribune published on 18 July 1986, 25 July 1986 and 1
July 31, 1985. The two-year redemption period thus August 1986 the notice of auction sale of the real
expired on July 31, 1987. The complaint for redemption properties. However, the Office of the Sheriff
was filed by respondents only on July 14, 1992, five (5) postponed the auction sale on 12 August 1986 to 11
years after expiration of the redemption period September 1986 at the request of ERHC. DBP did not
prescribed by law. republish the notice of the rescheduled auction sale
because DBP and ERHC signed an agreement to
Nonetheless, private respondents may continue in postpone the 12 August 1986 auction sale. ERHC,
possession and enjoyment of the land in question as however, disputes the authority of Jaime Nuevas who
legitimate tenants because the right of tenancy signed the agreement for ERHC.
attaches to the landholding by operation of law. The
leasehold relation is not extinguished by the alienation
In a letter dated 24 November 1986, ERHC informed
or transfer of the legal possession of the landholding.
DBP of its intention to lease the foreclosed properties.

DISCUSSION
On 22 December 1986, ERHC filed with the Regional
Q: What is RA 3844? Trial Court of Iriga City a complaint for annulment of the
A: The Agricultural Land Reform Act foreclosure sale of the personal and real properties.
Subsequently, ERHC filed a Supplemental Complaint.
Q: What is the period of redemption provided therein? Is ERHC alleged that the foreclosure was void mainly
it one year? because (1) DBP failed to comply with the procedural
A: No, the period of redemption is 2 years from the requirements prescribed by law; and (2) the foreclosure
registration of the sale. was premature.

In this case, the certificate of sale of the subject property,


which was sold at public auction, was registered with the ISSUES and RULING:
Register of Deeds of Pampanga on July 31, 1985. The two- 1. Whether DBP complied with the posting and
year redemption period thus expired on July 31, 1987. The publication requirements under applicable laws for a
complaint for redemption was filed by respondents only on valid foreclosure.
July 14, 1992, five (5) years after expiration of the
redemption period prescribed by law. ON THE POSTING OF AUCTION SALE NOTICES:

Nonetheless, private respondents may continue in


possession and enjoyment of the land in question as DBP insists that the non-execution of the certificate of
legitimate tenants because the right of tenancy attaches to posting of the auction sale notices did not invalidate the
the landholding by operation of law. The leasehold relation foreclosure. CORRECT.

26
A certificate of posting is not required, much less
considered indispensable for the validity of an The Office of the Court Administrator issued Circular
extrajudicial foreclosure sale of real property under Act No. 72002 pursuant to the 14 December 1999
No. 3135. In the present case, the foreclosing sheriffs Resolution of this Court in A.M. No. 99-10-05-0, as
failed to execute the certificate of posting of the auction amended by the Resolutions of 30 January 2001 and 7
sale notices. However, this fact alone does not prove August 2001. The Court issued these Resolutions for
that the sheriffs failed to post the required notices. As two reasons.
held in Bohanan, the fact alone that there is no
certificate of posting attached to the sheriff's records is
not sufficient to prove the lack of posting. First, the Court seeks to minimize the expenses which
the mortgagee incurs in publishing the notice of
extrajudicial sale. With the added information in the
Based on the records, DBP presented sufficient notice of sale, the mortgagee need not cause the
evidence to prove that the sheriffs posted the notices of reposting and republication of the notice of the
the extrajudicial sale. rescheduled auction sale. There is no violation of the
notice requirements under Acts Nos. 3135 and 1508
In the absence of contrary evidence, as in this case, the precisely because the interested parties as well as the
presumption prevails that the sheriffs performed their public are informed of the schedule of the next auction
official duty of posting the notices of sale. sale, if the first auction sale does not proceed.
Consequently, we hold that the non-execution of the Therefore, the purpose of a notice of sale, which is to
certificate of posting cannot nullify the foreclosure of notify the mortgagor and the public of the foreclosure
the chattel and real estate mortgages in the instant sale, is satisfied.
case.
Second, the Court hopes to deter the practice of some
On whether there was publication of the notice of sale mortgagors in requesting postponement of the auction
of the real properties in compliance with Act No. 3135: sale of real properties, then later attacking the validity
of the foreclosure for lack of republication. This practice
There is no question that DBP published the notice of will only force mortgagees to deny outright requests for
auction sale scheduled on 12 August 1986. However, no postponement by mortgagors since it will only mean
auction sale took place on 12 August 1986 because DBP, added publication expense on the part of mortgagees.
at the instance of ERHC, agreed to postpone the same Such development will eventually work against
to 11 September 1986. DBP contends that the mortgagors because mortgagees will hesitate to grant
agreement to postpone dispensed with the need to postponements to mortgagors.
publish again the notice of auction sale. Thus, DBP did
not anymore publish the notice of the 11 September In the instant case, there is no information in the notice
1986 auction sale. DBP insists that the law does not of auction sale of any date of a rescheduled auction
require republication of the notice of a rescheduled sale. Even if such information were stated in the notice
auction sale. Consequently, DBP argues vigorously that of sale, the reposting and republication of the notice of
the extrajudicial foreclosure of the real estate mortgage sale would still be necessary because Circular No. 7-
is valid. INCORRECT. 2002 took effect only on 22 April 2002. There were no
such guidelines in effect during the questioned
In Ouano v. Court of Appeals, it was held that foreclosure.
republication in the manner prescribed by Act No. 3135
is necessary for the validity of a postponed extrajudicial DISCUSSION
foreclosure sale. Another publication is required in case
the auction sale is rescheduled, and the absence of Q: What is the requirement?
such republication invalidates the foreclosure sale. A: Publication, and posting of the notice of sale in
conspicuous public places
2. If publication requirement may be waived by parties,
Q: Was the requirement of posting duly complied with?
SAME RULING IN OUANO.
A: Yes. The sheriff posted the notices of the sale in places
where the property is situated, and further there is a
3. Is it possible to only have ONE PUBLISHED presumption of regularity of in the exercise of the official
NOTICE OF SALE, but the subsequent RESCHEDULED function of the sheriff.
sale will be valid without need of another publication?
Q: How about the issue to the publication?
YES. If the first notice of sale EXPRESSLY STATES AND A: It was not complied with. The Court held recently in
ALLOWS the holding of a rescheduled auction sale Ouano v. Court of appeals that republication in the manner
without reposting or republication of the notice. prescribed by Act No. 3135 is necessary for the validity of a
However, the rescheduled auction sale will only be valid postponed extrajudicial foreclosure sale. Another
if the rescheduled date of auction is clearly specified in publication is required in case the auction sale is
the prior notice of sale. The rescheduled dates must be rescheduled, and the absence of such republication
SPECIFIED. The absence of this information in the prior invalidates the foreclosure sale.
notice of sale will render the rescheduled auction sale
void for lack of reposting or republication. If the notice Q: Assuming that there was already an agreement
of auction sale contains this particular information, between the mortgagor and mortgagee, would it not be
whether or not the parties agreed to such rescheduled sufficient to make the publication not required anymore?
date, there is no more need for the reposting or A: No. The auction sale is a public auction so if only the
republication of the notice of the rescheduled auction parties agree to the foreclosure date, it becomes a private
sale. sale.

27
Publication, therefore, is required to give the foreclosure Now, about the issue with regard to the publication. There
sale a reasonably wide publicity such that those interested was a publication of the sale here in 3 different dates in a
might attend the public sale. To allow the parties to waive newspaper of general circulation but the date provided
this jurisdictional requirement, result in converting into a therein is different from the date of the actual date of sale
private sale what ought to be a public auction. because they moved the said sale.

Q: When is it possible that the sale would still comply We could apply the same rule here with regard to
with the requirement of publication without the need for extrajudicial foreclosure so that there would be less
republication despite transfer of the scheduled date of expenses for publication. But in this instance, there is no
the sale? provision in the notice of sale that in case the first sale or
A: The rescheduled auction sale will only be valid if the first schedule the sale will not push through, the sale will
rescheduled date of auction is clearly specified in the prior be transferred to another specific date. That is not present
notice of sale. The absence of this information in the prior in the case. That is not compliance with the foreclosure
notice of sale will render the rescheduled auction sale void proceedings which made it invalid.
for lack of reposting or republication. If the notice of
auction sale contains this particular information, whether The Court, with this notice, hopes to deter the practice of
or not the parties agreed to such rescheduled date, there some mortgagors in requesting postponement of the
is no more need for the reposting or republication of the auction sale of real properties, then later attacking the
notice of the rescheduled auction sale. validity of the foreclosure for lack of republication. This
practice will only force mortgagees to deny outright
This is based on Circular No. 7-2002 pursuant to the 14 requests for postponement by mortgagors since it will only
December 1999 Resolution of this Court in A.M. No. 99-10- mean added publication expense on the part of
05-0, as amended by the Resolutions of 30 January 2001 mortgagees.
and 7 August 2001.
Moreover, differentiate this with the Chattel Mortgage
With the added information in the notice of sale, the Law. Under the Chattel Mortgage Law, the only
mortgagee need not cause the reposting and republication requirement is posting of the notice of auction sale. In this
of the notice of the rescheduled auction sale. There is no case, there was no postponement of the auction sale of
violation of the notice requirements under Acts Nos. 3135 the personal properties and the foreclosure took place as
and 1508 precisely because the interested parties as well scheduled. Thus, the extrajudicial foreclosure of the chattel
as the public are informed of the schedule of the next mortgage in the instant case suffers from no procedural
auction sale, if the first auction sale does not proceed. infirmity.
Therefore, the purpose of a notice of sale, which is to
notify the mortgagor and the public of the foreclosure sale, Take note in this case of strict compliance with the
is satisfied. requirement of notice of publication as provided under Act
3135.
In the instant case, there is no information in the notice of
auction sale of any date of a rescheduled auction sale.
Even if such information were stated in the notice of sale, FIRST DIVISION [G.R. No. 129279. March 4, 2003]
the reposting and republication of the notice of sale would ALFREDO M. OUANO, petitioner, vs. COURT OF
still be necessary because Circular No. 7-2002 took effect APPEALS, and HEIRS OF JULIETA M. OUANO
only on 22 April 2002. There were no such guidelines in
effect during the questioned foreclosure.
Facts: On June 8, 1977, respondent Julieta M. Ouano
(Julieta), now deceased, obtained a loan from the
Clearly, DBP failed to comply with the publication
Philippine National Bank (PNB) in the amount of P104,
requirement under Act No. 3135. There was no publication
280.00. As security for said loan, she executed a real
of the notice of the rescheduled auction sale of the real
estate mortgage over two parcels of land located at
properties. Therefore, the extrajudicial foreclosure of the
Opao, Mandaue City. She defaulted on her obligation.
real estate mortgage is void.
On September 29, 1980, PNB filed a petition for
extrajudicial foreclosure with the City Sheriff of
DBP, however, complied with the mandatory posting of the
Mandaue City.
notices of the auction sale of the personal properties.
Under the Chattel Mortgage Law, the only requirement is
On November 4, 1980, the sheriff prepared a notice of
posting of the notice of auction sale. There was no
sale setting the date of public auction of the two parcels
postponement of the auction sale of the personal
of land on December 5, 1980 at 9:00 a.m. to 4:00 p.m.
properties and the foreclosure took place as scheduled.
He caused the notice to be published in the Cebu Daily
Thus, the extrajudicial foreclosure of the chattel mortgage
Times, a newspaper of general circulation in Mandaue
in the instant case suffers from no procedural infirmity.
City, in its issues of November 13, 20 and 27, 1980. He
likewise posted copies thereof in public places in
Here you have to distinguish the requirement of posting as
Mandaue City and in the place where the properties are
required in Act 3135 and the certificate of posting issued
located.
with the sheriff. The certificate of posting is not required
for the validity of an extrajudicial foreclosure. The fact
However, the sale as scheduled and published did not
alone that there is no certificate of posting attached to the
take place as the parties, on four separate dates,
sheriffs record is not sufficient to prove the lack of posting.
executed Agreements to Postpone Sale (Agreements).
What the law requires is the posting of the notice of sale,
These Agreements were addressed to the sheriff,
which is present in this case, and not the execution of the
requesting the latter to defer the auction sale to
certificate of posting. Moreover, the presumption prevails
another date at the same time and place, without any
that the sheriffs performed their official duty of posting the
further republication of the Notice. Petitioner, however,
notices of sale.
insists that there was substantial compliance with the
publication requirement, considering that prior

28
publication and posting of the notice of the first date In fact, personal notice to the mortgagor in extrajudicial
were made foreclosure proceedings is not even necessary, unless
stipulated. As such, it is imbued with public policy
ISSUES: considerations and any waiver thereon would be
1. Whether the rescheduled extrajudicial foreclosure inconsistent with the intent and letter of Act No. 3135.
sale was valid despite absence of republication of
the Notice, despite agreement between parties to 3. Whether the Rules of Court applies to an
do away with the republication extrajudicial foreclosure sale, specifically, Rule 39,
Section 24 Adjournment of Sale: By written consent
NO. The governing law for extrajudicial foreclosures is of debtor and creditor, the officer may adjourn any
Act No. 3135 as amended by Act No. 4118. The sale upon execution to any date agreed upon in
provision relevant to this case is Section 3, which writing by the parties. Without such agreement, he
provides: may adjourn the sale from day to day, if it becomes
necessary to do so for lack of time to complete the
SEC. 3. Notice shall be given by posting sale on the day fixed in the notice.
notices of the sale for not less than twenty
(20) days in at least three public places of the No. At the outset, distinction should be made of the
municipality or city where the property is three different kinds of sales under the law, namely: an
situated, and if such property is worth more ordinary execution sale, a judicial foreclosure sale, and
than four hundred pesos, such notice shall an extrajudicial foreclosure sale.
also be published once a week for at least
three consecutive weeks in a newspaper of
general circulation in the municipality of city. An ordinary execution sale is governed by the pertinent
provisions of Rule 39 of the Rules of Court. Rule 68 of
the Rules of Court applies in cases of judicial
It is a well-settled rule that statutory provisions foreclosure sale.
governing publication of notice of mortgage foreclosure
sales must be strictly complied with, and that even
slight deviations therefrom will invalidate the notice On the other hand, Act No. 3135, as amended by Act
and render the sale at least voidable. Where required No. 4118 otherwise known as An Act to Regulate the
by the statute or by the terms of the foreclosure Sale of
decree, public notice of the place and time of the Property under Special Powers Inserted in or Annexed
mortgage foreclosure sale must be given, a statute to Real Estate Mortgages applies in cases of
requiring it being held applicable to subsequent sales as extrajudicial foreclosure sale.
well as to the first advertised sale of the property.
A different set of law applies to each class of sale
The principal object of a notice of sale in a foreclosure mentioned.
of mortgage is not so much to notify the mortgagor as
to inform the public generally of the nature and The cited provision in the Rules of Court hence does not
condition of the property to be sold, and of the time, apply to an extrajudicial foreclosure sale.
place, and terms of the sale. Notices are given to secure
bidders and prevent a sacrifice of the property. Clearly, 4. Whether or not Julietas act of requesting the
the statutory requirements of posting and publication postponement and repeatedly signing the
are mandated, not for the mortgagors benefit, but for Agreements (WAIVER) had placed her under
the public or third persons. In fact, personal notice to estoppel, barring her from challenging the lack of
the mortgagor in extrajudicial foreclosure proceedings publication of the auction sale.
is not even necessary, unless stipulated. As such, it is
imbued with public policy considerations and any
waiver thereon would be inconsistent with the intent NO. The waiver being void for being contrary to the
and letter of Act No. 3135. express mandate of Act No. 3135, such cannot be
ratified by estoppel. Estoppel cannot give validity to an
act that is prohibited by law or one that is against public
Publication, therefore, is required to give the policy.
foreclosure sale a reasonably wide publicity such that Neither can the defense of illegality be waived.
those interested might attend the public sale. To allow
the parties to waive this jurisdictional requirement
would result in converting into a private sale what 5. Whether or not there is laches when Julieta filed her
ought to be a public auction. complaint with the trial court after almost two years
from the May 29, 1981 auction sale

2. Whether publication may be waived as agreed by


the parties NO. An action or defense for the declaration of the
inexistence of a contract does not prescribe under
Article 1410 of the Civil Code.
It cannot be waived. The principal object of a notice of
sale in a foreclosure of mortgage is not so much to
notify the mortgagor as to inform the public generally
DISCUSSION
of the nature and condition of the property to be sold,
Q: Isnt it that there was already a waiver of the
and of the time, place, and terms of the sale. Notices
publication?
are given to secure bidders and prevent a sacrifice of
A: Yes, there was a waiver. So the question to be answered
the property. Clearly, the statutory requirements of
is may the requirement of publication and posting be
posting and publication are mandated, not for the
waived by the parties? The answer is NO. It cannot be
mortgagors benefit, but for the public or third persons.
waived by the parties. The SC said that publication is a

29
jurisdictional requirement such that if there is no and sold the same at public auction, with itself posting
publication or posting of notice, jurisdiction will not be the highest bid.
conferred upon the court.
On 4 October 1994, one week before the one-year
Take note of the importance of posting of the notice of sale redemption period expired, the DARIOs filed a
and the publication, it must be strictly complied with. In complaint with the RTC of Quezon City against the
this instance, waiver of the posting and publication can mortgagors, UNIONBANK, the Register of Deeds and the
never be valid. Because as stated in the earlier case of DBP, City Sheriff of Quezon City. The complaint was for
the extrajudicial foreclosure sale is public in nature and annulment of sale and real estate mortgage with
never just between the mortgagor and the mortgagee. So reconveyance and prayer for restraining order and
even if there was publication of the notice for the first sale prohibitory injunction. A notice of lis pendens was
and then the first sale was subsequently cancelled and annotated on the title.
postponed, there must be compliance with the
republication and posting of the notice where in the said
publication or the net publication or notice posted will now On 10 October 1994, RTC issued a temporary
indicate the next scheduled date of the foreclosure date. restraining order (TRO) enjoining the redemption of
So actual date of sale must conform to what is provided in property within the statutory period and its
the notice that was posted in conspicuous places usually at consolidation under UNIONBANKs name.
the court, city hall, and the barangay where the property is
located. And then of course the requirement of In the meantime, without notifying the DARIOs,
publication. UNIONBANK consolidated its title over the foreclosed
property on 24 October 1994. TCT No. 41828 was
Now, what happens after the redemption period has cancelled and TCT No. 120929 in UNIONBANKs name
already expired, the foreclosure proceeding was valid, and was issued in its stead.
all the requisites were complied with? What is the next
step for highest bidder, who may be a third person or the The DARIOs filed an amended complaint on 9
mortgagee? The next step is for such highest bidder to December 1994, alleging that they, not the mortgagors,
consolidate the title in his name. are the true owners of the property mortgaged and
insisting on the invalidity of both the mortgage and its
UNIONBANK OF THE PHILIPPINES VS. THE COURT OF subsequent extrajudicial foreclosure. They claimed that
APPEALS and FERMINA S. DARIO and REYNALDO S. the original title, TCT No. 61571, was entrusted to a
DARIO certain Atty. Reynaldo Singson preparatory to its
administrative reconstitution after a fire gutted the
DOCTRINE: In real estate mortgage, when the principal Quezon City Hall building. Mortgagor Leopoldo, private
obligation is not paid when due, the mortgages has the respondent Ferminas son, obtained the property from
right to foreclose the mortgage and to have the Atty. Singson, had the title reconstituted under his
property seized and sold with a view to applying the name without the DARIOs knowledge, executed an
proceeds to the payment of the principal obligation. ante-dated deed of sale in his favor and mortgaged the
Foreclosure may be effected either judicially or extra- property to UNIONBANK.
judicially. In a public bidding during extra-judicial
foreclosure, the creditor mortgagee, trustee, or other
The CA upheld Judge Capulongs order admitting the
person authorized to act for the creditor may
amended complaint on 24 April 1995, UNIONBANK
participate and purchase the mortgaged property as
thereafter elevated its cause to this Court.
any other bidder. Thereafter the mortgagor has one
year within which to redeem the property from and
after registration of sale with the Register of Deeds. In Meanwhile, on February 9, 1995, UNIONBANK filed its
case of non-redemption, the purchaser at foreclosure answer ad cautelam asserting its status as an innocent
sale shall file with the Register of Deeds, either a final mortgagee for value whose right or lien upon the
deed of sale executed by the person authorized by property mortgaged must be respected even if the
virtue of the power of attorney embodied in the deed mortgagor obtained his title through fraud. It also
or mortgage, or his sworn statement attesting to the averred that the action had become moot and
fact of non-redemption; whereupon, the Register of academic by the consolidation of the foreclosed
Deeds shall issue a new certificate of title in favor of the property on 24 October 1994 in its name, resulting to
purchaser after the owners duplicate of the certificate the issuance of TCT No. 120929 by the Register of
has been previously delivered and cancelled. Thus, Deeds of Quezon City.
upon failure to redeem foreclosed realty, consolidation In its 19 August 1995 Order, the RTC held the
of title becomes a matter of right on the part of the mortgagors and the City Sheriff of Quezon City in
auction buyer, and the issuance of a certificate of title in default and sustained UNIONBANKs contention that the
favor of the purchaser becomes ministerial upon the act sought to be enjoined had been enforced, negating
Register of Deeds. the need of hearing the application for preliminary
injunction.

FACTS: This case stemmed from a real estate mortgage After considering the arguments presented by the
executed by spouses Leopoldo and Jessica Dario parties, the CA ruled that despite its knowledge that the
(hereafter mortgagors) in favor of UNIONBANK to ownership of the property was being questioned,
secure a P3 million loan, including interest and other UNIONBANK took advantage of the DARIOs procedural
charges. The mortgage covered a Quezon City property error by consolidating title to the property, which
in Leopoldo Darios name and was annotated on the smacked of bad faith and evinced a reprobate
title on 18 December 1991. For non-payment of the disposition of the part of its counsel to advance his
principal obligation, UNIONBANK extrajudicially clients cause by fair means or foul. As a result thereof
foreclosed the property mortgaged on 12 August 1993 the transfer of title was vitiated by non-adherence to

30
procedural due process. which a restraining order or temporary injunction has
been granted operates as a dissolution of the
On 26 June 1997, CA nullified the consolidation of restraining order or temporary injunction, regardless of
ownership, ordered the Register of Deeds to cancel the whether the period for filing a motion for
certificate of title in UNIONBANKs name and to reconsideration of the order dismissing the case or
reinstate TCT No. 41828 with the notice of lis pendens appeal therefrom has expired. The rationale therefor is
annotated at the back. The CA also set aside the portion that even in cases where an appeal is taken from a
of the assailed judgment dismissing an action on the merits, the
RTC Orders that declared the DARIOs prayer for writ of appeal does not suspend the judgment, hence the
preliminary injunction as moot and academic. general rule applies that a temporary injunction
UNIONBANKs motion for reconsideration of the terminates automatically on the dismissal of the action.
abovementioned decision was likewise rejected for lack
of merit on 7 April 1998. We disagree with the appellate courts observation that
consolidation deprived the DARIOs of their property
UNIONBANKs contention: came to this Court claiming without due process. It is settled that the buyer in a
to be a mortgagee in good faith and for value with a foreclosure sale becomes the absolute owner of the
right to consolidate ownership over the foreclosed property purchased if it is not redeemed during the
property with the redemption period having expired period of one year after the registration of the sale.
and there having been no redemptioners. UNIONBANK Consolidation took place as a matter of right since there
contends that the TRO which provisionally enjoined the was no redemption of the foreclosed property and the
tolling of the redemption period was automatically TRO expired upon dismissal of the complaint.
dissolved upon dismissal of the complaint on 17 UNIONBANK need not have informed private
October 1994. respondent that it was consolidating its title over the
Conformably, consolidation of title in its name and the property, upon the expiration of the redemption period,
issuance of TCT No. 120929 rendered further without the judgment debtor having made use of his
proceedings on the application for injunction academic. right of redemption, the ownership of the property sold
Moreover, the alleged fraudulent mortgage was becomes consolidated in the purchaser. Notice to the
facilitated through the DARIOs negligence so they must mortgagors and with more reason, to the DARIOs who
bear the loss. It also contends that since the DARIOs are not even parties to the mortgage contract nor to
had filed several pleadings, due process, being an the extrajudicial sale is not necessary.
opportunity to be heard either through pleadings or
oral arguments, was observed. In real estate mortgage, when the principal obligation is
not paid when due, the mortgage has the right to
Darios contention: that UNIONBANKs consolidation of foreclose the mortgage and to have the property seized
the title in its name was in bad faith, vitiated a standing and sold with a view to applying the proceeds to the
court order, and is against the law, thus void ab initio. payment of the principal obligation. Foreclosure may be
The application for preliminary injunction was not effected either judicially or extrajudicially.
rendered moot and academic by consolidation, which
took place during the lifetime of the TRO, and did not In a public bidding during extra-judicial foreclosure, the
follow the proper legal procedure due to the creditor-mortgagee, trustee, or other person authorized
surreptitious manner it was accomplished. By treating to act for the creditor may participate and purchase the
the application for preliminary injunction as moot and mortgaged property as any other bidder. Thereafter the
academic and denying the motion for indirect contempt mortgagor has one year within which to redeem the
without hearing, the RTC order ran afoul with the property from and after registration of sale with the
requirements of due process. Register of Deeds. In case of non-redemption, the
purchaser at foreclosure sale shall file with the Register
ISSUE: Whether or not the consolidation of title in of Deeds, either a final deed of sale executed by the
UNIONBANKs name proper. YES person authorized by virtue of the power of attorney
HELD: UNIONBANKs consolidation of title over the embodied in the deed or mortgage, or his sworn
property on 24 October 1994 was proper, though statement attesting to the fact of non-redemption;
precipitate. Contrary to the DARIOs allegation whereupon, the Register of Deeds shall issue a new
UNIONBANK violated no standing court order. The only certificate of title in favor of the purchaser after the
bar to consolidation was the temporary restraining owners duplicate of the certificate has been previously
order issued by Justice Lipana-Reyes on 10 October delivered and cancelled. Thus, upon failure to redeem
1994 which effectively halted the tolling of the foreclosed realty, consolidation of title becomes a
redemption period 7 days short of its expiration. When matter of right on the part of the auction buyer, and the
the DARIOs original complaint was dismissed on 17 issuance of a certificate of title in favor of the purchaser
October 1994 for failure to append a certification of becomes ministerial upon the Register of Deeds.
non-forum shopping, the TRO, as an ancillary order that
cannot stand independent of the main proceeding,
became functus officio. Thus the tolling of the 12- DISCUSSION
month redemption period, interrupted by the filing of
the complaint and the TRO, recommenced and Q: In the filing of the case on Oct. 4, did it stop the one
eventually expired 7 days thereafter or on 24 October year period from running? Did it prevent the
1994, the date of the disputed consolidation. consolidation of the sale?
A: No. It did not prevent the consolidation.
The motion for reconsideration and to amend
Q: Would it not prejudice the mortgagor if eventually the
complaint filed by private respondent on 20 October
annulment of the foreclosure sale will be granted? Will
1994 was of no moment, this Court recognizing that a
the consolidation of the title in the name of the highest
dismissal, discontinuance or non-suit of an action in

31
bidder prejudice the right of the mortgagor owner of the title over the property. Consolidation is a matter of right as
property in case the annulment of the foreclosure will be to the highest bidder. Notice to the mortgagor-owner, to
granted? the private respondents who are not even parties to the
A: No. THE CONSOLIDATION OF OWNERSHIP OVER THE parties in the extrajudicial sale is not necessary. The
MORTGAGED PROPERTY IN FAVOR OF PETITIONER AND mortgagee has the right to foreclose the mortgage, have
THE ISSUANCE OF A NEW TITLE IN ITS NAME DURING THE the property seized and sold, with the view to apply the
PENDENCY OF THE ACTION FOR ANNULMENT AND proceeds to the principal obligation. The mortgagor has
RECONVEYANCE WILL NOT CAUSE IRREPARABLE INJURY TO one year to redeem the property from the registration of
PRIVATE RESPONDENTS; THE NOTICE OF LIS PENDENS the sale, and upon failure to redeem consolidation
ANNOTATED ON PETITIONERS TITLE SUBJECT TO THE becomes a matter of right on the part of the auction buyer,
OUTCOME OF THE LITIGATION, SUFFICIENTLY PROTECTS and the issuance of the certificate of title in favor of the
THE INTEREST OF PRIVATE RESPONDENTS IN THE purchaser becomes ministerial upon the register of deeds.
PROPERTY. The consolidation of ownership in favour of Union Bank
and his issuance of new title in its name during the
To be entitled to the injunctive writ, movant must show pendency of an action for annulment and reconveyance
that there exists a right to be protected which is directly will not cause irreparable injury to the private
threatened by an act sought to be enjoined. Furthermore, respondents.
there must be a showing that the invasion of the right is After the sale has already taken place, the sheriff will now
material and substantial and that there is an urgent and issue a provisional certificate of sale because there is still
paramount necessity for the writ to prevent a serious the 1 year redemption period. Thereafter, the sale will be
damage. The injunctive remedy prevents a threatened or registered in the Registry of Deeds.
continuous irremediable injury to some of the parties
before their claim can be thoroughly investigated and How to validly redeem?
advisedly adjudicated; it is resorted to only when there is a
pressing necessity to avoid injurious consequences which You must pay within the redemption period as provided
cannot be remedied under any standard compensation. under the law. You pay the purchase price plus one
percent (1%) interest per month and taxes from date of
In the case at bar, the consolidation of ownership over the registration of sale until date of redemption. (One percent
mortgaged property in favor of UNIONBANK and the because this was the previous legal interest rate. But with
issuance of a new title in its name during the pendency of the new interest, six percent (6%), legal interest rate
an action for annulment and reconveyance will not cause effective July 1, 2013, then you apply the appropriate
irreparable injury to private respondents who are plaintiffs interest rate effective from that date.) Payment is made to
in the said action that will merit the protection of the court the redemptioner or to the sale officer or the sheriff. The
through the writ of preliminary injunction. written official redemption must be served on the officer
who made the sale and a duplicate with the Register of
This is because as purchaser at a public auction, Deeds. If no redemption is made, the sheriff will issue a
UNIONBANK is only substituted to and acquires the right, final certificate of sale.
title, interest and claim of the judgment debtors or
mortgagors to the property at the time of levy. Perforce, During the 1 year redemption period or even thereafter,
the judgment in the main action for reconveyance will not who gets to have possession of the property?
be rendered ineffectual by the consolidation of ownership
and the issuance of title in the name of UNIONBANK. G.R. No. 169190 / February 11, 2010
CUA LAI CHU, CLARO G. CASTRO, and JUANITA CASTRO
More importantly, with the main action for reconveyance vs. HON. HILARIO L. LAQUI
pending before the RTC, the notice of lis pendens, which
despite consolidation remains annotated on UNIONBANKs Doctrine: The right to possession of a purchaser at an
transfer certificate of title subject to the outcome of the extrajudicial foreclosure sale is not affected by a
litigation, sufficiently protects private respondents interest pending case questioning the validity of the foreclosure
over the property. A transferee pendente lite stands proceeding. The latter is not a bar to the former.
exactly in the shoes of the transferor and is bound by any
judgment or decree which may be rendered for or against FACTS: November 1994: Philippine Bank of
the transferor. Once a notice of lis pendens has been duly Communication (respondent) loaned P3, 200,000 to the
registered, any cancellation or issuance of the title of the petitioners. To secure the loan, petitioners executed in
land involved as well as any subsequent transaction favor of private respondent a Deed of Real Estate
affecting the same, would have to be subject to the Mortgage.
outcome of the litigation. In other words, upon the August 1997: the mortgage was amended, and the loan
termination of the litigation there can be no risk of losing was increased by P1, 800,000, making the amount P5,
the property or any part thereof as a result of any 000,000. For failure of petitioners to pay the full
conveyance of the land or any encumbrance that may be amount of the outstanding loan upon demand, private
made thereon posterior to the filing of the notice of lis respondent applied for the extrajudicial foreclosure of
pendens. the real estate mortgage.

Q: To what extent will be the right of the highest bidder, TRIAL COURT: Granted respondents motion for a
as in this case, Union Bank? declaration of general default and allowed them to
A: A buyer in a foreclosure sale becomes the absolute present evidence ex parte.
owner of the property if it is not redeemed during the one COURT OF APPEALS: Petitioners appealed. However, it
year redemption period. Consolidation takes place as a was dismissed since the counsel for petitioners failed to
matter of right since there was no redemption of the indicate the updated PTR Number in the said petition,
foreclosed property. More so, when the TRO expired upon which is a ground for outright dismissal under B.M
the dismissal of the complaint. Union bank need not 1132. The court held that a proceeding for the issuance
inform the private respondents that it was consolidating its of a writ of possession is ex parte in nature.

32
decided in his favor, nullifying the extrajudicial
ISSUES: Whether the writ of possession was properly foreclosure and auction sale. GSIS appealed to the CA,
issued despite the pendency of a case questioning the which reversed the RTC. Petitioner elevated the CA
validity of the extrajudicial foreclosure sale even when decision to this Court via petition for review on
petitioners were declared in default. certiorari.

HELD/REASON: The Supreme Court held that since the This Court denied his petition for review and motion for
private respondent had purchased the property at the reconsideration. As a result, the CA decision became
foreclosure sale, their right over the said property final and executory, rendering unassailable both the
became absolute, vesting in it the corollary right of extrajudicial foreclosure and auction sale.
possession. -Petitioners cannot oppose or appeal the
courts order granting the writ of possession in an ex
parte proceeding. The remedy of petitioners is to have Because of the petitioners request for an extension of
the sale set aside and the writ of possession cancelled time to vacate the properties, GSIS acceded to the
in accordance with Section 8 of Act No. 3135, as request. Yet, the petitioner did not voluntarily vacate
amended: SEC. 8. The debtor may, in the proceedings in the properties, but instead filed a MR and/or to quash
which possession was requested, but not later than the writ of execution and motion to hold GSIS in
thirty days after the purchaser was given possession, contempt of court for painting the fence of the
petition that the sale be set aside and the writ of properties during the pendency of his said motion.
possession cancelled, specifying the damages suffered
by him, because the mortgage was not violated or the ISSUE: W/N the petitioner, as defaulting mortgagor, was
sale was not made in accordance with the provisions not entitled under Act 3135, as amended, and its
hereof. pertinent jurisprudence to any prior notice of the
application for the issuance of the writ of possession.
PETITION DISMISSED.
HELD: No. The petitioner, as defaulting mortgagor, was
not entitled under Act 3135, as amended, and its
DISCUSSION: pertinent jurisprudence to any prior notice of the
application for the issuance of the writ of possession.
Q: How about within the 1 year redemption period can
the highest bidder file for a writ of possession even if the
A writ of possession, which commands the sheriff to
1 year period has not yet lapsed?
place a person in possession of real property, may be
A: Yes. Sec. 7 of Act 3135, which provides that there is a
issued in:
need to file for a bond, but the bond is only required if he
wants to possess the property during the redemption
(1) Land registration proceedings under Section 17 of
period.
Act No. 496;
(2) Judicial foreclosure, provided the debtor is in
Q: Is there a violation of due process with this petition for
possession of the mortgaged property, and no third
writ of possession when the mortgagors were declared in
person, not a party to the foreclosure suit, had
default?
intervened;
A: No, because after the 1 year redemption period, it is
(3) Extrajudicial foreclosure of a real estate mortgage,
already a ministerial duty for the court to issue a writ of
pending redemption under Section 7 of Act No. 3135,
possession.
as amended by Act No. 4118; and
(4) Execution sales, pursuant to the last paragraph of
Q: Because what is the nature of this writ of possession?
Section 33, Rule 39 of the Rules of Court.
A: It is ex-parte.

Anent the redemption of property sold in an


MALLARI vs. GOVERNMENT SERVICE INSURANCE
extrajudicial foreclosure sale made pursuant to the
SYSTEM
special power referred to in Section 132 of Act No.
3135, as amended, the debtor, his successor-in-interest,
FACTS: In 1968, the petitioner obtained two loans or any judicial creditor or judgment creditor of said
totalling P34, 000.00 from respondent GSIS. To secure debtor, or any person having a lien on the property
the performance, he mortgaged two parcels of land subsequent to the mortgage or deed of trust under
registered under his and his wife Marcelina Mallaris which the property is sold has the right to redeem the
names. However, he paid GSIS about ten years after property at any time within the term of one year from
contracting the obligations only P10, 000.00 and P20, and after the date of the sale, such redemption to be
000.00. governed by the provisions of Section 464 to Section
466 of the Code of Civil Procedure, to the extent that
Nearly three years later (1984), GSIS applied for the said provisions were not inconsistent with the
extrajudicial foreclosure of the mortgage by reason of provisions of Act 3135.
his failure to settle his account. He requested an
updated computation of his outstanding account. He In this regard, we clarify that the redemption period
persuaded the sheriff to hold the publication of the envisioned under Act 3135 is reckoned from the date of
foreclosure to await action on his pending request for the registration of the sale, not from and after the date
final accounting (that is, taking his payments of P30, of the sale, as the text of Act 3135 shows. Although the
000.00 made in 1978 into account). GSIS responded to original Rules of Court (effective on July 1, 1940)
his request. It finally commenced extrajudicial incorporated Section 464 to Section 466 of the Code of
foreclosure proceedings against him because he had Civil Procedure as its Section 25 (Section 464); Section
meanwhile made no further payments. 26 (Section 465); and Section 27 (Section 466) of Rule
The petitioner sued GSIS (prelim injunction). The RTC 39, with Section 27 still expressly reckoning the

33
redemption period to be "at any time within twelve property may be redeemed without paying such
months after the sale;" and although the Revised Rules assessments, taxes, or liens. (30a) (Emphasis supplied).
of Court (effective on January 1, 1964) continued to
provide in Section 30 of Rule 39 that the redemption be Accordingly, the mortgagor or his successor-in-interest
made from the purchaser "at any time within twelve must redeem the foreclosed property within one year
(12) months after the sale," the 12-month period of from the registration of the sale with the Register of
redemption came to be held as beginning "to run not Deeds in order to avoid the title from consolidating in
from the date of the sale but from the time of the purchaser. By failing to redeem thus wise, the
registration of the sale in the Office of the Register of mortgagor loses all interest over the foreclosed
Deeds."36 This construction was due to the fact that property.38 The purchaser, who has a right to
the sheriffs sale of registered (and unregistered) lands possession that extends beyond the expiration of the
did not take effect as a conveyance, or did not bind the redemption period, becomes the absolute owner of the
land, until the sale was registered in the Register of property when no redemption is made, that it is no
Deeds. longer necessary for the purchaser to file the bond
required under Section 7 of Act No. 3135, as amended,
Desiring to avoid any confusion arising from the conflict considering that the possession of the land becomes his
between the texts of the Rules of Court (1940 and absolute right as the lands confirmed owner. The
1964) and Act No. 3135, on one hand, and the consolidation of ownership in the purchasers name and
jurisprudence clarifying the reckoning of the the issuance to him of a new TCT then entitles him to
redemption period in judicial sales of real property, on demand possession of the property at any time, and the
the other hand, the Court has incorporated in Section issuance of a writ of possession to him becomes a
28 of Rule 39 of the current Rules of Court (effective on matter of right upon the consolidation of title in his
July 1, 1997) the foregoing judicial construction of name.
reckoning the redemption period from the date of the
registration of the certificate of sale, to wit: The court can neither halt nor hesitate to issue the writ
of possession. It cannot exercise any discretion to
Sec. 28. Time and manner of, and amounts payable on, determine whether or not to issue the writ, for the
successive redemptions; notice to be given and filed. issuance of the writ to the purchaser in an extrajudicial
The judgment obligor, or redemptioner, may redeem foreclosure sale becomes a ministerial function. Verily, a
the property from the purchaser, at any time within one marked distinction exists between a discretionary act
(1) year from the date of the registration of the and a ministerial one. A purely ministerial act or duty is
certificate of sale, by paying the purchaser the amount one that an officer or tribunal performs in a given state
of his purchase, with one per centum per month of facts, in a prescribed manner, in obedience to the
interest thereon in addition, up to the time of mandate of a legal authority, without regard to or the
redemption, together with the amount of any exercise of his own judgment upon the propriety or
assessments or taxes which the purchaser may have impropriety of the act done. If the law imposes a duty
paid thereon after purchase, and interest on such last upon a public officer and gives him the right to decide
named amount at the same rate; and if the purchaser how or when the duty shall be performed, such duty is
be also a creditor having a prior lien to that of the discretionary, not ministerial. The duty is ministerial
redemptioner, other than the judgment under which only when its discharge requires neither the exercise of
such purchase was made, the amount of such other official discretion nor the exercise of judgment.
lien, with interest.
The proceeding upon an application for a writ of
Property so redeemed may again be redeemed within possession is ex parte and summary in nature, brought
sixty (60) days after the last redemption upon payment for the benefit of one party only and without notice
of the sum paid on the last redemption, with two per being sent by the court to any person adverse in
centum thereon in addition, and the amount of any interest. The relief is granted even without giving an
assessments or taxes which the last redemptioner may opportunity to be heard to the person against whom
have paid thereon after redemption by him, with the relief is sought. Its nature as an ex parte petition
interest on such last-named amount, and in addition, under Act No. 3135, as amended, renders the
the amount of any liens held by said last redemptioner application for the issuance of a writ of possession a
prior to his own, with interest. The property may be non-litigious proceeding.
again, and as often as a redemptioner is so disposed,
redeemed from any previous redemptioner within sixty It is clear from the foregoing that a non-redeeming
(60) days after the last redemption, on paying the sum mortgagor like the petitioner had no more right to
paid on the last previous redemption, with two per challenge the issuance of the writ of execution cum writ
centum thereon in addition, and the amounts of any of possession upon the ex parte application of GSIS. He
assessments or taxes which the last previous could not also impugn anymore the extrajudicial
redemptioner paid after the redemption thereon, with foreclosure, and could not undo the consolidation in
interest thereon, and the amount of any liens held by GSIS of the ownership of the properties covered by TCT
the last redemptioner prior to his own, with interest. No. 284272-R and TCT No. 284273-R, which
consolidation was already irreversible. Hence, his
Written notice of any redemption must be given to the moves against the writ of execution cum writ of
officer who made the sale and a duplicate filed with the possession were tainted by bad faith, for he was only
registry of deeds of the place, and if any assessments or too aware, being his own lawyer, of the dire
taxes are paid by the redemptioner or if he has or consequences of his non-redemption within the period
acquires any lien other than that upon which the provided by law for that purpose.
redemption was made, notice thereof must in like
manner be given to the officer and filed with the
registry of deeds; if such notice be not filed, the DISCUSSION

34
invalidate the sale because it is in favour of the
Q: So aside from the fact that the provision of Mallari was redemptioner.
denied, what was ruling of the court?
A: Mallari as a lawyer was guilty of misconduct because he In relation to foreclosure proceedings, we also have to
delayed the proceedings. take note of equitable mortgage provided under Art.
1602 wherein a deed of sale or a deed of sale with right to
The extrajudicial foreclosure was filed in 1984 but there repurchase or an absolute sale could be deemed as an
were several extensions, motions, cases of contempt of equitable mortgage. One of the instances provided in
court, because as a lawyer, Mallari would not incur Article 1602 is when the price of the sale with the right to
attorneys fees. Even if it was very clear that the repurchase is unusually inadequate. So no sale but what
foreclosure is proper, nevertheless, it was extended up to we have is an equitable mortgage. So again that would be
2010. The SC pointed out that not only was his petition in favor of the owner of the property because it would only
denied but he was also found guilty of misconduct. be subject to a lien and thereafter we could seek for the
reformation. Reformation is the remedy here if what was
Its a petition for writ of possession where the property is executed was a deed of sale but the intention was to have
located and the nature of this petition is ex-parte. In other that property secure the principal obligation. So the owner
words, notice to the mortgagor is not required and it does of the property can seek for reformation of the said
not violate the right to due process of the mortgagor in contract. Why? There was an agreement but not deed of
this kind of petition. Second, it is ministerial. As long as the sale, only a mortgage.
requisites have been complied with.
But what if the mortgagee, based on that pacto de retro
A writ of possession will be granted when the following sale or deed of absolute sale, will file an action for recovery
requisites are complied with: of possession against the owner of the property?
1. There was an extra judicial foreclosure
proceeding;
2. petitioner is the highest bidder; and That would be the time that the owner of the property can
3. that there was consolidation and title was raise the defense that what they had was not a deed of
already issued in petitioners name. sale or a deed of absolute sale or a pacto de retro sale but
rather an equitable mortgage by showing that there was a
What about if there is a deficiency? principal obligation and any of the circumstances in Article
If the sale took place however the proceeds are not 1602 are present. But with that defense and if it is duly
sufficient to extinguish the obligation, can the creditor proven, the owner of the property would still continue in
mortgagee proceed against the debtor for the deficiency? possession of that property and the mortgagee would not
-- Not necessarily the mortgagor. Because the mortgagor be entitled thereto but he will be entitled to foreclose the
will be the third person and as a third person he cannot be property if there is failure to pay the obligation.
liable for any deficiency but if you say judicial foreclosure,
the mortgagee can still recover from the deficiency. If will March 7 Kaye
be part of the judgment that if the there is a deficiency, the
mortgagee may still proceed against the debtor for the Last meeting we discussed the relevant provisions with
deficiency. As to extrajudicial foreclosure, under Act 3135, regard to real estate mortgage in relation to Act 3135.
there is no provision which explicitly states that the debtor Under the said law, it requires posting and publication. We
will be liable for the deficiency. But the SC has been have emphasized in our past discussions the relevance of
consistent in its ruling that the mortgagee may still such posting at conspicuous public places and we also have
demand from the debtor the deficiency. the publication wherein failure to comply of these
requirements will invalidate the foreclosure. Let us check
What if there is an excess? the case of Ramirez which emphasizes this notice
Whether it is a judicial or extra-judicial, foreclosure, if requirement.
there is an excess, it shall be returned to the mortgagor.
JOSE T. RAMIREZ v. THE MANILA BANKING
What about if the sale or if the purchase price during the CORPORATIONG.R.
sale is inadequate? No. 198800, December 11, 2013
Under obligations and contract, gross inadequacy of the Reporter: Guinomla
price will not necessarily invalidate the sale unless there is
fraud or other vitiation of consent. In an extra-judicial Facts:
foreclosure sale or judicial foreclosure sale, if the price of Ramirez obtained a loan from Manila Banking and
the thing is grossly inadequate, can the foreclosure sale be mortgaged his property. In their contract of mortgage, it
rescinded on the ground that it is inadequate? Take note it was expressly stipulated that:
is more liberal when it comes to redemption. Why? All correspondence relative to this MORTGAGE,
Because with regard to whether it is equity of redemption including demand letters, summons, subpoenas or
which is before the sale or before the confirmation of notifications of any judicial or extrajudicial actions
the sale, but essentially with these two foreclosure shall be sent to the MORTGAGOR
proceedings, if the price is grossly inadequate, as a general Ramirez defaulted in his obligation thus Manila Banking
rule, it will not justify the rescission of the sale. Why? proceeded with the extrajudicial foreclosure of the
Because if the price is inadequate, it will be in favor of the mortgaged property without giving notice to Ramirez,
mortgagor redemptioner. So as we have seen in some contrary to what they have stipulated as mentioned
cases that we have discussed, the loss with be liberally above.
construed in favor of the redemptioner. Exception to the Issue: What is the legal effect of violating an express
exception is if the inadequacy is shocking to the conscience stipulation of the deed of mortgage which requires
of man. But unless it can be proven that it is shocking to personal notice to the petitionermortgagor by the
the conscience, mere inadequacy of the price will not respondentmortgagee bank?

The extrajudicial foreclosure sale is NULL AND VOID.

35
stipulate personal notice to the mortgagor in extrajudicial
Personal notice to the mortgagor in extrajudicial foreclosure proceedings is not necessary.
foreclosure proceedings is not necessary because
Section 3 of Act No. 3135 only requires the posting of
the notice of sale in three public places and the We also pointed out last meeting that if there is failure to
publication of that notice in a newspaper of general redeem the property within the 1 year period, the
circulation HOWEVER, if there is an additional mortgagee may submit an affidavit of consolidation and
requirement as to the manner of giving notice as cancel the old title and a new one will be issued in favor of
agreed by the parties, IT MUST BE COMPLIED WITH, the highest purchaser to which after the title has been
otherwise the extrajudicial foreclosure sale will be consolidated, the highest purchaser will now be entitled to
void. possession thereof. And in fact, during the period of
redemption, the highest bidder is also entitled to the
The Act only requires: possession. However, it is required to post a bond.
(1) the posting of notices of sale inthree public places,
and Now how about in this case of Sps Dulnuan v Metrobank
(2) the publication of the same in a newspaper of
general circulation. SPS. DULNUAN v METROBANK
GR 19864 July 8, 2015
Personal notice to the mortgagor is not necessary. Reporter: Lagat
Nevertheless, the parties to the mortgage contract are
not precluded from exacting additional requirements. Facts:
The Sps entered into a contract of loan with Metrobank.
SECTION 4. The sale shall be made at public auction, To secure the obligation, they instituted a real estate
between the hours or nine in the morning and four in mortgage in their property. The spouses defaulted in
the afternoon; and shall be under the direction of the their obligation so Metrobank sought the extrajudicial
sheriff of the province, the justice or auxiliary justice of foreclosure of their property wherein it emerged as the
the peace of the municipality in which such sale has to highest bidder. After the lapse of the period of
be made, or a notary public of said municipality, who redemption period without the Sps redeeming their
shall be entitled to collect a fee of five pesos each day property, Metrobank sought the consolidation of title in
of actual work performed, in addition to his expenses. its favor. The Sps opposed such by filing a complaint for
annulment of the mortgage contending that
consolidation was not proper because it was made
SECTION 6. In all cases in which an extrajudicial sale is during the redemption period.
made under the special power hereinbefore referred to,
the debtor, his successors in interest or any judicial The courts decided in favor of Metrobank stating that in
creditor orjudgment creditor of said debtor, or any forclosure proceedings the highest bidder whether the
person having alien on the property subsequent to the mortgagee or not is entitled to possession. And during
mortgage or deed of trust under which the property is the redemption period, there has to be a bond that
sold, may redeem the same at any time within the term must be issued.
of one year from and after the date of the sale; and
such redemption shall be governed by the provisions of Issue: WON Metrobank as the highest bidder entitled
sections four hundred and to possession despite non-posting of the bond?

Yes
Q: Does Act 3135 require notice to the mortgagor for the It is an established rule that the purchaser in an extra-
foreclosure sale? judicial foreclosure sale is entitled to the possession of
A: No Maam. the property and can demand that he be placed
inpossession of the same either during (with bond) or
Q: So what is the effect of that stipulation? after the expiration (without bond) of the redemption
A: According to the Supreme court, the general rule is that period therefor. 20 The non-expiration of the period of
notification is not required in the foreclosure of properties. redemption shall not preclude the purchaser from
However, the parties are not barred to stipulate such in taking possession of the property provided that the
their contract of mortgage. And in case, there is such necessary is posted. The buyer can in fact demand
stipulation, the parties must comply with such. possession of the land even during the redemption
period except that he has to post a bond in accordance
Q: So what is the effect of failing to do so? with Section 7 21 of Act No. 3135, as amended. In the
A: Failure to do so will render the foreclosure of the case at bar, Metrobank manifested its willingness to
mortgage void. post a bond but its application for the issuance of the
writ of possession was unjustly denied by the RTC.
Atty Sarona: So again now take note, that under Act 3135,
personal notice to the mortgagor is not necessary, it only Q: So in this case, was the possession prayed for by
requires the posting of the notice in conspicuous public Metrobank made during the period of redemption?
places and the publication in a newspaper of general A: Yes Maam
circulation. However, if the parties stipulate that the
mortgagor must be notified for the foreclosure proceeding Q: Did Metrobank post the required bond? As you said, as
as what happened in this case of Ramirez, then such must a requirement, the highest bidder must post a bond. What
be complied with. The respondents have no choice but to was the basis of the the SCs ruling in favor of Metrobank?
comply with this contractual provision for the contract is Is Metrobank entitled to possession?
still obligated (? not clear). Its not really an additional A: No Maam, no bond was posted by MB
obligation imposed by law. But it is an obligation by virtue
of the contract between the parties. So unless the parties

36
Q: So why as it entitled to possession when no bond was YES. The long-settled rule in extrajudicial foreclosure
posted? What does Sec 7 of Act 3135 provide? ofreal estate mortgage is that after consolidation of
ownership of the foreclosed property, it is the
Atty Sarona: Yes that is there is a difference if the ministerial duty of the court to issue, as a matter of
possession is prayed for during the redemption period right, an ex parte writ of possession to the buyer.
because in that case, bond is required
The established rule is that the purchaser in an
Q: You said that Metrobank did not post a bond. But why extrajudicial foreclosure sale becomes the absolute
was it that it was still entitled to possession in this case? owner of the property if no redemption is made within
A: Because the RTC denied their application for writ of one (1) year from the registration of the certificate of
possession. sale by those who are entitled to redeem. Possession
being a recognized essential attribute of ownership,
Q: What is the effect of the action of the Sps Dulnuan in after consolidation of title the purchaser may demand
relation to the prayer for possession? possession as a matter of right.29 Under Section 7 of
Act No. 3135, as amended by Act No. 4118, the
Atty Sarona: So here even before the redemption period, issuance of the writ is merely a ministerial function of
the highest purchaser in the foreclosure sale can still be the RTC, which the new owner may obtain through an
entitled to possession. He can demand that he be given ex parte motion.
possession of the same even during but with a bond. After
expiration of the redemption period, this time without a The possession may be granted to the buyer either
bond. The expiration of the period of redemption shall not (a)within the one-year redemption period, upon the
preclude the purchaser from taking possession of the filing by the purchaser of a bond, or
property provided that the necessary bond is posted. The (b) after the lapse of the redemption period, without
buyer may in fact demand possession of the land even need of a bond.
during the redemption period except that he has to post a
bond. 2. Whether or not a pending action for the annulment
of the writ stays the issuance of the writ of possession.
In this case, Metrobank did not actually post a bond. But in
its petition for possession, it manifested its willingness to NO.
post a bond. But its application for issuance was denied by As a GENERAL RULE:
the RTC. Secondly, the pendency of the action filed by the It is settled that a pending action for annulment of
Sps stating the validty of the mortgage again does not bar mortgage or foreclosure sale does not stay the issuance
the issuance of the writ of possession. of the writ of possession. The trial court, where the
application for a writ of possession is filed, does not
From the FT of the case The pendency of the action need to look into the validity of the mortgage or the
assailing the validity of the mortgage should not bar the manner of its foreclosure. The purchaser is entitled to a
issuance of the writ of possession. A pending action for writ of possession without prejudice to the outcome of
annulment of mortgage or foreclosure does not stay the the pending annulment case.
issuance of a writ of possession. Regardless of the
pendency of such suit, the purchaser remains entitled to a As an EXCEPTION:
writ of possession, without prejudice, of course, to the The ministerial duty of the court to issue an ex parte
eventual outcome of the pending annulment case. writ of possession ceases once it appears that there is a
third party in possession of the property, who is a
DARCEN v GONZALES stranger to the mortgage and who claims a right
GR 199747 April 3, 2015 adverse to that of the debtor/ mortgagor.
Reporter: Mangadlao
Facts For the EXCEPTION TO APPLY:
The Darcens including the spouse are heirs to parcels The property need not only be possessed by a third
of land which they inherited from their patriarch. The party, but also held by the third party adversely to the
wife, obtained a loan from Gonzales Credit and debtor/mortgagor.
mortgaged the inherited properties. Since she was not
able to pay her obligation, Gonzales Credit initiated an Basis:
extrajudicial foreclosure proceeding on the mortgaged Section 33, Rule 39 of the Rules of Court provides that
property. There was a console dation of in an execution sale, the possession of the property
ownership of the said properties under Gonzales Credit. shall be given to the purchaser or last redemptioner,
The heirs were not able to redeem the said properties unless a third
within the redemption period. Thereafter, a writ of party is actually holding the property adversely to the
possession was issued in favor of Gonzales. judgment obligor.
CLAIM OF DARCENS:
The application of the above Section has been extended
The issuance of the writ of possession is improper as to extrajudicial foreclosure sales pursuant to Section 6
they are in adverse possession of the property. The of ActNo. 3135, to wit:
issuance of the writ shouldnt have been ministerial.
Thus the Darcens filed an action for the annulment of Sec. 6. In all cases in which an extrajudicial sale is made
the writ. under the special power hereinbefore referred to, the
debtor, his successors in interest or any judicial creditor
ISSUES: or judgment creditor of said debtor, or any person
1. Whether or not it is ministerial for the court toissue having alien on the property subsequent to the
a writ of possession after consolidation of the mortgage or deed oftrust under which the property is
ownership of the property in the name of the buyer. sold, may redeem the same at any time within the term
of one year from and after the date of sale; and such

37
redemption shall be governed by the provisions of property who is a stranger to the mortgage and whose
section four hundred and sixty-four to fourhundred and rights are adverse to the debtor or mortgagor.
sixty-six, inclusive, of the Code of CivilProcedure, in so Case at bar
far as these are not inconsistent with the So in this case, there is no proof that the petitioners are
provisions of this Act. adverse 3rd party claimants. There is also no evidence that
their right emanate from another owner adverse to the
In this case, the DARCENS, were not able to prove that mortgagor. In fact, it was established that they were heirs
they are adverse party claimants thus the issuance of or successors in interest of the said mortgagors. And
the writ may be done ministerially. therefore, they are bound by the said mortgage. And they
cannot question the issuance of writ of possession by the
courts. It is its ministerial duty.

Section 8. The debtor may, in the proceedings in which


possession was requested, but not later than thirty days
after the purchaser was given possession, petition that SPS GATUSLAO v YANSON
the sale be set aside and the writ of possession GR 191540 August 26, 2014
cancelled, specifying the damages suffered by him, Reporter: Campaner
because the mortgage was not violated or the sale was
not made in accordance with the provisions hereof, and Facts
the court shall take cognizance of this petition in The wife here Erlinda Gatuslao was the daughter of late
accordance with the summary procedure provided for Limsiaco who was the original owner of the parcel of
in section one hundred and twelve of Act Numbered land. Limsiaco, during his lifetime mortgage the herein
Four hundred and ninety-six; and if it finds the properties that are subject of the complaint to PNB.
complaint of the debtor justified, it shalldispose in his Due to Mr Limsiacos failure to pay the obligation, PNB
favor of all or part of the bond furnished by Either of extrajudicially foreclosed the property and
the parties may appeal from the order of the judge in subsequently it emerged as the highest bidder. After
accordance with section fourteen of Act Numbered the lapse of the 1 year redemption period, the estate
Four hundred and ninety-six; but the order of of Limsiaco did not redeem the property. PNB caused
possession shall continue in effect during the pendency the consolidation of the titles in its favor.
of the appeal. Without a writ of possession being issued in favor of
PNB, PNB sold the properties to respondent Yanson. So
Section 9. When the property is redeemed after the Yanson filed a complaint before the RTC for an ex-parte
purchaser has been given possession, the redeemer motion for writ of possession. So the petitioner (heirs of
shall be entitled to deduct from the price of redemption Limsiaco) intervened contending that the respondent is
any rentals that said purchaser may have collected in not entitled to the issuance of ex-parte writ of
case the property or any part thereof was rented; if the possession because it should be PNB(the predecessor
purchaser occupied the property as his own dwelling, it and seller of Yanson) that is entitled to such.
being town property, or used it gainfully, it being rural
property, the redeemer may deduct from the price the RTC granted the writ in favor of the Yansons
interest of one per centum per month provided for in
section four hundred and sixty-five of the Code of Civil Issue: WON the subsequent buyer of the property is
Procedure. entitled to the issuance of the writ of possession

Respondent is entitled to the issuance of writ of


Q: Whats the significance of adverse possession in relation possession.
to the petition for writ of possession?
A: Here Maam, as an exception to the general rule is in an Petitioners insist that respondent is not entitled to the
adverse possession of a third person, the issuance of a writ issuance of the writ of possession under Section 7 of
of possession will cease to be a ministerial duty of the Act No. 3135 as he is only a buyer of the subject
courts? properties in a contract of sale subsequently executed
Q: Who are in possession of the property? in his favor by the actual purchaser, PNB. To them, it is
A: The Darcens only the actual purchaser of a property at the public
Q: Are they considered possessors having adverse rights to auction sale who can ask the court and be granted a
the morgagors? writ of possession.
A: Here Maam, they failed to establish that they are the
adverse parties This argument is not tenable. Respondent, as a
Q: By what right then are they possessing the property? transferee or successor-in-interest of PNB by virtue of
A: the contract of sale between them, is considered to
Q: Who are they, by the way? have stepped into the shoes of PNB. As such, he is
A: They are the children of mortgagor necessarily entitled to avail of the provisions of Section
Atty Sarona: So therefore, they are not adverse 3 rd parties 7 of Act No. 3135, as amended, as if he is PNB. This is
because being successors in interest, the right emanate apparent in the Deed of Absolute Sale 46 between the
from the mortgagor not adverse to the said mortgagor . two, viz.:
therefore, we apply the general rule that the issuance of
the writ of possession is ministerial 1. The Vendor hereby sells, transfer[s] and
So here, not even the annulment of mortgage will stay the convey[s] unto [and] in favor of the Vendee, and
execution of the writ of possession. Again, as a general the latter's assigns and successors-in-interest, all
rule, it is a ministerial duty of the court to issue an ex-parte of the former's rights and title to, interests and
writ for possession. participation in the Property on an "AS IS,
As an exception, such ministerial duty ceases when it WHERE IS" basis. It is thus understood that the
appears that there is a 3rd party in possession of the Vendee has inspected the Property and has

38
ascertained its condition. transferee or successor in-interest of PNB, respondent is to
be considered to also step into the shoes of PNB and
2. The Vendor is selling only whatever rights and necessarily entitled to avail of the provisions of Sec 7 of Act
title to, interests and participation it has 3135.
acquired over the Property, and the Vendee
hereby acknowledges full knowledge of the One of the rights that can be applied as a purchaser is that
nature and extent of the Vendor's rights and title it could validly convey by way of its subsequent sale of the
to, [and] interests and participation in the same to respondent in the availment of the writ of
Property. possession.

3. The Vendee further agrees to undertake, at OKABE v SATURNINO


its/his/herexpense, the ejectment of any GR 196040 August 26, 2014
occupant of the Property. Reporter: Borbe
(Emphases in the original)
Facts
Verily, one of the rights that PNB acquired as purchaser The subject of this case is a 81 sq. m. property that was
of the subject properties at the public auction sale; donated in Makati. The said property was registered in
which it could validly convey by way of its subsequent the same of the wife of Ernesto Saturnino, respondent.
sale of the same to respondent, is the availment of a
writ of possession. This can be deduced from the The Sps Saturnino obtained a loan from PNB and the
above-quoted stipulation that "[t]he [v]endee further loan was secured by the said property. However, they
agrees to undertake, at . . . his expense, the ejectment failed to settle their loan obligation. So PNB
of any occupant of the [p]roperty." Accordingly, consolidated the property. The Spss were not able to
respondent filed the contentious ex parte motion for a redeem the property during the redemption period .
writ of possession to eject petitioners therefrom and
take possession of the subject properties. PNB, without taking possession of the property sold it
to Fe Okabe, petitioner. Petitioner now filed an ex-parte
issuance of a writ of possession of the subject property.
Q: Who filed for the petition for writ of possession? However, this was opposed by Saturnino(mortgagor
A: Yanson, the subsequent purchaser of PNB (the highest debtor)
bidder)
RTC ruled in favor of Okabe. It held that the issuance of
Q: Was the petition of writ of possession properly filed a writ is a ministerial duty of the court
even if Mr Yanson was not the highest bidder during the
foreclosure sale? Issue
A: Yes Maam. The SC said that the R is entitled to a writ of WON an ex-parte petition for the issuance of a writ of
possession because of the following reasons possession was the proper remedy of the petitioner in
1. PNB(its predecessor is entitled to such obtaining possession of the subject property.
possession
2. Due to the transfer of ownership(sale) from PNB YES
to respondent Yanson, the latter acquired all the
Purchaser in the foreclosure sale may apply for a writ of
rights of PNB
possession during the redemption period, 30 upon an
ex parte motion and after furnishing a bond. I n GC
Atty Sarona: This emphasized that the petition for writ of
Dalton Industries, Inc. v. Equitable PCI Bank, 31 the
possession remains to be ex-parte in nature. And the duty
Court held that the issuance of a writ of possession to a
of the courts is a ministerial duty to issue the same as long
purchaser in an extrajudicial foreclosure is summary
as the ones in possession are not strangers or third party
and ministerial in nature as such proceeding is merely
to the foreclosure sale.
an incident in the transfer of title. Also, in China
Banking Corporation v. Ordinario, 32 we held that under
Here, as Limsiacos successors in-interest, Petitioners
Section 7 of Act No. 3135, the purchaser in a
merely stepped into the shoes of and compelled not only
foreclosure sale is entitled to possession of the
to acknowledge but also to respect the mortgage that it
property.
had earlier executed in favor or respondent. Not being 3 rd
parties who have a right contrary to that of the mortgagor,
Case at Bar
the trial court is justified in issuing the writ. So the writ of
Here, petitioner does not fall under the circumstances
possession may be issued ex-parte. And being ex-parte, no
of the aforequoted case and the provisions of Section 7
notice is required to be issued to the petitioners who are in
of Act No. 3135, as amended, since she bought the
possession of the subject property. The ex-parte nature of
property long after the expiration of the redemption
the proceedings does not deny due process to the
period. Thus, it is PNB, if it was the purchaser in the
petitioners because the issuance of the same does not
foreclosure sale, or the purchaser during the
prevent a separate case for annulment of mortgage and
foreclosure sale, who can file the ex-parte petition for
foreclosure sale. The court may grant the petition even
the issuance of writ of possession during the
without the petitioners participation.
redemption period, but it will only issue upon
compliance with the provisions of Section 7 of Act No.
Case at bar
3135.
The record show that the petitioners were able to be heard
or were actually heard on their side of the controversy so
there is no violation of due process.
With regard to the right of respondent, remember, Yanson
Q: So is Okabe entitled to the writ of possession?
was not the highest bidder at the foreclosure sale. It was
PNB. And PNB sold the same to the respondent. As

39
A: It is only required when the third person is an adverse
possessor.
SPS GUEVARA v THE COMMONER LENDING
Q: What do you mean by adverse possessor? GR 204672
A: Because in this case, Okabe brought the property from Reporter: Del Rosario
PNB, hence Okabe was subrogated the rights of PNB to file
the writ of possession. Facts
Sps Guevara obtained a 320k loan from PCLC which was
Atty Sarona: So take note the general rule for the issuance secured by a real estate mortgage over a land situated
or writ of possession. It is ministerial in nature. With regard in Iloilo from a free patent granted to them.
to the court, it must issue the writ of possession provided
that the following requisites are present. When the Sps defaulted in their payments, PCLC
1. Foreclosure sale extrajudicially foreclosed the mortgage in accordance
2. The petitioner who is the highest bidder in the with Act 3135. PCLC emerged as the highest bidder. So a
foreclosure sale certificate of sale was issued to them. And the same
3. Title has been consolidated and registered in his was registered. Sps. Guevara failed to redeem within 1
name year so a new TCT was issued to PCLC. When PCLC
applied for writ of possession, the Sps opposed the
When all of those are duly presented, then the court has same . The challenged the validity of the foreclosure
the ministerial duty to issue the writ of possession. contending that PCLC failed to observe the proper
Moreover, the proceeding is ex-parte. So there is no need procedure. And they also assailed the issuance of the
for the participation of motgagor or his heirs or any party final deed of sale saying that it is premature since they
in possession thereof whose title is not adverse to that of are still entitled to redeem the property within 5 years
the debtor mortgagor. from the expiration of the 1 year redemption period.
However, take note the SC further noted that the remedy
of the writ of possession that is available to the mortgagee So the Sps Guevara filed an action for redemption
is made available to its subsequent purchaser. maintaining that they still have 5 years to redeem the
property .
Is hearing required?
IT DEPENDS RTC while it granted the writ of possession and notice
Hearing is required to determine who is in possession of to vacate in favor of TCLC, it also granted the petition in
the property. Unlike if the purchaser is the mortgagee or the cadastral case filed by the Sps Guevara. The RTC
3rd party during the redemption period wherein a writ of also recognized the right to repurchase of the Sps
possession may issue ex-parte or without hearing. within the 5 year period provided under Sec 119 of the
HEARING IS REQUIRED Public land act(CA 141)
1. Acquired by 3rd party
2. After redemption period Issue: What is the correct redemption period that
must be followed?
If the purchaser is a third party who acquired the property
after the redemption period, a hearing is conducted to Lending/ Credit Institution has 1 year
determine whether who is in possession of the subject
property is still the mortgagor or is already in the In an extra-judicial foreclosure of registered land
possession of a 3rd party holding the property adverse to acquired under a free patent, the mortgagor may
the defaulting debtor or mortgagor. redeem the property within two (2) years from the date
Why? of foreclosure if the land is mortgaged to a rural bank
Because if it is in possession of the mortgagor, then a writ under Republic Act No. (RA) 720, 41 as amended,
of possession can be issued. otherwise known as the Rural Banks Act, or within one
But if it is in possession of a third person whose title is (1) year from the registration of the certificate of sale if
adverse to the mortgagor, the issuance of the writ of the land is mortgaged to parties other than rural banks
possession is not proper. pursuant to Act No. 3135. 42 If the mortgagor fails to
What is the remedy here of the subsequent purchaser? exercise such right, he or his heirs may still repurchase
File an action for ejectment. the property within five (5) years from the expiration of
1. Unlawful detainer the aforementioned redemption period 43 pursuant to
2. Recovery of possession: if it is more than 1 year Section 119 of the Public Land Act, which states:
na SEC. 119. Every conveyance of land acquired
under the free patent or homestead provisions,
Between the action for ejectment and the writ of when proper, shall be subject to repurchase by
possession, mas mabilis talaga ang writ of possession kasi the applicant, his widow, or legal heirs, within a
nga its ministerial and ex-parte. But you have to take into period of five years from the date of the
possession, who is in possession of the property. conveyance.
So there is no inconsistency between the case of Gatuslao
and the present case of Okabe. The SC here just elucidated Case at bar:
that hearing is needed to determine who is in possession In this case, the subject property was mortgaged to and
thereof .If the one in possession does not hold the foreclosed by TCLC, which is a lending or credit
property adverse from the mortgagor. When we say institution, and not a rural bank; hence, the redemption
adverse, his right does not emanate from the mortgagor. period is one (1) year from the registration of the
Example he purchased or inherited it from another person certificate of sale on August 25, 2000, or until August
or the tenants under the tenancy laws. In these case, the 25, 2001. Given that Sps. Guevarra failed to redeem the
remedy is not a writ of possession. You really have to file subject property within the aforestated redemption
an action for ejectment whether it is summary or more period, TCLC was entitled, as a matter of right, to
than 1 year. consolidate its ownership and to possess the same. 44

40
Nonetheless, such right should not negate Sps. not necessary for the preservation of the right because in
Guevarra's right to repurchase said property within five this case they filed the action within the 5 day period. So
(5) years from the expiration of the redemption period that is already a formal offer to redeem. Since it was
on August 25, 2001, or until August 25, 2006, in view of entitled to redeem, the court also took into consideration
Section 119 of the Public Land Act as above-cited. that the PCLC(mortgagee) does not have the freedom to
determine the price.
Q: So what is the redemption period in this case? Is it 1 As emphasized by the courts, PCLC is entitled to its claims
year or 2 years? as provided in the promissory note and the mortgage
A: 1 year Maam because TCLC is a credit institution and contract in view of the settled rule that the action to
not a Rural Bank. So the Sc also said that after the foreclose must be limited to the amount of the mortgage.
expiration of the 1 year period, PCL also have the right but So exclude ang penalty charge
such should not negate the right of the Sps to redeem Ang interest pwede ba?
within the 1 year period Yes but the SC said in this case that the 3% interest was
excessive and unconscionable. And so it was reduced to 1
Q: Counted from the? % per month.
A: Counted from August 25, 2005 or until August 25, 2006

Q: August 25, 2005 is what? March 9 del Rosario


A: It is the registration of the certificate of sale
Chapter 4
Q: How about the contention with regard to the purchase ANTICHRESIS
price? What was the ruling of the court?
Antichresis is a contract of real security.
From the FT of the case regarding the Purchase price
The Court has, however, ruled 56 that redemptions from Art. 2132. By the contract of antichresis the creditor
lending or credit institutions, like TCLC, are governed by acquires the right to receive the fruits of an immovable
Section 78 57 of the General Banking Act(now Section 47 of his debtor, with the obligation to apply them to the
of the General Banking Law of 2000), which amended payment, of the interest, if owing, and thereafter to the
Section 6 of Act No. 3135 in relation to the proper principal of his credit.
redemption price when the mortgagee is a bank, or a
banking or credit institution. 58 It is an accessory contract. It secures the performance of
the principal obligation and it is very clear under Art. 2132
Nonetheless, the Court cannot subscribe to TCLC's that it is also a nominate contract.
contention that it is entitled to its total claims under the
promissory note and the mortgage contract 59 in view of Take note: delivery of the property of the immovable to
the settled rule that an action to foreclose must be limited the creditor is not necessary for the perfection of
to the amount mentioned in the mortgage. Hence, antichresis. However, delivery is required so that the
amounts not stated therein must be excluded, like the creditor can receive the fruits and apply the same to the
penalty charges of three percent (3%) per month included interest yet owing and thereafter to the principal.
in TCLC's claim. 61 A penalty charge is likened to a Normally, the contract of antichresis covers all the fruits of
compensation for damages in case of breach of the an immovable property but the parties can stipulate
obligation. Being penal in nature, it must be specific and otherwise.
fixed by the contracting parties.
Do not confuse antichresis for pledge. While both are
Moreover, the Court notes that the stipulated three contracts of security and in both instances, the debtor
percent (3%) monthly interest is excessive and loses control over the property, they admit of several
unconscionable. In a plethora of cases, the Court has differences:
affirmed that stipulated interest rates of three percent
(3%) per month and higher are excessive, iniquitous, Antichresis vs. Pledge
unconscionable, and exorbitant ANTICHRESIS PLEDGE

Atty Sarona: I gave you this case because you have here a As to Real property Personal property
different redemption period. While we have the general subject
rule under Act 3135 , we also have to take into matter
consideration if what was foreclosed is a registered land As to the It is a formal It is a real
under a free patent. So redemption period is: kind of contract which contract wherein
1. Rural bank = 2 years contract requires to be in delivery is
2. Otherwise=apply Act 3135 ; 1 year from the writing in order to required for its
be perfected. perfection.
registration of the sale
Antichresis vs. Mortgage
However, there is an addition of 5 years. The 5 years
should be counted from the expiration of the redemption ANTICHRESIS MORTGAGE
period. As to Subject matter is Delivery is not
delivery delivered to the required or
What is this 5 years?
The right to repurchase on the part of the mortgagor creditor not for the possession of the
within the said period perfection thereof property to the
This is because the land here was acquired through a free but for the creditor mortgagee
patent and the applicable law is Sec 119 of the Public Land to apply the fruits to
Act. the obligation
In the case at bar, the Sps Guevara had until Aug 26, 2006 As to the The creditor acquires Creates real
right to the no real right to rights although
to redeem the property. The tender of purchase price is
fruits

41
receive the fruits of the mortgagee or Nowhere in the contract in question does the character
the property. creditor although of antichresis appear.
the mortgagee
does not have Dela Vega s. Ballilos - while the contract is called
rights to receive mortgage by the parties, the court held that it is really a
the fruits unless contract of antichresis. The contract stipulated that the
agreed upon. debtor assigned and transfer the ownership and
As to the Creditor is obliged to Such obligation is possession of the land to the creditor for his
obligation pay the taxes and not present in management and enjoyment as a profit from the
to pay charges upon the mortgage. amount for which it had been mortgaged.
taxes and
estate unless there is
charges
upon the a stipulation to the THE RIGHT OF REDEMPTION NOT HAVING BEEN
estate contrary. EXERCISED WITHIN THE PERIOD OF 10 YEARS, THE
As to the The creditor shall No such TITLE OF ALEGATA, OR HIS HEIRS HAS BEEN
application apply the fruits to obligation exists CONSOLIDATED. The action was brought in January
of the the interest if owing in a mortgage. 1922, 15 years after the contract was entered into. The
fruits to contract provided that the redemption will be until
then thereafter apply
the interest Juana Mabaquiao, or her heirs has the means. Whether
to the principal
obligation. or not this is considered a period, it is clear that the title
transmitted to Nicolas Alegata has been consolidated,
According to article 1508 of the Civil Code, when no
Now lets go to the case of Alojado. period of redemption is fixed it shall last four years,
and if it is fixed, it shall not exceed ten years. The right
ALOJADO VS. SIONGCO of redemption not having been exercised within the
GR 27084, December 31, 1927 period of ten years, the title of Nicolas Alegata, or his
heirs, has by this fact alone been consolidated at any
Facts: events.
Mabaquiao sold a parcel of land to Alegata for P7,744.
The land was included in the settlement of his estate
thus was adjudicated to hs only heirs, Lim Eng Teeng Q: What is the period applicable to the right of
and Lim Kang Sang. They sold it to Lim Ponso & Co. repurchase? What was the agreement of the parties
with the right to repurchase for the period of 1 year regarding the right to repurchase? When can it be
which expired without the right being exercised. Lim repurchased?
Ponso & Co. transferred this land unconditionally to A: When she has the means. Under obligations and
Siongco and Kingko. contracts it is an obligation with a period.

Alojado, as the administrator of Mabaquiao, brings this Q: So applying the law in sales in the period of
action against Siongco, Kingko and Lim Ponso & Co. and redemption, what it the applicable period here?
prays that he be declared the absolute owner of this A: The period shall not exceed 10 years.
land with the improvements thereon, and that the
defendants be ordered to restore and respect his right When it comes to civil law do not forget to relate it to your
of ownership, possession and usufruct of the property; other civil subjects. In this case, you can relate it to
and, moreover, that other pronouncements be made as obligations and contracts and with regard to sale,
prayed for in his complaint. The court absolved the redemption.
defendants from the complaint and plaintiff appealed
from this judgment. For an antichresis to exist, the parties must agree that the
creditor has the right to receive the fruits of the property
Alojado contends that the contract executed by with the obligation to apply them to the payment of the
Mabaquiao and Alegata was not a contract of sale with interest. No such intention exists in Alojado. What is clear
the right to repurchase, but a contract of antichresis. is that there was an agreement with the right to
repurchase in which Juana could repurchase the land when
Issue: Is the contract executed by Mabaquiao and she had the means. With that, it has been 15 years after
Alegata a contract of antichresis? the contract was entered into and no right to repurchase
was exercised.
Ruling:
THE CONTRACT IS THAT OF SALE WITH A RIGHT OF If no period was fixed it shall last 4 years. Because of the
REPURCHASE. It clearly talks about a sale and the phrase when she had the means, we already know that
conveyance of land with the right to repurchase, and that refers to a period, the period of redemption should
the character of the contract is that of a sale with the not exceed 10 years. Since the period of 10 years has
right to repurchase. But, examining it as a whole, it already lapsed, the right to repurchase the property is not
clearly appears that it was the parties' intention that available anymore.
the vendor could repurchase the land without delay
when he had the means to pay the purchase price. Again, for an antichresis to exist, there must be an express
agreement entered into by the creditor and the debtor,
CONTRACT OF ANTICHRESIS IS ONE WHERE THE that the creditor, having been given the possession of a
CREDITOR ACQUIRES THE RIGHT TO RECEIVE THE property as security, is to apply the fruits to the payment
FRUITS OF THE PROPERTY OF HIS DEBTOR WITH THE of the interest if owing, and thereafter to the principal to
OBLIGATION TO APPLY THEM TO THE PAYMENT OF the credit.
INTEREST, IF ANY ID DUE AND THEN TO THE PRINCIPAL
OF HIS CREDIT. Art. 2133. The actual market value of the fruits at the
time of the application thereof to the interest and

42
principal shall be the measure of such application.
The possession and usufruct enjoyed was done by a
Take note here: market value at the time the fruits will be verbal contract entered by the owners of the hacienda
applied to the obligation. Not the market value at the time and the creditor Antonio Vicente Barretto. Since it is not
of the perfection of the antichresis. shown that the debtors have delivered the whole
hacienda to the creditor by assignment of the property
The purpose of the provision is to forestall the use of in payment of the debt.
antichresis for usury. Notwithstanding that the usury law
has been suspended, you still apply the same provision. Issue: Is the contract that of antichresis?
<stopped at 10:16>
Ruling:
Now take note of Article 2134. IT IS AN ANTICHRESIS. In spite of the fact that the
agreement between the creditor and the debtors was
Art. 2134. The amount of the principal and of the not in writing, due to the relationship that they have, it
interest shall be specified in writing; otherwise, the may safely be assumed that the debtors have limited
contract of antichresis shall be void. themselves to give to the creditor the right to collect his
credit from the fruits of the hacienda of Balintagac. As
This is the basis of the perfection of a contract of he was given the possession of the property, but the
antichresis which must be in writing in order to be valid. dominion of which was not transferred to him.
Art. 1881 provides:
What happened in the case of Barretto? By antichresis a creditor acquires a right to
receive the fruits of real property of his
BARRETTO VS. BARRETTO debtor, with the obligation to apply them to
GR No. L-11933, December 1, 1917 the payment of the interest, if due, and
Facts: afterwards to the principal of his credit.
Alberto Barretto claims a portion of land part of
Balintagac hacienda as being his, together with its fruits ALTHOUGH ART. 1884 PROVIDES THAT THE CREDITOR
or their value, and also of a lot situated in the same DOES NOT ACQUIRE THE OWNERSHIP OF THE
hacienda together with the rents. He claims that PROPERTY DELIVERED BY VIRTUE OF AN ANTICHRESIS,
Leonardo Barretto is said to have usurped a portion of ART. 1883 PROVIDES THAT THE DEBTOR CANNOT
land of the hacienda and has been receiving 2/3 of the RECOVER THE USE OF IT. The debtor must first fully pay
fruits therein. He refused to return the fruits received, the creditor, who in case of insolvency may ask for the
or their value in spite of the fact that he has been sale of the real property which he possesses.
required to do so in writing by the plaintiff Alberto.
Since it is not shown that the debtors have delivered
The counsel of Leonardo denied the allegations and
the whole hacienda to the creditor by assignment of
alleged that his client is in possession of the said lot as
its true owner. the property, it is to be presumed that the debtors
delivered not only one half, but the whole hacienda
In the complaint of intervention, it was alleged that the
hacienda was owned and possessed by Juan Antonio with a view that the creditor might collect by usufruct
Barretto, Sr. He had 8 children (1) Juan Antonio his credit with the accrued interests.
Barretto, (2) Angelica Maria Barretto, (3) Leonardo
Barretto, (4) Fransisca Barretto, (5) Bartolome Barretto, In spite of the fact that the agreement between the
(6) Jose A Barretto, (7) Leopoldo Barretto who creditor and the debtors was not set down in any
succeeded him. document, due to the relationship which exists
between them, it may safely be asserted that the
The heirs are at present in possession of the same debtors have limited themselves to give to the creditor
through their agents and representatives. The the right to collect his credit from the fruits of the
intervenors deny that Alberto Barreto is the owner of hacienda of Balintagac, conferring upon him the
any part of the hacienda. possession of the property, but not transferring to him
the dominion of the same, since such transfer was not
The records show that Antonio Vicente Barretto as proved in the present action.
creditor and mortgagee of the hacienda, was not able
to collect his credit of P11,000 nor obtain the THE AGREEMENT OR VERBAL STIPULATION IS AN
adjudication in his favor of half of the hacienda which ANTICHRESIS AS DEFINED BY ARTICLE 1881 OF THE
was mortgaged for the security of the debt. He took CIVIL CODE, TO WIT:
possession of the said hacienda by virtue of the By the antichresis a creditor acquires a right
voluntary assignment with the express consent of the to receive the fruits of real property of his
heirs of the late Juan Antonio Barretto, Sr. debtor, with the obligation to apply them to
the payment of the interest, if due, and
Since 1888-1889, once the foreclosure proceedings afterwards to the principal of his credit.
brought about the creditor Antonio Vicente Barrte The perusal of articles 1882-1886 shows that the
against Juan Antonio Barretto, Jr. were suspended, the possession of the hacienda enjoyed by the creditor
creditor took possession of the hacienda and held it in Antonio Vicente and his successors up to the present
usufruct with the knowledge and express consent of its time was conferred to them by virtue of the stated
legitimate owners; thus there has not been any contract or agreement in antichresis. One of the
opposition or protest against the possession which by administrators of the hacienda presented the sworn
usufruct the creditor and his successors enjoyed, aside declaration of ownership for the purposes of tax
from the usurpation of 2 small portions of that property assessment and paid the land tax in the name of the
done by Leonardo Barretto in 1912. creditor who possessed and held the hacienda in

43
usufruct. obligation, it was foreclosed and ownership was
consolidated in DBPs name under a TCT. Serafin Adolfo,
Although article 1884 states that the creditor does not Sr. repurchased the same and was issued a TCT a year
acquire through possession the ownership of the real after his wife died. He allegedly mortgaged the subject
property delivered by virtue of an antichresis for failure property to Ancieto Bangis who took possession of the
to pay the debt within the stipulated time, land but their transaction was not reduced into writing.
nevertheless, the debtor cannot recover the use of the When Adolfo died, his heirs executed a deed of
real property given in antichresis to the creditor, extrajudicial partition covering the subject property and
without previously TCT issued to them. The said property was subdivided
and separate titles were issued in names of the heirs of
Alberto being in the legitimate possession and use of all Adolfo. The heirs of Adolfo filed a complaint for
the hacienda of Balintagac which was voluntarily annulment of the deed of sale and declaration of the
delivered to him by Juan Antonio, Jr. and his co-heirs, purported contract of sale as antichresis, accounting
with the object that the creditor Antonio Vicente might and redemption of property and damages against
collect the capital and interests which they owed and Bangis. The RTC rendered a decision in favor of the heirs
still owe him a lawful contractual act called by law a of Adolfo declaring that the contract as an antichresis,
covenant in antichresis the debtors cannot, while the ordering the defendant to deliver the possession of the
debt exists and is not fully paid, recover or reacquire property in question to the plaintiffs and the TCT under
the possession and use of the real property delivered to Bangis as null and void. Thus, the heirs of Bangis
the creditor, without the latter giving his consent appealed before the CA.
CA affirmed the RTC finding that the contract between
the parties was a mortgage, not a sale. It noted that
while Bangis was given possession of the subject
Q: Was there a contract in writing for this antichresis to property, the certificate of title remained in the custody
exist? of Adolfo and was never cancelled.
A: No. It was verbal.
Issue: Whether the agreement entered into by the
Q: So how do you reconcile that with Art. 2134? parties is that of antichresis?
A: It applied the old Civil Code, specifically Art. 1881 which
provides: By antichresis a creditor acquires a right to Ruling:
receive the fruits of real property of his debtor, with the THERE NEITHER AN ANTICHRESIS NOR A SALE. For the
obligation to apply them to the payment of the interest, if contract of antichresis to be valid, Article 2134 of the
due, and afterwards to the principal of his credit. Civil Code requires that the amount of the principal
and of the interest shall be specified in writing;
Q: Why cant Art. 2134 be applied? Why is it in this case, otherwise the contract of antichresis shall be void.
the contract was still considered as a contract of
antichresis? In this case, the Heirs of Adolfo were indisputably
A: Because it is a 1917 case. Art. 2134 is a new provision in unable to produce any document in support of their
the New Civil Code which was effective on August 30, claim that the contract between Adolfo and Bangis was
1950. an antichresis, hence, the CA properly held that no such
relationship existed between the parties.
Take note that before the new civil code the contract of
antichresis was informal. Now, it is formal as it is required The bare testimony of one of the Heirs of Bangis,
that it be in writing. Rodolfo Bangis, that the subject document was only
handed to him by his father, Aniceto, with the
The possession of the Balintagac hacienda was taken by information that the original thereof could not be
voluntary assignment with the express consent of the heirs found was insufficient to justify its admissibility. The
of the debtor. The agreement they entered into was a identification made by Notary Public Atty. Valentin
contract of antichresis. The debtors have limited Murillo that he notarized such document cannot be
themselves to give to the creditor the right to collect his given credence as his conclusion was not verified
credit from the fruits of the hacienda there was no against his own notarial records.
transfer of ownership.
In sum, the Heirs of Bangis failed to establish the
Since this is an old case, the ruling of the court was that existence and due execution of the subject deed on
the agreement or the verbal stipulation which lead to the which their claim of ownership was founded.
facts proved deserves in law the name of antichresis. But
again, reconcile that with Art. 2134 which is a new Q: So if there is no antichresis nor sale, what was the
provision in the Civil Code. With the effectivity of the New contract entered into by the parties?
Civil Code, a contract of antichresis must be in writing A: At least it is a mortgage. Even if there is no written
wherein the amount of the principal with interest are agreement there can still be a valid mortgage.
clearly specified, otherwise, it shall be void.
Q: Why was there an issue with regard to the nature of
How about in the case of Bangis? the contract i.e. whether it was a sale, a mortgage, or an
antichresis? Who was in possession of the property?
BANGIS VS. HEIRS OF SERAFIN A: The heirs of Bangis were in possession. Bangis is the
GR 190875, June 13, 2012 mortgagee. The effect of the possession of the mortgagee
even for a number of years such will not transfer the
Facts: possession of the property.
Spouses Serafin, Sr. and Saludada Adolfo were the
original registered owners of a lot which was mortgaged Relate these cases to the previous subjects that you have
to the DBP. Upon default in the payment of the loan already taken.

44
On the date above stated, Macapinlac was indebted to
There is no antichresis here for failure to comply with the Bachrach Motor Company for the price of an
requirement under Art. 2134. The principal or interest automobile and its accessories, purchased upon credit;
must be in writing otherwise the contract of antichresis is and as evidence of this indebtedness he executed 14
void. There is also no proof that a contract of sale exists. promissory notes (PNs) payable to Bachrach amounting
The SC held that at the very least the contract that they to the sum of P12,960. Contemporaneously with the
had is that of mortgage. delivery of the PNs, Macapinlac executed what purports
In a contract of mortgage, even if the mortgagee is in to be a deed of sale, with privilege of repurchase, to be
possession of the property for a number of years, such exercised on or before October 2, 1917 (due date of the
possession is not in the concept of an owner. Therefore, debt). This transfer covered the Hacienda Dolores. In
acquisitive prescription does not apply. The title remained this conveyance E. M. Bachrach is named as transferee.
with Adolfo and the upon his demise transferred to his
heirs. Moreover, even if the property has been in the On November 8, 1917, Francisco Repide acquired, for
possession of the heirs of Adolfo for 28 years, the long the sum of P5,000, all the rights of E. M. Bachrach in
period of time should not be taken against the true owners the property which had been conveyed to the latter.
of the mortgagors in this case. Repide was well aware that the transfer of the property
to Bachrach had been made by the Macapinlac for the
The SC also pointed out that even if acquisitive possession purpose of securing a debt owing to Bachrach
is to be applied considering that the heirs of Bangis were in Company, and he was also aware that part of the debt
bad faith, then you apply the 30 year adverse possession. has been paid and there was only balance of less than
In this case, only 28 years have passed. You can relate this one-half of the sum of P12,960.
to Land Titles as well as to the Laws on Prescription.
After Repide had acquired the interest in the hacienda
Obligation of the creditor under Art. 2135: in question, he processed the certificate of title to be
transferred to his own name.
Art. 2135. The creditor, unless there is a stipulation to
the contrary, is obliged to pay the taxes and charges To accomplish this, it was necessary to make it appear
upon the estate. that the contract of sale with pacto de retro noted in
He is also bound to bear the expenses the original Torrens certificate was really and truly what
necessary for its preservation and repair. it appeared to be, that is, a contract of sale, not a mere
The sums spent for the purposes stated in this mortgage, and that the ownership had consolidated in
article shall be deducted from the fruits. the purchaser by reason of the failure of the seller to
repurchase the property before the expiration of the
The obligation of the antichretic creditor: to pay the taxes time allowed for redemption. Inasmuch as it appeared
and charges upon the estate, unless there is a stipulation that the ownership had then consolidated in the
to the contrary. purchaser, he directed the ROD of Pampanga to register
the property in the name of Francisco Gutierrez Repide
If he does not pay taxes, he can be required to pay and to issue to him a new certificate of transfer, which
indemnity for damages. If it is the debtor who paid the was accordingly done.
taxes, such amount shall be applied to the payment of his
debt. If such payment will result to the obligation being At the time of the filing of this complaint, Repide was in
fully paid, the creditor will not have the obligation to actual possession of the property in question, and that
return the possession to the owner. he had in effect been enjoying possession since August
1917.
The creditor is bound to pay the expenses necessary for
the preservation and repair of the property. Any sum spent
for these purposes are deducted from the fruits. Issue: Is there an equitable mortgage? What contract
governs between Macapinlac and Repide (as successor
Art. 2136. The debtor cannot reacquire the enjoyment in interest of Bachrach) if the original contract was an
of the immovable without first having totally paid what equitable mortgage?
he owes the creditor.
But the latter, in order to exempt himself from Ruling:
the obligations imposed upon him by the preceding THE ESTATE OF REPIDE OCCUPIES SUBSTANTIALLY THE
article, may always compel the debtor to enter again POSITION OF A MORTGAGEE IN POSSESSION. The
upon the enjoyment of the property, except when there question then arises as to what are the legal rights of
is a stipulation to the contrary. the plaintiff as against the Repide estate.The solution of
this problem is to be found in the application of the
The first paragraph is very clear, the debtor cannot demand doctrine formulated in Barretto vs. Barretto. In that
the return of the possession of the immovable property case the heirs of a mortgagee of an estate were found
until the debt is totally paid. in possession of mortgaged property more than thirty
years after the mortgage had been executed; and it was
So lets have the case of Macapinlac. shown that the mortgage had never been foreclosed.
Upon this state of facts it was in effect held that the
MACAPINLAC VS. REPIDE rights of the parties, heirs of the mortgagor and
GR 18574, September 20, 1922 mortgagee, were essentially the same as under the
Facts: contract of antichresis.
On and prior to August 22, 1916, Jose Macapinlac was
the owner of the Hacienda Dolores, a property located By reference to the appropriate provisions of the Civil
in Pampanga. This property had been registered and a Code (arts. 1881-1884), in the chapter dealing with
Torrens certificate of title had been issued. antichresis, it will be at once seen that while non-
payment of the debt does not vest the ownership of the

45
property in the creditor, nevertheless the debtor cannot Again, SC discussed an antichresis. However, take note that
recover the enjoyment of the property without first the term here which was used by the Court was
paying in full what he owes to his creditor. At the same mortgagee. But actually, it still refers to an antichretic
time, however, the creditor is under obligation to apply creditor based on the intention of the parties.
the fruits derived from the estate in satisfaction, first, of
the interest on the debt, and secondly, to the payment Considering that there was an antichresis and not just an
of the principal. From this is necessarily deduced the equitable mortgage, the one in possession of the property
obligation of the creditor to account to the debtor for or the creditor can continue to retain the same until all the
said fruits and the corresponding right of the debtor to claims are satisfied. In the complaint, the plaintiff had
have the same applied in satisfaction of the mortgage made an offer Macapinlac offered to pay Repide all debts
debt. and charges. However it was Repide who refused to
accept. It was alleged that no valid tender of payment was
The respective rights and obligations of the parties to a made that considering that there was no indication of a
contract of antichresis may be taken to be established, specific sum. Notwithstanding, the SC noted that in this
namely: instance that tender was not necessary because the
that if the mortgagee acquires possession in amount cannot be known until an accounting is had And
any lawful manner, he is entitled to retain the accounting can be made on the part of the creditor
such possession until the indebtedness is with regard to the fruits (i.e. how much were the fruits,
satisfied and the property redeemed; how was it applied, to what extent has it been applied to
that the non-payment of the debt within the the obligation of the debtor.)
term agreed does not vest the ownership of
the property in the creditor; Now, thats a common issue regarding a contract of
that the general duty of the mortgagee in antichresis.
possession towards the premises is that of
the ordinary prudent owner; In connection with the obligation of the creditor to apply
that the mortgagee must account for the the fruits to the interest if owing, and thereafter to the
rents and profits of the land, or its value for principal, he has to liquidate or make an accounting of how
purposes of use and occupation, any amount much is the value of the fruits and whether it was applied
thus realized going towards the discharge of to the interest and principal.
the mortgage debt;
that if the mortgagee remains in possession If creditor does not want to pay taxes and expenses
after the mortgage debt has been satisfied, Under Art.2136, also take note of the 2 nd paragraph.
he becomes a trustee for the mortgagor as to Remember under Art. 2135 that as a general rule, the
the excess of the rents and profits over such creditor has the obligation to pay the taxes and expenses
debt; and mentioned therein. If the creditor does not want to pay
that the mortgagor can only enforce his the taxes and incur expenses as mentioned in Art. 2135, he
rights to the land by an equitable action for may compel the debtor to reacquire the enjoyment of the
an account and to redeem. same, except when there is a contrary stipulation.

Art. 2137. The creditor does not acquire the ownership


Q: There is no antichresis in this case? of the real estate for non-payment of the debt within
A: There is an antichresis. the period agreed upon.
Every stipulation to the contrary shall be void.
Q: Why is the agreement considered as an antichresis? But the creditor may petition the court for the payment
A: The SC referred to the parties as mortgagee and of the debt or the sale of the real property. In this case,
mortgagor but it is really an antichresis because their the Rules of Court on the foreclosure of mortgages shall
agreement involves the possession of the property by the apply.
creditor until debtor pays all debts and charges and the
retention of the same until all valid claims against the If the obligation is not paid, we are already clear that the
estate are satisfied. debtor is not entitled to the possession of the same.

Maam: There was an intention to apply the fruits of the Let us also be clear that failure to pay on the part of the
property to the obligation. Again, make the distinction debtor does not mean that the creditor will now acquire
between the mortgage and antichresis. ownership over the property. Again what the creditor only
acquires in a contract of antichresis is the right to receive
Q: In this instance, even if there was an antichresis, can the fruits There is no transfer of ownership.
Repide demand the return of the property?
A: There can only be a return of the property if there has What happened in the case of Ramirez?
been a full payment of the debt. Only then can the debtor
ask for the return of the possession of the property. RAMIREZ VS. CA
GR L-38185, September 24, 1986
Q: Can Repide demand the return of the property? It was Facts:
alleged that he tendered the payment although with no On September 15, 1959, petitioners-spouses Hilario
amount. What is the effect of such tender? He said that Ramirez and Valentina Bonifacio filed an application for
he was willing to pay but without indicating how much he registration of a parcel of riceland in Pamplona, Las
was willing to pay. What was the ruling of the court? Pinas, Rizal. After notice and publication, nobody
A: There is still a need to account for the ample amount appeared to oppose the application. An order of
that Macapinlac has to pay to Repide as the antichretic general default was issued and the court allowed the
creditor. petitioners to present evidence in support of their
claim. Thereafter, the petitioners presented parole
evidence that they acquired the land in question by

46
purchase from Gregoria Pascual during the early part of in the concept of an owner but mere holders placed in
the American regime but the corresponding contract of possession of the land by its owners. Their possession
sale was lost and no copy or record of the same was cannot serve as a title for acquiring possession.
available. On January 30, 1960, the court ordered the
issuance of the decree of registration and consequently, Even if there is a stipulation that there is an
Original Certificate of Title No. 2273 of the Registry of acknowledgement that the creditor is in possession by
Deeds of Rizal was issued in the petitioners names. On virtue of an antichresis and that if the creditor continues to
March 30, 1960, private respondents filed a petition to be in possession of the same for 30 years, he will become
review the decree of registration on the ground of the owner thereof, the such will be considered as void.
fraud. The respondents alleged among others that they
obtained a loan of P400.00 from the petitioners in Again, possession must be in the concept of an owner
which they secured with a mortgage on the land in which is different from that of an antichretic creditor,
question by way of antichresis and that there were unless he repudiates his status.
several attempts to redeem the land but were refused
by the petitioners. Pactum Commissorium is not applicable to pledge and
antichresis
The trial court ordered the cancellation of the original A pactum commissorium is not applicable to pledge and
certificate of title. The Court of Appeals affirmed the antichresis because there is no automatic appropriation to
decision. the creditor or antichretic creditor in case the debtor fails
to pay his obligation. A stipulation authorizing the
Issue: Can an antichretic creditor acquire land of antichretic creditor to appropriate the property of an
debtor by prescription? unpayment of the debt within the period agreed upon
shall be void.
Ruling: NO.
AN ANTICHRETIC CREDITOR CANNOT ACQUIRE THE Remedies available to an antichretic creditor in case the
LAND OF A DEBTOR BY PRESCRIPTION. AN debtor fails to pay his obligation:
ANTICHRETIC CREDITOR IS NOT A POSSESSOR IN THE 1. The creditor can file an action for specific
CONCEPT OF OWNER BUT A MERE HOLDER PLACED IN performance or collection for sum of money. He
POSSESSION OF THE LAND BY ITS OWNERS. Thus, has to make sure that there will still be a balance
possession of an antichretic creditor cannot serve as a after the application of the fruits to the payment
title for acquiring dominion. The court, from other 2. Art. 2137, 2nd paragraph foreclose the
cases like Trillana v. Manansala, Valencia v. Acala and mortgages as provided in the Rules of Court
Barretto v. Barretto, held that the antichretic creditor 3. Extajudicial foreclosure as allowed in contracts of
cannot ordinarily acquire by prescription the land mortgage and pledge
surrendered to him by the debtor. Holding: The decision
appealed from is affirmed with a modification that the Art. 2138. The contracting parties may stipulate that
respondents are ordered to pay the petitioners the the interest upon the debt be compensated with the
amount of P400.00 as principal for the contract of fruits of the property which is the object of the
antichresis, the fruits obtained from the possession of antichresis, provided that if the value of the fruits
the land having been applied to the interests on the should exceed the amount of interest allowed by the
loan. laws against usury, the excess shall be applied to the
principal.
Q: So first, it is established that you have here a contract
of antichresis. Who is in possession of the property? The antichretic creditor again is under the obligation to
A: The antichretic creditor. apply the fruits of the property in satisfaction of the
interest, if owing, and then to the principal.
Q: For how long? What is the effect of the possession of
the creditor? Art. 2139. The last paragraph of Article 2085, and
A: The prescriptive period will not run. Acquisitive Articles 2089 to 2091 are applicable to this contract.
prescription will only run when such possession is in the
concept of an owner. We already know that the last paragraph of Art. 2085
allows third persons who are not parties to the contract to
Q: Is there a repudiation of the petitioners of their right secure the principal obligation with the pledgee or
as creditors? mortgagee with their own property. In this case, subject
A: No. their property to a contract of antichresis.

If there is a contract of antichresis the mortgagee creditors Under Articles 2089 to 2091, we have emphasized that
are only in possession as creditors. They are not in contracts of pledge and mortgage are indivisible so the
possession thereof as owner This would be relevant to same with antichresis. A contract of antichresis is also
acquisitive prescription. Whether it is 10 years in good indivisible.
faith or 30 years in bad faith, possession must be in the
concept of an owner. In relation to Land Titles, such Under Art. 2091, it can also secure all kinds of obligation.
possession in concept of an owner must be open, Again, similar to a pledge or mortgage: such obligation can
continuous, exclusive, notorious, and adverse. Such must be a pure obligation or subject to a condition.
be present so the acquisitive prescription shall run.
It is not that common at present that the parties enter into
In this case, Petitioners are only antichretic creditors and it a contract of antichresis. Rarely do you see or do you
was admitted that there was no repudiation for acquisitive encounter a parties who would want to enter such
prescription to run. The antichretic creditor cannot contract.
ordinarily acquire by prescription the lands surrendered to
him by the debtor. Here, the Petitioners are not possessors

47
Aside from a mortgage, what is the other agreement that required. If there is contract wherein
may be entered into by the parties? delivery, it will be there must be
delivery
They will enter into a contract of mortgage, na para din considered as a delivery.
siyang antichresis. Mortgage siya because it is a real estate pledge.
mortgage provided that they all have requisites present. Sale of the Act No. 1508 or the Art. 2112 of the
But there is a stipulation between the parties that the property in Chattel Mortgage CC applies.
mortgagee will be given the possession of the property, to case of Law applies.
which he will be given the right to apply the fruits of the default
property to the obligation (i.e. harvest.) So para din siyang The creditor can The creditor
antichresis not strictly an antichresis, not strictly a still sue for the cannot sue for
mortgage but nevertheless valid between the parties. deficiency except if the balance.
what is involved is a While the debtor
Another instance will be: a real estate mortgage where sale of personal on the other
there is no transfer of possession but there is an property or on hand, does not
agreement that the harvest wil be applied to the installment. In also get the
obligation. Minsan ang harvest pwede nilang paghatian other words, Art. excess unless
(i.e. , 2/3.) The harvest that will go to the creditor will be 1484 of the Recto there is a
applied to the obligation and the same will continue until Law is applicable. stipulation to the
the obligation is fulfilled. The debtor is contrary
entitled to the
Again, as long as all the valid requirements are present, an excess.
agreement is valid between the parties. So though it may
not be strictly an antichresis it will still be considered a
valid contract.
Art. 2141. The provisions of this Code on pledge,
insofar as they are not in conflict with the Chattel
Chapter 5 Mortgage Law, shall be applicable to chattel mortgages.
CHATTEL MORTGAGE
What laws apply to Chattel Mortgage?
This is another kind of security. The only difference herein 1. Act No. 1508 or the Chattel Mortgage Law
is that the chattel mortgage involves personal property. principally
2. Provisions of Pledge under the CC suppletorily
Art. 2140. By a chattel mortgage, personal property is 3. There are other laws that can be applied
recorded in the Chattel Mortgage Register as a security depending on the subject matter:
for the performance of an obligation. If the movable, a. Vessels: Ship Mortgage Decree
instead of being recorded, is delivered to the creditor or b. Revised Administrative Code
a third person, the contract is a pledge and not a chattel c. Revised Penal Code on criminal
mortgage. liablity: Art. 319 on Estafa, (1) for
knowingly removing any personal
We have a personal property as a security of a principal property mortgaged under the Chattel
obligation to which such mortgage contract is recorded in a Mortgage Law to any province or city
Chattel Mortgage Registry. other than the one where it was
located and at the time of the
It is an accessory contract. We can also say that it is formal execution of the mortgage, without the
because of Art. 2140 for validity, registration is written consent of the mortgagee; (2)
indispensable. Under Art. 2140, it is also clear that a for selling or pledging personal
chattel mortgage is a nominate contract. property already mortgage or any part
thereof under the terms of the Chattel
Distinguish Chattel Mortgage from a Pledge Mortgage Law without the consent of
Similarities: the mortgagee written on the back of
1. Both are accessory contracts entered into to the mortgage duly recorded in the
secure the performance of a principal obligation. Chattel Mortgage Register.
2. Both contracts involve personal properties.
3. Both contracts are indivisible. Criminal liability must be distinguished from civil liability.
4. Both contracts constitute a lien on the property. This means that the mortgagor shall not necessarily be
5. In both contracts, the creditor cannot relieved of his criminal liability even if the subsequently
appropriate the property to himself in case the pays the mortgagee. He can still be liable under the
debtor defaults in the payment. provisions of Article 319 of the RPC. Moreover, if the
6. Both will be extinguished upon the fulfillment of mortgaged property is sold, the same is valid provided all
the principal obligation or by the destruction of the requisites for a valid sale are present even if no
the property pledged or mortgaged. written consent was obtained from the mortgagee. But the
mortgagor or the one who sold the property can be
Differences: criminally liable under Art. 319 of the RPC.

CHATTEL PLEDGE THE CHATTEL MORTGAGE LAW


MORTGAGE Act No. 1508, as amended
Under Art. 2140, Registration is not
As to
the registration is required for Section 1. The short title of this act shall be The
registratio
required for validity. Chattel Mortgage Law.
n
validity.
As to No delivery is It is a real Sec. 2. All personal property shall be subject to

48
mortgage, agreeably to the provisions of this Act, and a (If the mortgage is given for the performance of some
mortgage executed in pursuance thereof shall be other obligation aside from the payment of promissory
termed a chattel mortgage. notes, describe correctly but concisely the obligation to
be performed.)
Sec. 3. Chattel mortgage defined.- A chattel mortgage is
a conditional sale of personal property as security for The conditions of this obligation are such that if the
the payment of a debt, or the performance of some mortgagor, his heirs, executors, or administrators shall
other obligation specified therein, the condition being well and truly perform the full obligation (or
that the sale shall be void upon the seller paying to the obligations) above stated according to the terms
purchaser a sum of money or doing some other act thereof, then this obligation shall be null and void.
named. If the condition is performed according to its
terms the mortgage and sale immediately becomes Executed at the municipality of _________, in the
void, and the mortgagee is thereby divested of his title. Province of ________, this _____ day of 19_____
____________________ (Signature of mortgagor.)
Sec. 4. Validity.- A chattel mortgage shall not be valid
against any person except the mortgagor, his executors In the presence of
or administrators, unless the possession of the property
is delivered to and retained by the mortgagee or unless _________________ _________________
the mortgage is recorded in the office of the Register of (Two witnesses sign here.)
Deeds of the province in which the mortgagor resides at
the time of making the same, or if, he resides within the FORM OF OATH.
Philippines, in the province in which the property is We severally swear that the foregoing mortgage is
situated: Provided, however, That if the property is made for the purpose of securing the obligation
situated in a different province in which the mortgagor specified in the conditions thereof, and for no other
resides, the mortgage shall be recorded in the office of purpose, and that the same is a just and valid
the Register of Deeds of both the province in which the obligation, and one not entered into for the purpose of
mortgagor resides and that in which the property is fraud.
situated, and for the purposes of this Act, the City of
Manila shall be deemed to be a province. FORM OF CERTIFICATE OF OATH.
At ___________, in the Province of _________,
Sec. 5. Form. - A chattel mortgage shall be deemed to personally appeared ____________, the parties who
be sufficient when made substantially in accordance signed the foregoing affidavit and made oath to the
with the following form, and shall be signed by the truth thereof before me.
person or persons executing the same, in the presence _____________________________
of two witnesses, who shall sign the mortgage as (Notary public, justice of the peace, 1 or other officer,
witnesses to the execution thereof, and each mortgagor as the case may be.)
and mortgagee, or in the absence of the mortgagee, his
agent or attorney, shall make and subscribe an affidavit Sec. 6. Corporations.- When a corporation is a party to
in substance as hereinafter set forth, which affidavit, such mortgage the affidavit required may be made and
signed by the parties to the mortgage as above-stated, subscribed by a director, trustee, cashier, treasurer, or
and the certificate of the oath signed by the authority manager thereof, or by a person authorized on the part
administering the same, shall be appended to such of such corporation to make or to receive such
mortgage and recorded therewith. mortgage. When a partnership is a party to the
mortgage the affidavit may be made and subscribed by
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT. one member thereof.
This mortgage made this ____ day of ______19____
by _______________, a resident of the municipality of Sec. 7. Descriptions of property.- The description of the
______________, Province of ____________, Philippine mortgaged property shall be such as to enable the
Islands mortgagor, to ____________, a resident of the parties to the mortgage, or any other person, after
municipality of ___________, Province of reasonable inquiry and investigation, to identify the
______________, Philippine Islands, mortgagee, same.
witnesseth:
If the property mortgaged be large cattle," as defined
That the said mortgagor hereby conveys and by section one of Act Numbered Eleven and forty-
mortgages to the said mortgagee all of the following- seven, 2 and the amendments thereof, the description
described personal property situated in the of said property in the mortgage shall contain the
municipality of ______________, Province of brands, class, sex, age, knots of radiated hair commonly
____________ and now in the possession of said known as remolinos, or cowlicks, and other marks of
mortgagor, to wit: ownership as described and set forth in the certificate
(Here insert specific description of the property of ownership of said animal or animals, together with
mortgaged.) the number and place of issue of such certificates of
ownership.
This mortgage is given as security for the payment to
the said ______, mortgagee, of promissory notes for If growing crops be mortgaged the mortgage may
the sum of ____________ pesos, with (or without, as contain an agreement stipulating that the mortgagor
the case may be) interest thereon at the rate of binds himself properly to tend, care for and protect the
___________ per centum per annum, according to the crop while growing, and faithfully and without delay to
terms of __________, certain promissory notes, dated harvest the same, and that in default of the
_________, and in the words and figures following performance of such duties the mortgage may enter
(here insert copy of the note or notes secured). upon the premises, take all the necessary measures for
the protection of said crop, and retain possession

49
thereof and sell the same, and from the proceeds of the officer shall pay to the register of deeds. The return
such sale pay all expenses incurred in caring for, shall particularly describe the articles sold, and state
harvesting, and selling the crop and the amount of the the amount received for each article, and shall operate
indebtedness or obligation secured by the mortgage, as a discharge of the lien thereon created by the
and the surplus thereof, if any shall be paid to the mortgage. The proceeds of such sale shall be applied to
mortgagor or those entitled to the same. the payment, first, of the costs and expenses of keeping
and sale, and then to the payment of the demand or
A chattel mortgage shall be deemed to cover only the obligation secured by such mortgage, and the residue
property described therein and not like or substituted shall be paid to persons holding subsequent mortgages
property thereafter acquired by the mortgagor and in their order, and the balance, after paying the
placed in the same depository as the property originally mortgages, shall be paid to the mortgagor or person
mortgaged, anything in the mortgage to the contrary holding under him on demand.
notwithstanding.
If the sale includes any "large cattle," a certificate of
Sec. 8. Failure of mortgagee to discharge the transfer as required by section sixteen of Act Numbered
mortgage. If the mortgagee, assign, administrator, Eleven hundred and forty-seven 5 shall be issued by the
executor, or either of them, after performance of the treasurer of the municipality where the sale was held to
condition before or after the breach thereof, or after the purchaser thereof.
tender of the performance of the condition, at or after
the time fixed for the performance, does not within ten Sec. 15. 6, 6a
days after being requested thereto by any person
entitled to redeem, discharge the mortgage in the Sec. 16. This Act shall take effect on August first,
manner provided by law, the person entitled to redeem nineteen hundred and six.
may recover of the person whose duty it is to discharge
the same twenty pesos for his neglect and all damages Enacted, July 2, 1906.
occasioned thereby in an action in any court having
jurisdiction of the subject-matter thereof.

Sec. 9-12. (inclusive) 3 Valid subject matter of a Chattel Mortgage:


General Rule: Personal or movable properties.
Sec. 13. When the condition of a chattel mortgage is
broken, a mortgagor or person holding a subsequent There may be variations allowed here:
mortgage, or a subsequent attaching creditor may 1. You have shares of stock which is merely an
redeem the same by paying or delivering to the evidence of an intangible right the latter
mortgagee the amount due on such mortgage and the being a personal property. The requirement
reasonable costs and expenses incurred by such breach under the law is the registration of the
of condition before the sale thereof. An attaching Chattel Mortgage in both provinces of the
creditor who so redeems shall be subrogated to the owner of the shares of stock and the
rights of the mortgagee and entitled to foreclose the corporation which issued the shares.
mortgage in the same manner that the mortgagee 2. Interest may also be subject of a chattel
could foreclose it by the terms of this Act. mortgage. Again even if it is only an
intangible property because just the same,
Sec. 14. Sale of property at public auction; Officer's it is considered as a personal property.
return; Fees; Disposition of proceeds. The 3. Machineries treated by the parties as
mortgagee, his executor, administrator, or assign, may, personal properties. You might have already
after thirty days from the time of condition broken, discussed under Property the Davao
cause the mortgaged property, or any part thereof, to Sungmin (?) case wherein between the
be sold at public auction by a public officer at a public parties even if the machinery is heavy,
place in the municipality where the mortgagor resides, bolted or cemented, the parties will treat it
or where the property is situated, provided at least ten as a personal property, subject the same to
days' notice of the time, place, and purpose of such sale a chattel mortgage, applying the principle of
has been posted at two or more public places in such estoppel.
municipality, and the mortgagee, his executor, 4. Vessels. The Ship Mortgage Decree requires
administrator, or assign, shall notify the mortgagor or registration in the Philippine Coast Guard to
person holding under him and the persons holding be effective against third persons
subsequent mortgages of the time and place of sale, 5. Motor vehicles. The mortgage must also be
either by notice in writing directed to him or left at his registered with the LTO.
abode, if within the municipality, or sent by mail if he 6. Public Utility Vehicle. It must be registered
does not reside in such municipality, at least ten days with the LTFRB for the purpose of binding
previous to the sale. third persons.

The officer making the sale shall, within thirty days What happened in the case of Borlough vs. Fortune?
thereafter, make in writing a return of his doings and
file the same in the office of the register of deeds where BORLOUGH VS. FORTUNE
the mortgage is recorded, and the register of deeds GR L-9451, March 29, 1957
shall record the same. The fees of the officer for selling Facts: United Car Exchange sold to Fortune Enterprises
the property shall be the same as in the case of sale on a chevrolet sedan who sold it to Aguinaldo. The latter
execution as provided in Act Numbered One hundred made a promissory note for P2400 payable in 20
and ninety, 4 and the amendments thereto, and the installments with 12% per annum. He also executed a
fees of the register of deeds for registering the officer's deed of chattel mortgage over the car and registered
return shall be taxed as a part of the costs of sale, which the same in the RoD in Manila.

50
result, his registration was not effective against third
When Aguinaldo defaulted payment, he sold the same persons.
to Borlough for P4000 who registered the car with the
Motor Vehicles Office. Q: Can we not say that the registration with the Chattel
Mortgage Register of Deeds shall also bind the Borlough
Fortune brought an action against Aguinaldo to recover considering that the purpose of such is to bind 3 rd persons
the balance of the purchase price. Borlough filed a 3rd through constructive notice?
party Complaint claiming the vehicle. A: No. Because the Revised Motor Vehicles Law is a new
vehicle was seized by the sheriff and sold law compared to the Chattel Mortgage Law and it provides
it at public auction an additional requirement to register the mortgage before
the Motor Vehicles Office.
CFI: in favor of Borlough; ordered Fortune to pay
Borlough P4000 Maam: Registration with the Motor Vehicles Office now
IAC: ordered Fajardo to pay P4000 plus attys fees the Land Transportation Office is really just an additional
plaintiff to pay to Borlough any requirement to bind 3rd persons.
amount received by it in excess of
its credits and judicial expenses Again we have a prior mortgage registered under the
mortgage was superior being prior Chattel Mortgage Law but was not registered in the Motor
in point of time, to whatever rights Vehicles Office. Its subsequent registration by virtue of a
may have been acquired by sale with the Motor Vehicles Office accompanied by actual
Borlough bu reason of his possession.
possession and by registration of his
title The SC held that the RML is a special legislation to amend
and compile the laws relative to motor vehicles while the
Issue: Which should prevail, a prior mortgage executed Chattel Mortgage Law is a general law covering mortgages
over a motor vehicle, registered under the Chattel of all kinds of personal property. The Chattel Mortgage was
Mortgage Law only or a subsequent registration of the not repealed by the Revised Motor Vehicles Law. It does
vehicle in the MVO accompanied by actual not state that the registration is to be dispensed with.
possession? What we have under the Revised Motor Vehicles Law is an
additional requirement.
Ruling:
BORLOUGHS RIGHT SHOULD BE UPHELD. The failure The recording provisions of the Revised Motor Vehicles
of the respondent motgagee to report the mortgage Law are merely complementary to those of the Chattel
executed in its favor had the effect of making said Mortgage Law. To affect third persons, the mortgage of any
mortgage ineffective against Borlough. motor vehicle should not only be registered in the Chattel
Mortgage Registry, but the should also be recorded in the
The recording provisions of the Revised Motor Vehicles Motor Vehicles Office as required by section 5 (e) of the
law are merely complementary to those of the Chattel Revised Motor Vehicles Law. The failure of the mortgage to
Mortgage Law. A mortgage to affect 3rd persons should report the mortgage in his favor has the effect of making
be registered in the Chattel Mortgage Registry and said mortgage ineffective against a purchaser in good faith
Motor Vehiles Office as required in Section 5(e) of the (Borlough) who registers his purchase in the Motor
Revised Motor Vehicles Law Vehicles Office. Failure to comply with this statute, the
chattel mortgage = RoD transferees title is rendered invalid as against its
registration of vehicle = LTO subsequent purchaser who is enabled by such failure of
compliance to retain the indicia of ownership, such as a
Q: What were registered? What contracts are involved subsequent purchaser in good faith.
here?
A: As to Aguinaldo, it was a chattel mortgage. As to There was no evidence that Borlough here was a purchaser
Borlough, it was a contract of sale. in good faith. There was no evidence that he had prior
notice of the mortgage executed in favor of Fortune. So
Q: You said both were registered, where were they between the two, Borlough has a better right as against
registered? Fortune Enterprises.
A: As for Aguinaldo, it was registered with the RoD of
Manila. As to Borlough, it was registered with the Motor Other valid subject matter of chattel mortgage:
Vehicles Office. 7. House of fixed materials. A house which is
intended to be demolished. This is has been
Q: Who has a better right over the vehicle? upheld by the SC as a valid subject matter of
A: Borlough. The SC emphasized that there are 2 laws chattel mortgage.
involved: (1) Chattel Mortgage Law and the (2) Revised 8. House built on a rented land.
Motor Vehicles Law. Aguinaldo was banking on the Chattel
Mortgage Law for his registration while Borlough was STANDARD OIL VS. JARAMILLO
banking on the Motor Vehicles Law. SC upheld the rights of GR 20329, March 16, 1923
Borlough because of the Revised Motor Vehicles Law. The Facts: Dela Rosa was the lessee of a land an owner of
purpose of the law is to control the registration and the building built thereon. Subsequently he executed a
operation of motor vehicles. The same also added a chattel mortgage conveying to Standard Oil both his
requirement that there must still be a registration in leasehold interest in the land and the building which
accordance with the Motor Vehicles Law in order for the was built over the leased land. In the document, it
registration to be effective to third persons. In this case, appeared that the clauses were intended to be a
Aguinaldo was not able to comply with such requirement mortgage. This document was acknowledged, delivered
because he only registered the car before the RoD. As a and presented to RoD Jaramillo for the purpose of
registering this document. RoD Jaramillo refused to

51
register because the interest did not appear to be a
personal property within the meaning of the Chattel Now what about a subject matter described and identified
Mortgage Law. in a chattel mortgage whats the rule there? What
happened in the case of Saldaa?
Issue: Whether the RoD may refuse to register of the
mortgage. Reasonable Description Rule:

Ruling: SALDAA VS. PHILIPPINE GUARANTY


THE ROD MAY NOT REFUSE THE REGISTRATION OF THE GR L-13194, January 29, 1960
MORTGAGE. It is the ministerial duty for the RoD to Facts: Josefina in order to secure a loan executed a
register the mortgage. No provision of law can be cited chattel mortgage covering properties described as
which confers upon him any judicial or quasi-judicial follows:
powers to determine the nature of any document of A building of strong materials, used for restaurant
which registration is sought as a chattel mortgage. business, located in front of the San Juan de Dios
Hospital at Dewey Boulevard, Pasay City, and the
THE REGISTRATION IS A CONSTRUCTIVE NOTICE OF AN following personal properties therein contained:
EXISTENCE OF A CONTRACT AND THE LEGAL EFFECTS
OF THE CONTRACT MUST BE DISCOVERED IN THE 1 Radio, Zenith, cabinet type.
INSTRUMENT ITSELF. SUCH REGISTRATION ADDS 1 Cooler.
NOTHING TO THE INSTRUMENT. 1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.
Q: What is the effect of registering a chattel mortgage 1 G.E. Deepfreezer.
which actually involves a real property? 8 Tables, stateside.
A: Here, the SC held that the parties to the contract may 32 Chromium chairs, stateside.
treat as personal property that which by its nature would 1 Sala set upholstered, 6 pieces.
be a real property. 1 Bedroom set, 6 pieces.

Q: Will the chattel mortgage be invalid? And all other furniture's, fixtures or equipment
A: It will not invalidate the chattel mortgage only between found in the said premises.
the parties. Because we apply the principle of estoppel.
Subsequent to the execution of the mortgage, a writ of
Regardless of the nature of the property subject of a execution was duly issued as a result of a civil case
chattel mortgage, even if it indicates as a subject matter a instituted by Hospital de San Juan de Dios against
real property, the RoD has no right to refuse the Josefina Eleazar; whereupon the following properties of
registration of the same on the ground that he finds that Josefina Eleazar were levied upon:
the properties actually are real properties as his duties 8 Tables with 4 (upholstered) chairs each.
with respect to such instruments are ministerial only. 1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.1 Radio-phono (Zenith,
As between the parties, if a real property as you have 8 tubes).
discussed in Property, Article 415 wherein those 2 Showcases (big, with mirrors).
considered as real properties are enumerated, if the same 1 Rattan sala set with 4 chairs, 1 table and 3
are made subject matter in a chattel mortgage, it will not sidetables .
necessarily invalidate the chattel mortgage as between the 1 Wooden drawer.
parties. As long as it is deemed to be the agreement 1 Tocador (brown with mirror).
between the parties, and no 3rd parties are prejudiced, the 1 Aparador .
mortgage will actually be upheld. 2 Beds (single type).
1 Freezer (deep freeze).
This is also an application of the principle of estoppel. The 1 Gas range (magic chef, with 4 burners).
parties themselves designated, deemed the property a 1 Freezer (G.E.).
personal property although it is a real property. They
cannot later on impugn the validity of the contract as void On January 31, 1957, the plaintiff-appellant Saldana
as it did not comply with the requirements of the law to filed a third-party claim asserting that the above-
constitute a chattel mortgage. The parties cannot say that described properties levied are subject to his chattel
the contract is void because it does not comply with the mortgage of May 8, 1953. In virtue thereof, the sheriff
provisions of the law but instead they will be estopped released only some of the property originally included
from questioning the same. But as to third parties, it will in the levy of January 28, 1957, to wit: 1 radio, 8 tables,
necessarily bind them when the mortgaged property is real 32 chromium chairs, 1 G.E. Freezer.
instead of personal. The chattel mortgage will no doubt be
held effective against 3rd persons. Appellant claims that the phrase and all other
furnitures, fixtures and equipment found in the said
But in the case of Standard Oil this was not ruled upon by premises," validly and sufficiently covered within its
the Courts because the issue therein was the duty of the terms the personal properties disposed of in the
RoD to have the mortgage registered. This shouldnt stop auction sale.
you from memorizing Art. 415 of the CC.
ISSUE: Whether or not the properties levied are
As mentioned earlier, if you have incorporeal properties it covered by the mortgage. YES.
can be considered as a valid subject matter in a contract of
chattel mortgage. As I mentioned earlier, shares of stock as HELD: Section 7 of Act No. 1508, commonly and better
an evidence of incorporeal right, registration is required known as the Chattel Mortgage Law, does not demand
both in the principal place of business of the corporation a minute and specific description of every chattel
and where the stockholder resides. mortgaged in the deal of mortgage but only requires

52
that the description of the properties be such "as to So take note of this rule with regard to the description of
enable the parties in the mortgage, or any other the personal property mortgaged. Notice the difference
person, after reasonable inquiry and investigation to when compared to a real estate mortgage contract. Since
identify the same". in the latter, a mistake or typo in the number of the title
will invalidate the subsequent foreclosure proceeding. It
Gauged by this standard, general description have been must be really specific. But here, there is leeway as long as
held by this Court. The description in the mortgage it can be reasonably determined.
must point out its subject matter so that such person
may identify the chattels observed, but it is not Affidavit of Good Faith
essential that the description be so specific that the With regard to a chattel mortgage, there is a requirement
property may be identified by it alone, if such for the execution of an affidavit of good faith. This is an
description or means of identification which, if pursued oath in a contract of a chattel mortgage wherein the
will disclose the property conveyed. parties (mortgagor and mortgagee) severely swear that the
mortgage is made for the purpose of securing the
The specifications in the chattel mortgage contract in obligations specified in the conditions thereof and for no
the other purposes and that the same is a just and valid
instant case, we believe, in substantial compliance with obligation and not entered into for the purpose of fraud.
the "reasonable description rule" fixed by the Chattel
Mortgage Act. We may notice in the agreement, You have the case of Lilius vs. Manila Railroad.
moreover, that the phrase in question is found after an
enumeration of other specific articles. It can thus be LILIUS VS. MANILA RAILROAD
reasonably inferred therefrom that the "furnitures, GR 42551, September 4, 1935
fixture and equipment" referred to are properties of like Facts:
nature, similarly situated or similarly used in the In G.R. No. L-39587, Aleko E. Lilius, and his wife Sonja
restaurant of the mortgagor located in front of the San Maria Lilius, and Brita Marianne Lilius, met an accident,
Juan de Dios Hospital at Dewey Boulevard, Pasay City, wherein their Studebaker car, collided with locomotive
which articles can be definitely pointed out or ascertain No. 713, Manila Railroads train. They were awarded by
by simple inquiry at or about the premises. A contrary the SC damages including interests and costs.
view would unduly impose a more rigid condition than
what the law prescribes, which is that the description In G.R. No. 42551, Laura Shuman, the Manila Wine
be only such as to enable identification after a Merchants, Ltd., the Bank of the Philippine Islands and
reasonable inquiry and investigation. the Manila Motor Co., Inc. (creditors of the spouses
Lilius) have appealed from the order of the CFI of
Q: What is the issue here? What was included in the Manila fixing the degree of preference of the claimants
chattel mortgage contracts? Did it include all the distributing the proceeds of the judgement of the this
properties of the mortgagor? What is the reasonable court in the case of Lilius vs. Manila Railroad.
description rule? What does it require? Does the same
specific description in a real estate mortgage contract? Manila Motor claims that the lower court erred in not
What phrase in the chattel mortgage? holding their claims, evidenced by public document and
final judgement, as preferred over all other claims
Section 7 does not demand a specific description of every against Aleko E. Lilius. The public document refers to a
chattel or personal property mortgage. In the deal of mortgage appearing in the evidence as the basis of its
mortgage only requires that description of the property be judgement, without mentioning the date of execution
such as to enable the parties in a mortgage or any other of the exhibit.
person, after reasonable inquiry and investigation to
identify the same. That is the reasonable description rule Issue: Is there a valid chattel mortgage as alleged by
to which general description have been upheld by the Manila Motor?
Court.
Ruling: YES.
So as against third persons, the description must point out UNDER SECTION 5 OF ACT NO. 1507, AS AMENDED BY
a subject matter so that such person may identify the ACT NO. 2496, A CHATTEL DOES NOT HAVE TO BE
chattels observed. But it is not essential that the ACKNOWLEDGED BEFORE A NOTARY PUBLIC. As
description be so specific that the property may be against creditors and subsequent encumbrances, the
identified by him alone in such description or by means of law does require an affidavit of good faith appended to
identification which if pursued will disclose the property the mortgage and recorded with it. A chattel mortgage
conveyed. may, however, be valid as between the parties without
such an affidavit of good faith. The rule is expressly
The phrase and all other furnitures, fixtures, and stated that as between the parties and as to third
equipment found in the said premises, placed after the persons who have no rights against the mortgagor, no
enumeration of other specific articles, which makes it affidavit of good faith is necessary. It will thus be seen
reasonably inferred that the furniture, picture and that under the law, a valid mortgage may exist between
equipment referred to are properties of like nature the parties without its being evidenced by a public
similarly situated or similarly used in the restaurant of the document.
mortgagor, which articles can be definitely pointed out or
ascertained after a simple inquiry about the premises. Q: Do you have a valid chattel mortgage here?
A: Yes. Because the Court said that the chattel does not
Again, under Section 7, like or subsituated properties made need to be acknowledged before a notary public. As
reference to those thereafter acquired by the mortgagor against creditors and subsequent encumbrances, the law
and placed in the same depository as a property originally requires an affidavit of good faith.
mortgaged.
Q: What is the effect if there is no affidavit of good faith?

53
A: According to the Court, the mortgage is still valid was loaned to Ong does not represent the balance of
despite the absence of the affidavit of good faith. any purchase price since the documents state that Ong
is already the absolute owner of the subject vessel.
Q: Why do we still need an affidavit of good faith?
A: Without it, the mortgage wouldnt be binding against CEBU INTERNATIONAL IS A MORTAGEE IN GOOD FAITH
third parties who were prejudiced or who have rights WHOSE RIGHTS MUST BE RESPECTED. The prevailing
against the property. jurisprudence is that a mortgagee has a right to rely in
good faith on the certificate of title of the mortgagor to
The absence of an affidavit of good faith does not affect the property given as security and in the absence of any
the validity of a mortgage. The parties will still be bound by sign that might arouse suspicion, has no obligation to
the mortgage as well as third persons who have no rights undertake further investigation. Hence, even if the
against the mortgagor or have no rights as against the mortgagor is not the rightful owner of or does not have
property. But with regard to 3rd persons who will be a valid title to the mortgaged property, the mortgagee
prejudiced by such mortgage or have rights against the or transferee in good faith is nonetheless entitled to
mortgagor, an affidavit of good faith is necessary. A valid protection. Although this rule generally pertains to real
mortgage may still exist between the parties, in fact, even estate property, particularly registered land, it may also
without it being evidenced by a public document. be applied by analogy to personal property, in this case
However, for it to be registered, the RoD will require that specifically, since ship owners are, likewise, required by
the same be notarized. law to register their vessels with the PCG.

How about the case of Cebu International? PETITIONER FAILED TO COMPLY WITH THE SPECIAL
AFFIDAVIT OF GOOD FAITH AS REQUIRED IN SEC. 4 OF
CEBU INTERNATIONAL FINANCE VS. CA PD 1521. The special affidavit of good faith, is required
GR 107554, February 13, 1997 only for the purpose of transforming an already valid
Facts: On 4 March 1987, Jacinto Dy executed a Special mortgage into a preferred mortgage. Thus, the
Power of Attorney in favor of private respondent Ang abovementioned affidavit is not necessary for the
Tay, authorizing the latter to sell the cargo vessel validity of the chattel mortgage itself but only to give it
Owned by Dy and christened LCT Asiatic. a preferred status.
On 28 April 1987, through a Deed of Absolute
Sale, Ang Tay sold the subject vessel to private As between two innocent persons, the mortgagee and
respondent Robert Ong (Ong) for P900,000.00. Ong the owner of the mortgaged property, one of whom
paid the purchase price by issuing three (3) checks in must suffer the consequence of a breach of trust, the
the following amounts: P150,000.000, P600,000.00 and one who made it possible by his act of confidence must
P150,000.00. However, since the payment was not bear the loss, it is Ang Tay and his principal Jacinto Dy
made in cash, it was specifically stipulated in the deed who must, unfortunately, suffer the consequences
of sale that the LCT Asiatic shall not be registered or thereof. They are considered bound by the chattel
transferred to Robert Ong until complete payment. mortgage on the subject vessel.
Thereafter, Ong obtained possession of the
subject vessel so he could begin deriving economic Q: Before it was registered, what did he do? What was
benefits therefrom. He, likewise, obtained copies of the the requirement before it can be registered? What did he
unnotarized deed of sale allegedly to be shown to the do to the copies of the deed of sale?
banks to enable him to acquire a loan to replenish his A: He had them notarized.
(Ongs) capital. The aforequoted condition, however,
which was handwritten on the original deed of sale, Maam: Yes because if it is not notarized, it will not be
does not appear on Ongs copies. registered.
Contrary to the aforementioned agreements
and without the knowledge of Ang Tay, Ong had his Q: Was there an affidavit of good faith here?
copies of the deed of sale (on which the A: None. But then the Court said that the affidavit of good
aforementioned prohibition does not appear) notarized faith is not necessary because it would just add value to
on 18 May 1987. Ong presented the notarized deed to the mortgage but it would still be valid between the
the Philippine Coast Guard which subsequently issued parties. Its effect aside from adding value, it turns
him a Certificate of Ownership and a Certificate of
Philippine Register over the subject vessel on 27 May You have a mortgagee in good faith. While it was true that
1987. Ong also succeeded in having the name of the there was yet no valid deed of sale, or duly executed sale
vessel changed to LCT Orient Hope. in favor of Ong, it appears that he was able to have the
On 29 October 1987, Ong acquired a loan same notarized and registered it. Remember with regard to
from petitioner in the amount of P496,008.00 to be vessels that the Certificate of Ownership and Certificate of
paid in instalments as evidenced by a promissory note Philippine Registry must be duly registered with the
of even date. Eventually, he defaulted in his payments. Philippine Coast Guard. In this instance, you have a
mortgagee who relied in good faith on the Certificate of
Issue: Is there a valid chattel mortgage? Title of the mortgagor to which the title was given as
security which had no sign that might arouse suspicion.
Ruling: Therefore, Cebu International had no obligation to
THE CHATTEL MORTGAGE CONTRACT BETWEEN CEBU undertake further investigation, applying mortgagee in
INTERNATIONAL AND ONG IS VALID AND SUBSISTING. good faith. Even if the mortgagor is not the rightful owner
It cannot be disputed that it was Dy who was the seller does not have the valid title to the mortgaged property,
and Ong the buyer of the vessel. Petitioner is the the mortgagee or transferee is nonetheless entitled to
creditor-mortgagee and not the owner-seller. The protection.
mortgage contract which expresses the true nature of
the transaction between petitioner and Ong: that it is a The mortgagee in good faith that we have discussed in real
simple loan with chattel mortgage. The amount that estate mortgage was applied in this instance by analogy to

54
personal properties since the vessel was duly registered in considered as a pledge.
the Philippine Coast Guard.

Notice that there was no affidavit of good faith here but In relation to the requirement of recording, lets look at the
the SC still upheld the mortgage in favor of Cebu case of:
International because the purpose of the affidavit of good FILIPINAS MABLE CORPORATION vs. THE HONORABLE
faith is not only to bind third persons (although it cannot INTERMEDIATE APPELLATE COURT
be applied to a mortgagee in good faith) but it can also, as [G.R. No. L-68010 May 30, 1986]
an additional effect thereof is that it may be considered as
a preferred mortgage. So when you to concurrence and Facts: DBP granted a 5M loan to Filipinas. To secure the
preference of credits, when we say preferred mortgage said loan, it executed a deed of mortgage (chattel) and
and it turns out that the debtor is insolvent and you have deed of assignment in favor of DBP.
these vessels subject to a mortgage, if there is an affidavit Filipinas seeks to annul the deed of assignment and
of good faith, the proceeds of the sale of that vessel will be deed of mortgage because allegedly the loan was never
applied first to the mortgagee. If the mortgage does not delivered to them.
have an affidavit of good faith, you will not have any Filipinas contention:
preference over the proceeds of the sale of the vessel. You There was no valid loan contract for failure of
will be joined with the other creditors and any of the consideration, the mortgage cannot exist or stand by
remaining proceeds of the sale of the vessel will be shared itself being a mere accessory contract. Additionally, the
pro rata if hindi applicable yung hierarchy as to the chattel mortgage has not been registered. Therefore,
preference of claims. the same is null and void under Article 2125 of the New
Civil Code
I think you have the sample form in Art. 1508 and both
parties will execute such affidavit. Its purpose is to secure Issue: WON the failure to record the deed makes the
the fulfillment of the obligation and not executed to latter null and void
defraud third persons. Its absence will only depreciate the
mortgage, will not bind the mortgagees as against 3 rd Ruling: NO.
persons who will be prejudiced thereby and it will not As regards the second assignment of error, we agree
transform an already valid mortgage into a preferred with the petitioner that a mortgage is a mere accessory
mortgage. Such affidavit is not necessary for the validity of contract and, thus, its validity would depend on the
the mortgage. Again such absence of the affidavit will still validity of the loan secured by it. We, however, reject
leave the mortgage as valid between the parties but not the petitioner's argument that since the chattel
binding as against third persons who have rights against mortgage involved was not registered, the same is null
the mortgagor the contract is not valid. The credits secured and void. Article 2125 of the Civil Code clearly provides
by the mortgage will also not assume the position of a that the non-registration of the mortgage does not
preferred credit in the absence of such affidavit. affect the immediate parties. It states:
Art. 2125. In addition to the requisites stated in article
Importance of an Affidavit of Good Faith 2085, it is indispensable, in order that a mortgage may
Very important ang affidavit of good faith, because be validly constituted that the document in which it
remember, in a chattel mortgage, the property is not appears be recorded in the Registry of Property. If the
delivered to the mortgagee-creditor. It remains in instrument is not recorded, the mortgage is
possession of the debtor-mortgagor. Because once it is nevertheless binding between the parties.
delivered to the debtor-mortgagor, it is not considered as a xxxxxxxxx
mortgage anymore but a pledge. What is the relevance The petitioner cannot invoke the above provision to
there? For example, hahabulin yan kasi may iba ka pang nullify the chattel mortgage it executed in favor of
utang, tapos mamaya magexecute tayo ng mortgage para respondent DBP.
walang makukuha sayo. With the affidavit of good faith,
this is also to prevent fraud in the sense na magexecute Discussion on the case:
tayo ng chattel mortgage para hindi ma-sheriff or habulin. Article 2125 is a provision under real estate mortgage, but
With the execution of the affidavit of good faith, you attest in this case of Filipinas, it applied the same provision to a
that the obligation is true and it exists na may utang ka chattel mortgage, wherein it was ruled that even if it was
talaga. Because with an affidavit, you attest to the not recorded, it is nevertheless binding between the
truthfulness that the there is a valid obligation which exists parties.
and that the mortgage is not entered into to defraud
creditors. Filipinas cannot invoke the provision to nullify the chattel
mortgage it executed in favor of DBP.

Discussion on the provision/topic:


March 14 Kuit 2140 does not automatically or necessarily say that if it is
not recorded, the mortgage is void. Although in the
discussions, it is mentioned that for validity, the
Definition of Chattel Mortgage: registration is indispensable. If you try to reconcile that
with Filipinas case, applying 2125, SC emphasized that it is
Art. 2140. By a chattel mortgage, personal property is still valid despite the absence of registration. There are no
recorded in the Chattel Mortgage Register as a security cases which repealed or superseded the ruling on Filipinas
for the performance of an obligation. If the movable, which applied 2125 on a chattel mortgage.
instead of being recorded, is delivered to the creditor or
a third person, the contract is a pledge and not a chattel Previously, we discussed that we apply the ruling in the
mortgage. case of Saldana wherein it was ruled that: unlike in REM, in
A property subject of a chattel mortgage is not Chattel Mortgage Law, it does not require a specific
delivered to the creditor, otherwise, it may be description. It only requires the description of the

55
mortgaged property sufficient to identify the same after a A chattel mortgage, as hereinbefore so intimated, must
reasonable investigation and inquiry. comply substantially with the form prescribed by the
Chattel Mortgage Law itself. One of the requisites,
Absence of affidavit of good faith: chattel mortgage is under Section 5 thereof, is an affidavit of good
still valid. However, absence thereof will vitiate mortgage faith. While it is not doubted that if such an affidavit is
only against third persons without notice, creditors, and not appended to the agreement, the chattel mortgage
subsequent encumbrancers. Moreover, its absence will would still be valid between the parties (not against
convert the chattel mortgage to a preferred credit. third persons acting in good faith ]), the fact, however,
that the statute has provided that the parties to the
Similar to continuing guaranty, with regard to mortgage, as contract must execute an oath that -
long as a mortgage has a valid blanket clause, it will also
secure even future debts. "x x x (the) mortgage is made for the purpose of
securing the obligation specified in the conditions
But what about chattel mortgage? thereof, and for no other purpose, and that the same is
ACME SHOE, RUBBER & PLASTIC CORPORATION and a just and valid obligation, and one not entered into for
CHUA PAC vs. HON. COURT OF APPEALS, PRODUCERS the purpose of fraud."
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY makes it obvious that the debt referred to in the law is a
[G.R. No. 103576. August 22, 1996] current, not an obligation that is yet merely
Facts: ACME obtained a P3M loan (1978) secured by a contemplated. In the chattel mortgage here involved,
chattel mortgage from Producers Bank, which the latter the only obligation specified in the chattel mortgage
granted. The said loan was fully paid. contract was the P3,000,000.00 loan which petitioner
In case the MORTGAGOR executes subsequent corporation later fully paid. By virtue of Section 3 of the
promissory note or notes either as a renewal of the Chattel Mortgage Law, the payment of the obligation
former note, as an extension thereof, or as a new loan, automatically rendered the chattel mortgage void or
or is given any other kind of accommodations such as terminated.
overdrafts, letters of credit, acceptances and bills of
exchange, releases of import shipments on Trust Q: Do you have a provision in the mortgage which covers
Receipts, etc., this mortgage shall also stand as security future debts?
for the payment of the said promissory note or notes A: Yes (see italicized portion of the case).
and/or accommodations without the necessity of
executing a new contract and this mortgage shall have Q: Is the provision valid?
the same force and effect as if the said promissory note A: Yes but they must execute a new chattel mortgage or
or notes and/or accommodations were existing on the amend the old one. Otherwise, it is without any effect.
date thereof. This mortgage shall also stand as security
for said obligations and any and all other obligations of Discussion on the case:
the MORTGAGOR to the MORTGAGEE of whatever kind Maam reads ruling (see 1st paragraph in the ruling). In this
and nature, whether such obligations have been instance, 1978 chattel mortgage already ceased to exist
contracted before, during or after the constitution of with the full payment of the P3M loan. Remember, when
this mortgage. the principal obligation is extinguished, the accessory
The bank again extended a P1M loan (1984) to ACME. obligation is also extinguished. Therefore, there were no
However, the P1M loan was not settled. Hence, more chattel mortgage that could cover the loans
Producers Bank applied for an extrajudicial foreclosure concluded thereafter. Take note of this distinction
of the chattel mortgage which secured the P3M loan. (compared to pledge, REM, and guaranties and securities),
that a chattel mortgage may only cover obligations existing
Issue: WON chattel mortgage may cover future debts at the time the mortgage is constituted. Even if there is a
promise, as in the case of Acme, the security itself does
Ruling: NO. not come into existence until they will execute a new
While a pledge, real estate mortgage, or antichresis chattel mortgage or amend the old one, specifically stating
may exceptionally secure after-incurred obligations so that in this personal property there is a new obligation and
long as these future debts are accurately described, a it acts as a security for this specific new obligation.
chattel mortgage, however, can only cover obligations
existing at the time the mortgage is A deed of chattel mortgage shall be void if it provides
constituted. Although a promise expressed in a chattel that the security stated is for the payment of any and all
mortgage to include debts that are yet to be contracted obligations contracted. Void in the sense that it is without
can be a binding commitment that can be compelled any effect until it will be amended or a new mortgage
upon, the security itself, however, does not come into contract will be contracted.
existence or arise until after a chattel mortgage
agreement covering the newly contracted debt is What is the purpose of affidavit of good faith?
executed either by concluding a fresh chattel mortgage "x x x (the) mortgage is made for the purpose of securing
or by amending the old contract conformably with the the obligation specified in the conditions thereof, and for
form prescribed by the Chattel Mortgage Law. Refusal no other purpose, and that the same is a just and valid
on the part of the borrower to execute the agreement obligation, and one not entered into for the purpose of
so as to cover the after-incurred obligation can fraud."
constitute an act of default on the part of the borrower
of the financing agreement whereon the promise is That the mortgage was executed to secure the fulfillment
written but, of course, the remedy of foreclosure can of an obligation, which is a true obligation, and it is not
only cover the debts extant at the time of constitution executed to defraud third persons.
and during the life of the chattel mortgage sought to be
foreclosed. In other words, you really have to expressly and specifically
provide that at the time the mortgage was executed, there

56
exists a true obligation. Remember, that the property here second mortgagee will increase (plus obligation to first
is not delivered to the possession of the mortgage. It mortgagee).
remains in the possession of the debtor. The latter, in the
event the other creditors foreclose the property, cannot A second mortgagee is allowed, However, the latter cannot
say that he does not own the property or that it was foreclose the mortgage. What he can do is to redeem the
mortgaged to avoid the foreclosure, there must be a property from the first mortgagee, pay off the latter and in
chattel mortgage executed and there is an affidavit of good effect the second mortgagee will be entitled to the
faith, so as not to defraud third persons. mortgage.

Discussion on the topic: What about possession of the property? We mentioned in


our REM discussion that the property need not be
In REM, does it cover the fruits of the mortgaged delivered to the mortgagee, unless agreed otherwise.
property? Yes, unless there is an agreement to the
contrary. How about in chattel mortgage?
1) Before default/foreclosure, the mortgagee is not
How about with regard to personal properties? entitled to the possession of the property.
General Rule: It does not cover subsequently acquired Otherwise, it would be considered a pledge.
personal properties. 2) After default, if the mortgagee desires to
Exception: inventories are mortgage e.g sari sari store, foreclose the property, the creditor can take
etc. possession of the property. However, it is not in
the concept of an owner, but for purposes of
If were talking of goods in the ordinary course of business, selling the property.
it can be replenished and to which it can be a valid subject
in a contract of chattel mortgage. The after-acquired If the mortgagor, after default, refuses to deliver the
properties, since it can be replenished, may be used to property, the mortgagee can file a judicial foreclosure for
fulfill an obligation, even if at the time the chattel purposes of sale.
mortgage was executed, the exact properties were not yet
present. We also apply the rule (pactum commissorium) that the
mortgagor cannot automatically appropriate the property
Can a creditor of a chattel mortgage assign his rights to a to himself.
third person? YES, same rule with REM. The creditor can
assign his credit to some other person to which if the If there is another party who is in possession of the
debtor fails to pay his obligation, the third person can hold property, the mortgagee can implead those who are
the same as against the debtor. If debtor fails to pay, the claiming possession or ownership of the same. So, the
assignee can foreclose the property. creditor shall implead all persons claiming possession or
ownership over the property mortgaged.
Is it required that the assignment be registered to bind
debtor? NO because of 1240. Now Act No. 1508 (page 48) provides for the proceeding of
the foreclosure of a chattel mortgage to which the
Art. 1240. Payment shall be made to the person in mortgagee must discharge the mortgage in the manner
whose favor the obligation has been constituted, or his provided in the said law. Otherwise, he can be held liable
successor in interest, or any person authorized to for damages by any person entitled to redeem the
receive it. (1162a) property.

Even if you merely registered the assignment credit and It is the same with pledge and real estate mortgage. What
the same is without the knowledge of the debtor, payment takes place here is a public sale a public auction. So
results to the extinguishment of the obligation. Why? again, the creditor has no right to appropriate to himself
Because as to the debtor, the creditor is still the creditor at the personal property.
the time of payment. So, what is required is personal
knowledge. Mere registration is not sufficient without the If you take a look at Act No. 1508, more or less, the
actual knowledge of the debtor. The debtor cannot be procedure prescribed therein is more or less the same with
prejudiced by the assignment. The remedy of the third a foreclosure of a mortgage. But you will notice the
person is to go after the creditor. If the debtor has difference in the number of days in absence of we call the
knowledge, even if not registered, he has to pay to the right redemption.
assignee to extinguish the obligation.
Although, same with Art. 2135, the mere fact that the
Who may redeem? Technically speaking, when were mortgagee was sole bidder for the mortgaged property in a
talking about a chattel mortgage, were not talking about public sale so it must be really in a public sale, does not
the right of redemption. But, who may pay the obligation warrant that the transaction was attended with fraud. It is
to the creditor before it is sold? not sufficient that one alleges fraud, it requires full and
1) Mortgagor; convincing evidence.
2) a person holding a subsequent mortgage;
3) or a subsequent attaching creditor. Take a look at Section 14 of Act No. 1508: there is a 30 day
period stated therein. What is this 30 day period? We have
In other words, if a second mortgagee is allowed in REM, the case of Cabral.
the same is also allowed in a chattel mortgage.

However, in a chattel mortgage, the second mortgage CABRAL VS. EVANGELISTA


cannot foreclose the property before the first mortgagee. G.R. L-26860, July 30, 1969
What can he do? Pay debtors obligation to first Facts:
mortgagee, but of course, the debtors obligation to the On 12 Dec 1959, George had executed in favor of Cabral

57
Spouses a chattel mortgage covering a Morrison English delivery of the chattels to them with a certificate
piano and a Frigidaire GM Electric Stove as security for of sale did not give them a superior right to the
payment to the latter of a promissory note in the sum chattels as against the Cabral spouses.
of P1k executed on the same date in the Chattel
Mortgage Register of Rizal on 14 Dec 1959. Meanwhile, It has long been settled by this Court that The
the Evangelista spouses obtained a final money right of those who acquire said properties should
judgment against Tunaya in a Civil Case. They caused not and cannot be superior to that of the creditor
the levy in execution on Tunayas personal properties, who has in his favor an instrument of mortgage
including the piano and the stove mortgaged to Cabral executed with the formalities of the law, in good
spouses. faith, and without the least indication of fraud.

The said mortgage chattels, together with other In another case case between two mortgagees,
personal properties of the judgment debtor, were sold we held that "As between the first and second
at public auction to Evangelista spouses as the highest mortgagees, therefore, the second mortgagee has
bidders. The judgment credit of Evangelista spouses, as at most only he right to redeem, and even when
creditors in the said Civil Case, was considered paid up the second mortgagee goes through the formality
and the Sheriff issued the corresponding certificate of of an extrajudicial foreclosure, the purchaser
sale in their favor. acquires no more than the right of redemption
from the first mortgagee.
Subsequently, 8 months after the maturity of Tunayas
promissory note and his having defaulted in the The superiority of the mortgagee's lien over that
payment thereof, Cabral spouses filed their complaint of a subsequent judgment creditor is now
against Tunaya and the Evangelista spouses, alleging expressly provided in Rule 39, section 16 of the
that the Evangelista spouses had refused their demands Revised Rules of Court, which states with regard
to pay the amount due to Tunayas promissory note or to the effect of levy on execution as to third
to exercises their right of redemption. persons that "The levy on execution shall create a
lien in favor of the judgment creditor over the
Evangelista spouses now claim that their right over the right, title and interest of the judgment debtor in
mortgaged chattels as purchasers at the public sale in such property at the time of the levy, subject to
execution of their judgment against their debtor, liens or encumbrances then existing."
Tunaya, should not be held subordinate to the
mortgage lien of Cabral spouses as mortgagees, by
virtue of prescription and laches on the part of said Q: What was the understanding of the Spouses Cabral in
mortgagees as well as of their having purchased the that provision?
chattels at a public sheriffs sale. A: According to Spouses Evangelista, the 30 day period is a
prescriptive period for Spouses Cabral to cause the
Issues: foreclosure of the mortgage. However the Court ruled that
(1) Has the right of Cabral Spouses to recover the the 30-day period is actually a the minimum period for the
properties prescribed? NO. mortgage-creditor to cause the sale or auction of the
(2) Did the Certificate of Sale give the Evangelista mortgaged property after the condition has been violated.
Spouses superior right against the Cabral In other words, the said 30 day period serves as a period
Spouses? NO. for the mortgagor-payor Tunaya to discharge his
obligations.
Ruling:
(1) This 30-day period is the minimum period after Q: How about right of redemption, is it present in a
violation of the mortgage condition for the chattel mortgage? Because, recall, in real estate
mortgage creditor to cause the sale at public mortgage, the general rule is that you have that 1 year
auction of the mortgaged chattels, with at least from registration of sale to redeem the property. Do we
ten days notice to the mortgagor and posting of have a similar provision in a chattel mortgage? What was
public notice of the time, place and purpose of the ruling of the court here? Can the property be
such sale, and is a period of grace for the redeemed by the mortgagor after the sale has already
mortgagor, who has no right of redemption after taken place?
the sale is held, to discharge the mortgage
obligation.
The 30-day period provided in Section 14 is the minimum
The prescription period for recovery of movables period after the violation of the mortgage condition. Ang
for foreclosure purposes such as in the present sabi diyan, mortgagee may after 30 days from the
case is eight years as provided in Article 1140 of condition broken, in other words from the time of default,
the Civil Code, and here plaintiffs had timely filed you count the 30 days. From that you can now have the
their action within 8 months from the mortgage mortgaged property sold at a public auction, provided that
debtor's default. there is compliance with the requirement: at least 10 days
notice to the mortgagor prior to the sale; and posting of
By the same token , neither could laches properly the public notice of the time, the place and the purpose of
be imputed against plaintiffs, who filed their such sale.
action promptly after they had been advised by
Tunaya of the public auction sale on June 24, 1960 Why is it required under the law that these notices be
of the chattels, at the instance of Evangelista as given to the mortgagor? So within the 10 day period, he
his judgment creditor. can redeem a property.

(2) Evangelista spouses purchase of the mortgaged Why would that be relevant? Because after the personal
chattels at the public sheriff's sale and the property is sold in a public auction, no right of

58
redemption is available. Take note of this distinction as to
real estate mortgage. This 10-day period is a grace period A second levy was made upon 35 taxicabs, 7 of which
for the mortgagor who has no right of redemption after are mortgaged to Northern Motors. The taxies were
the sale is held to discharge the mortgage obligation. levied and sold at an auction sale. The auction sale
proceeded and the purchasers were of unknown
So the 30-day period is not a prescriptive period. In this addresses, hence the 8 taxicabs cannot be recovered.
case, the SC pointed out that the prescriptive period to The proceeds of the auction were contested by
foreclosure of mortgages or chattel mortgages is 8 years Northern Motors. Moreover, the sheriff deducted the
and we apply Art. 1140. expenses of the execution sale from the proceeds.

There could have been no laches. Moreover, the SC Honesto Ong and City Sheriff of Manila filed a motion
mentioned that the purchase of the properties at the for the reconsideration contending that the lien of
public sale and the delivery to them with the certificate of Northern Motors, as chattel mortgagee, over certain
sale did not give them a superior right to the chattels. taxicabs is not superior to the levy made on the said
Why? Because again it was already mortgaged. The sale cabs by Honesto Ong, the assignee of the unsecured
conveys to the purchaser all the right which the debtor had judgment creditor of MYT.
in such property on the day the execution or attachment
was levied. On the other hand, Northern Motors prayed that the
sheriff should be required to deliver to it the proceeds
The sale that was conducted here was an execution sale of the execution sale of the mortgaged taxicabs without
not the foreclosure sale contemplated. If you apply the deducting the expenses of execution.
foreclosure sale in relation to a chattel mortgage, then you
apply Act No. 1508. ISSUES:
1. WON the expenses for the execution sale should be
The right of those who acquired said properties cannot and deducted from the proceeds thereof. NO
should not be superior to that of the creditor. In this case, 2. WON the purchaser has a better right than the
there was an instrument of mortgage executed with the creditor/mortgagee. NO
formalities of the law in good faith without any indication
of fraud. HELD:
THOSE CABS CANNOT BE SOLD AT AN EXECUTION SALE
Again, the 30 day period is not a prescriptive period. Right BECAUSE THE LEVY THEREON WAS WRONGFUL.
of redemption and equity of redemption: these are the
terms we have used in real estate mortgage. In a chattel Ong had no right to levy upon the mortgaged taxicabs
mortgage the debtor has 10 days from notice of the order and that he could have levied only upon the
of foreclosure but he has no right of redemption after the mortgagor's equity of redemption. The essence of the
sale. chattel mortgage is that the mortgaged chattels should
answer for the mortgage credit and not for the
What are the remedies of the creditor-mortgagee? Even if judgment credit of the mortgagor's unsecured creditor.
there is a chattel mortgage, he can file an action for The mortgagee is not obligated to file an "independent
collection of the obligation. When he files the said case, action" for the enforcement of his credit. To require him
he deemed to have abandoned his right to foreclose the to do so would be a nullification of his lien and would
property. He can attach the same property in his action for defeat the purpose of the chattel mortgage which is to
collection of sum of money but he will be required to give him preference over the mortgaged chattels for the
produce a bond. Otherwise he will have to wait until satisfaction of his credit. (See art. 2087, Civil Code).
hearing can be conducted and the judgement will be
rendered in his favor so that he can execute all the Ong's theory that Manila Yellow Taxicab's breach of the
properties of the debtor including that which was covered chattel mortgage should not affect him because he is
by the chattel mortgage. not privy of such contract is untenable. The registration
The remedies available to the creditor-mortgagee are of the chattel mortgage is an effective and binding
alternative in nature and not cumulative. If he files an notice to him of its existence or a lien which, being
action for mortgage he cannot later on file an action for recorded, follows the chattel wherever it goes.
foreclosure.
His contention that Northern Motors was negligent
because it did not sue the sheriff within the 120-day
NORTHERN MOTORS VS. COQUIA period provided for in section 17, Rule 39 of the Rules
G.R. L-40018, December 15, 1975 of Court is not correct. Such action was filed on April
Facts: 14, 1975. However, instead of Honesto Ong, his
Manila Yellow Taxicab, executed a chattel mortgage assignor Tropical Commercial Corporation, was
over several taxicabs in favor of Northern Motors. impleaded as a defendant therein. That might explain
TROPICAL is a judgment creditor of Yellow Taxicab his unawareness of the pendency of such action.
which assigned the credit to ONG.
Ong admits "that the mortgagee's right to the
MYT failed to pay its loan so On December 12 1974, mortgaged property is superior to that of the judgment
Sheriff then levied upon 20 taxicabs in favor of Tropical, creditor". But he contends that the rights of the
8 of which are security for the chattel mortgage. purchasers of the cars at the execution sale should be
Northern Motors filed an intervention on December 18, respected. He reasons out they were not parties to the
1974; however, the levied taxicabs were sold the same mortgage and that they acquired the cars prior to the
day at 2pm although agreement shows that it should mortgagee's assertion of its rights thereto.
have happened at 4pm. Indemnity bond was posted by The third-party claim filed by Northern Motors, Inc.
TROPICAL, but the bond was cancelled after the sale should have alerted the purchasers to the risk which
without notice to Northern Motors. they were taking when they took part in the auction

59
sale. Moreover, at an execution sale the buyers acquire mortgage creates a real right binding against the whole
only the right of the judgment debtor which in this case world. With that, Northern Motors has a superior right
was a mere right or equity of redemption. The sale did than Ong. The third party claim filed by Northern Motors
not extinguish the pre-existing mortgage lien. should have alerted the purchasers to the risk they were
taking when they took part in the auction sale. At an
We already held that the execution was not justified execution sale, the buyers acquire only the right of the
and that Northern Motors, as mortgagee, was entitled judgement debtor which in this case was a mere right or
to the possession of the eight taxicabs. Those cabs equity of redemption. Those cabs should not have been
should not have been levied upon and sold at public levied and sold at public auction to satisfy the judgement
auction to satisfy the judgment credit which was of such credit which was inferior to the chattel mortgage.
inferior to the chattel mortgage. Since the cabs could Since the cabs can no longer be recovered, the proceeds of
no longer be recovered because they had been the execution sale may be regarded as a partial substitute
transferred to persons whose addresses are unknown, for the unrecoverable cabs to which Northern Motors is
the proceeds of the execution sale may be regarded as entitled thereto.
a partial substitute for the unrecoverable cabs.
Northern Motors is entitled to the entire proceeds What happens after the property has been sold in a
without deduction of the expenses of execution. foreclosure of a chattel mortgage?
POLICY: The mortgagee has a better right over the thing
mortgaged than the judgment creditors of the Who is entitled to the deficiency? Can the creditor
mortgagor. It is improper to deduct the expenses of an demand for the deficiency?
illegal auction from the proceeds of thereof. Proceeds
of the must be delivered to the mortgagee in full. PAMECA VS. CA AND DBP
G.R. 106435, July 14, 1999
Facts:
Q: Who is the mortgagee here? PAMECA Wood Treatment Plant, Inc. obtained a loan of
A: Northern US$267,881.67 or P2M from DBP. As security for the
said loan, aside from the promissory note for the said
Q: Who is Honesto Ong? amount, a chattel mortgage was also executed over
A: He is an assignee. PAMECAs properties in Dumaguete City, consisting of
inventories, furniture and equipment, to cover the
Q: Was there a public sale here? By virtue of what? whole value of the loan.
A: Yes, by virtue of a judgement in favor of
DBP extrajudicially foreclosed the chattel mortgage, as
Q: So sale, in what nature? Was it a foreclosure sale? the highest bidder, it purchased the properties for
What is the issue here? Who has a better right over the P322,350.
vehicles?
A: Northern Motors has a better right because there has DBP filed a complaint for the collection of the balance
been a third party clam filed it. This should have alerted of P4,366,332.46 against PAMECA and private
Honesto in purchasing the taxis. Also the Court said that petitioners as solidary debtors with PAMECA under the
Ong had no right to levy upon the mortgaged taxi cabs and promissory note.
that he could have only levied upon the mortgagors equity
of redemption. The Court here discussed the essence of RTC: ordered PAMECA and private petitioners to pay
chattel mortgage to the effect that it should answer for the P4,366,332.46, plus 21% interest per annum and other
mortgage credit and not for the judgement credit of the charges from April 1, 1984 until the whole amount is
mortgagors unsecured creditor. paid

Q: Where do the taxi cabs stay? Isnt it that they have CA: affirmed the RTC decision.
been sold to unknown persons? Who will be liable to
Northern Motors? Issue: Can the creditor-pledgee the right to recover
A: deficiency in case the proceeds of the foreclosure sale
are less than the amount of the principal obligation?
Can Art. 2115 be applied to foreclosures of chattel
Ong is the assignee of an unsecured judgement creditor of mortgage?
Manila Yellow Taxicabs. There was a court action, the sale
which took place was actually an execution sale and not a Ruling:
foreclosure sale. However, it must be noted that there was Article 2115. The sale of the thing pledged shall
already this mortgage in favor of Northern Motors. extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the
SC emphasized that the mortgaged chattels should answer obligation, interest and expenses in a proper case. If the
for the mortgage credit and not for the judgement credit of price of the sale is more than said amount, the debtor
the mortgagors unsecured creditor. The mortgagee should shall not be entitled to the excess, unless otherwise
not be obligated to file an independent action. To require agreed. If the price of the sale is less, neither shall the
the mortgagee to do so would be a nullification of his lien creditor be entitled to recover the deficiency
and would defeat the purpose of the chattel mortgage notwithstanding any stipulation to the contrary.
which is to give him preference over the mortgaged
chattels for the satisfaction of his credit. THE EFFECTS OF FORECLOSURE UNDER THE CHATTEL
MORTGAGE LAW RUN INCONSISTENT WITH THOSE OF
Take note: even if Ong is not privy to the chattel mortgage, PLEDGE UNDER ART. 2115. Whereas, in pledge, the sale
the SC said that such contention is untenable. Why? of the thing pledged extinguishes the entire princpal
Because the mortgage here was duly registered and it is an obligation, such that the pledgor may no longer recover
effective and valid notice to him of its existence. A proceeds of the sale in excess of the amount of the

60
principal obligation, Section 14 of the Chattel Mortgage auction sale, the mortgagor is entitled to the same which
Law expressly entitles the mortgagor to the balance of is the same rule sa real estate mortgage.
the proceeds, upon satisfaction of the principal
obligation and costs. Since the chattel mortgage law bars the creditor-
mortgagee from retaining the excess of the sale proceeds,
SINCE THE CHATTEL MORTGAGE LAW BARS THE there is a corollary obligation on the part of the debtor-
CREDITOR-MORTGAGEE FROM RETAINING THE EXCESS mortgagor to pay the deficiency in case of a reduction in
OF THE SALE PROCEEDS THERE IS A COROLLARY the price at public auction.
OBLIGATION ON THE PART OF THE DEBTOR-
MORTGAGOR TO PAY THE DEFICIENCY IN CASE OF A The exception is Art. 1484 wherein it involves the sale of
REDUCTION IN THE PRICE AT PUBLIC AUCTION. In personal property in installment. If you take a look at Art.
Manila Trading and Supply Co. vs. Tamaraw Plantation 1484 there are remedies provided for by law. These
Co., Court While it is true that section 3 of Act No. remedies are alternative in nature. If the unpaid seller will
1508 provides that a chattel mortgage is a conditional avail of the foreclosure of the said chattel mortgage, he is
sale, it further provides that it is a conditional sale of not entitled to the deficiency anymore. Since the remedies
personal property as security for the payment of a debt, in Art. 1484 are alternative in nature which is different if
or for the performance of some other obligation he files an action for specific performance. (?) Also take
specified therein. note that this rule with regard to deficiency and excess is
different from what we have discussed in a contract of
Mr. Justice Kent, in the 12th Edition of his pledge.
Commentaries, as well as other authors on the question
of chattel mortgages, have said, that in case of a sale In this case of Pameca, I reiterate that the fact that the
under a foreclosure of a chattel mortgage, there is no mortgagee was the sole bidder of the mortgage property
question that the mortgagee or creditor may maintain in a public sale does not warrant the conclusion that the
an action for the deficiency, if any should occur. And transaction was attended by fraud as fraud requires full
the fact that Act No. 1508 permits a private sale, such and convincing evidence which is not present in this case.
sale is not, in fact, a satisfaction of the debt, to any Furthermore, since this is a public auction sale, the
greater extent than the value of the property at the presumption of regularity shall be upheld in the absence of
time of the sale. The amount received at the time of the any contrary evidence.
sale, of course, always requiring good faith and honesty
in the sale, is only a payment, pro tanto, and an action Lastly, if the property is sold, what happens to the
may be maintained for a deficiency in the debt. proceeds? How will it be applied?
1. First, it will be applied to the costs
ART. 1484, CC CANNOT BE APPLIED TO THIS CASE. The and expenses of the leading the sale,
said article applies clearly and solely to the sale of 2. Second, the amount will be used to
personal property the price of which is payable in pay the obligation
installments. Although Article 1484, paragraph (3) 3. If there is still an excess, names of
expressly bars any further action against the purchaser persons holding subsequent mortgages in their
to recover an unpaid balance of the price, where the order will be paid and any balance shall be paid to
vendor opts to foreclose the chattel mortgage on the be mortgagor or the person holding under him
thing sold, should the vendees failure to pay cover two under Section 14.
or more installments, this provision is specifically
applicable to a sale on installments.

March 23, 2017 Confesor


Q: Can the creditor-mortgagee demand from the
deficiency? PART XII: CONCURRENCE AND PREFERENCE OF CREDITS.
A: Yes.
So the first thing that you should take note of is that the
Q: What is your basis? rules here will only apply to two or more creditors and the
A: The Recto Law. (wrong) assets of the debtor are not sufficient to cover the
obligation to all creditors. In these rules, it answers who
Q: Isnt it that the Recto Law governs sale of personal among the creditors will be preferred?
property in installment which there is a chattel mortgage?
Why will it not apply Art. 1484? Because it does not Do remember that even if the debtor is insolvent, whether
involve a sale of personal property in installment. So natural or juridical, that does not mean that he doesnt
what law is applicable? have properties anymore. He may still have properties but
A: The Chattel Mortgage Law will apply. Specifically, only that they are not sufficient to cover all obligations. To
Section 14 which expressly entitles the mortgagor to the distinguish concurrence of credits from preference of
balance of the proceeds, upon satisfaction of the principal credits,
obligation and costs.
Concurrence of Credits implies the possession by two or
Both the chattel mortgage found in Act. 3135 do not more creditors of equal rights or privileges over the same
contain any provision which prohibits the mortgagee to property or all of the property of a debtor.
from recovering the deficiency.
Preference of Credit is the right held by a creditor to be
In this case, Section 14 in fact of the Chattel Mortgage Law preferred in the payment of his claim above others.
expressly entitles the mortgagor to the balance of the A preference is an exception to the general rule. For
proceeds, upon satisfaction of the principal obligation and this reason, the law to preferences is strictly
costs. In other words, if sobra yung proceeds from the construed.

61
Preference does not create an interest in property. It p) Lands subject to the public land act. One issued
creates simply a right of one creditor to be paid first by the government within 5 years.
the proceeds of the sale of property as against
another creditor. It creates no lien on property, and,
therefore, gives no interest in property, specific or So those are instances where the properties cannot be
general, to the preferred creditor but a preference in included for the purpose of applying the concurrence and
application of preference of credits.
the proceeds after the sale.
Preference must be distinguished from lien because
the latter attaches to the property and creates an Article 2237. Insolvency shall be governed by special
interest in the property. laws insofar as they are not inconsistent with this Code.
The law does not give the creditor who has a (n)
preference, a right to take the property or sell it as
against another creditor. It is not a question of who We had the insolvency law, Act. No. 1956 but now
takes or sells; it is one of the application of the superseded by "FRIA"- Republic Act 10142 (Financial
proceeds after the sale of payment of the debt. Rehabilitation and Insolvency Act of 2010). It provides for
the procedure for rehabilitation, insolvency, liquidation of
Article 2236. The debtor is liable with all his property, the assets of the debtor, as well as suspension of
present and future, for the fulfillment of his obligations, payments.
subject to the exemptions provided by law. (1911a)
Article 2238. So long as the conjugal partnership or
The creditors have the right to go after the properties of absolute community subsists, its property shall not be
the debtor to be able to satisfy its obligations. It may among the assets to be taken possession of by the
cover properties which were in existence at the time the assignee for the payment of the insolvent debtor's
obligation was incurred as well as future properties. obligations, except insofar as the latter have redounded to
However, do take note, subject to the exceptions provided the benefit of the family. If it is the husband who is
by law. insolvent, the administration of the conjugal partnership or
absolute community may, by order of the court, be
What are the exceptions? transferred to the wife or to a third person other than the
a) Family home unless a mortgage is specifically assignee.
made under such family home
b) Right to receive support should not be used to Remember the properties covered by the conjugal
pay creditors properties or absolute community, they do not belong to
c) Rule 39, section 13 on Properties exempt from the individual spouses but rather to the CPG or ACP. Such
execution properties may be exempted to pay off the specific
d) Ordinary tools and implements personally used obligations of the respective spouses unless it is proven
by him in his trade, employment or livelihood that it has redounded to the benefit of the family.
e) 3 horses or 3 cows, or 3 carabaos, or other
beasts of burden, such as the judgment obligor How about co-ownership under 2239?
may select, necessarily used by him in his
ordinary occupation Article 2239. If there is property, other than that
f) Necessary clothing, and articles except jewelry mentioned in the preceding article, owned by two or
g) Household furniture and utensils necessary for more persons, one of whom is the insolvent debtor, his
housekeeping, and used for that purpose by the undivided share or interest therein shall be among the
judgment obligor and his family, such as the assets to be taken possession of by the assignee for the
judgment debtor may select, of a value not payment of the insolvent debtor's obligations. (n)
exceeding one hundred thousand pesos
h) Provisions for individual or family use sufficient In a co-ownership, each co-owner has a specific undivided
for four months; interest in the property. Can his share be subject to the
i) The professional libraries of judges, lawyers, rules? Yes, because again, it will be covered as long as the
physicians, pharmacists, dentists, engineers, debtor owns the property. The share of the other co-
surveyors, clergymen, teachers, and other owners should not be included in applying the rules.
professionals, not exceeding three hundred
thousand pesos in value; Article 2240. Property held by the insolvent debtor as a
j) One fishing boat and accessories, not exceeding trustee of an express or implied trust, shall be excluded
the total value of one hundred thousand pesos, from the insolvency proceedings. (n)
owned by a fisherman and by the lawful use of
which he earns his livelihood; In a trust, we have the trustee and the beneficiary. While
k) So much of the salaries, wages, or earnings of the trustee may have the legal title, who is the owner of
the judgment debtor for his personal services the trust? That is the beneficiary. That means, if in case the
within the four months preceding the levy as are trustee is the person who is deemed insolvent, the
necessary for the support of his family; property entrusted to him will not be used to pay off his
l) Lettered gravestones; obligations. Why? Because it belongs to the beneficiary.
m) Moneys, benefi ts, privileges, or annuities
accruing or in any manner growing out of any life Now, lets go to the classification of credits. So general
insurance; classification of credits, you have-
n) The right to receive legal support, or money or (1) Special preferred credits under Art. 2241 and 2242
property obtained as such support, or any It is special and preferred in the sense that these
pension or gratuity from the government; credits are related to a specific movable property
o) Properties especially exempted by law. under 2241, and immovable under 2242 to which

62
they will be given preference to the sale of the
property involved. harvest advanced to the debtor, upon the fruits
(2) Ordinary preferred credits under Art. 2244 harvested;
There is a hierarchy of preference but they are not
attached to a specific property. In other words, all
(12) Credits for rent for one year, upon the personal
the assets not covered under 2241 and 2242, the
property of the lessee existing on the immovable
property will be sold and the proceeds will be
leased and on the fruits of the same, but not on
distributed under 2244.
money or instruments of credit;
(3) Common credits under Art. 2245

(13) Claims in favor of the depositor if the depositary


has wrongfully sold the thing deposited, upon the
price of the sale.
Article 2241. With reference to specific movable
property of the debtor, the following claims or liens
shall be preferred: In the foregoing cases, if the movables to which the lien
or preference attaches have been wrongfully taken, the
creditor may demand them from any possessor, within
(1) Duties, taxes and fees due thereon to the State or
thirty days from the unlawful seizure. (1922a)
any subdivision thereof;

(2) Claims arising from misappropriation, breach of The first thing that you should remember under 2241 is
trust, or malfeasance by public officials committed that it does not provide for a hierarchy of preferences.
in the performance of their duties, on the Why is it considered special preferred credits? Because
movables, money or securities obtained by them; these credits are preferred with regard to the proceeds of
specific personal property. Why? As among these 13
(3) Claims for the unpaid price of movables sold, on credits enumerated, no.2 is not preferred over no. 3 or no.
said movables, so long as they are in the 4, etc. Except for number 1. Why? Because that is
possession of the debtor, up to the value of the preferred among other credits as provided under Art.
same; and if the movable has been resold by the 2243.
debtor and the price is still unpaid, the lien may be
enforced on the price; this right is not lost by the Article 2243. The claims or credits enumerated in the two
immobilization of the thing by destination, preceding articles shall be considered as mortgages or
provided it has not lost its form, substance and pledges of real or personal property, or liens within the
identity; neither is the right lost by the sale of the purview of legal provisions governing insolvency. Taxes
thing together with other property for a lump sum, mentioned in No. 1, article 2241, and No. 1, article 2242,
when the price thereof can be determined shall first be satisfied. (n)
proportionally;
Some excerpts from 2016 TSN
(4) Credits guaranteed with a pledge so long as the Taxes and duties shall be first satisfied. That means the
things pledged are in the hands of the creditor, or proceeds arising from the sale of a specific property
those guaranteed by a chattel mortgage, upon the pambayad sa taxes due. So, what happens here? If you
things pledged or mortgaged, up to the value have a car the value of which is P2 million and you have
thereof; the following liabilities- taxes and duties, sabihin natin
luxury car so let us say it has an unpaid balance of duties of
(5) Credits for the making, repair, safekeeping or P500,000 and then let us say it is subject to a chattel
preservation of personal property, on the movable mortgage, P500,000. Let us say there was also an unpaid
thus made, repaired, kept or possessed; price amounting to P500,000. What are the other credits
here, for example expenses for repairs, P500,000. and then
another expenses, let us say safekeeping of the vehicle,
(6) Claims for laborers' wages, on the goods
also P500,000. So what do we have here? The liabilities
manufactured or the work done;
exceed the value of the movable property.

(7) For expenses of salvage, upon the goods salvaged;


*So if it is sold for P2 million, how would the proceeds be
applied? So first, you apply it to the taxes and duties. So
(8) Credits between the landlord and the tenant, that would mean from P2 million minus P500,000, P1.5
arising from the contract of tenancy on shares, on million nalang. share sila diyan(the remaining liabilities). So
the share of each in the fruits or harvest; pro-rata sila. So (P500,000/P2,000,000) times P1.5 million
so that is P375,000. So out of the liability for example
(9) Credits for transportation, upon the goods carried, covered by the chattel mortgage, P375,000 would come
for the price of the contract and incidental from the proceeds of sale of the movable property. What
expenses, until their delivery and for thirty days happens to the balance of P125,000? It is not extinguished
thereafter; but doon na siya mahulog sa other credits. Hindi na siya
special preferred. It would now share together with the
(10) Credits for lodging and supplies usually furnished common credits. Maam says she will not ask these types
to travellers by hotel keepers, on the movables of computation questions in the exam
belonging to the guest as long as such movables
are in the hotel, but not for money loaned to the Art. 2241 and 2242 do not give preference, order or
guests; priority of payment, hindi yan siya 1,2,3,4 and 5. Una lang
yung duties and taxes due to the government in relation to
that movable property. All the rest will concur to the
(11) Credits for seeds and expenses for cultivation and
remaining proceeds of the sale of the subject property.

63
Q1: what would be the advantage if Cordova is deemed a
CORDOVA vs REYES preferred creditor?
A1: the advantage would be---if he would be an ordinary
FACTS: Jose Cordova bought from Philfinance creditor the governing law would be 2245 which merely
certificates of stock of Celebrity Sports Plaza Inc (CSPI) provides for pro-rata, unlike if a preferred creditor which is
and shares of stock of other corporations. CSPI shares entitled to the value of his claim.
were delivered to former Filmanbank and Philtrust
Banks (as custodian banks to hold the shares in behalf Q2: What was the ruling of Court? Is Cordova an ordinary
of Cordova). creditor in which 2245 will apply or 2241?
A2: He is an ordinary creditor, and hence he has no
In 1981, Philfinance was placed under receivership by preference under Article 2245:Credits of any other kind or
SEC. Thereafter, private respondents Reyes and Atty class, or by any other right or title not comprised in the
Wendell Coronel were appointed as liquidators. In 1991, four preceding articles, shall enjoy no preference. This
without the knowledge and consent of Cordova and being so, Article 2251 (2) states that: Common credits
without authority from SEC, private respondents referred to in Article 2245 shall be paid pro rata regardless
withdrew the CSPI shares from the custodian banks. of dates.Like all the other ordinary creditors or claimants
They subsequently sold the shares to Northeast against Philfinance, he was entitled to a rate of recovery of
Corporation and included the proceeds thereof in the only 15% of his money claim.
funds of Philfinance. Cordova filed a complaint against
private respondents in the receivership proceedings So here we have Cordova who is deemed as an ordinary
with the SEC for the return of the shares. creditor of PhiFinance and not as a preferred creditor.
While it is true that shares of petitioner were specific or
In 1998, SEC dismissed the petition, but granted it upon determinate, it must be noted that the same is already
reconsideration. It held that Cordova was the owner of sold. He cannot claim preference or priority over the
the CSPI shares by virtue of a confirmation sale (which proceeds of the said shares. However, the effect is that the
was considered as a deed of assignment) issued to him money raised from the said sale became generic. And as
by Philfinance. But since the shares had already been such were commingled with the assets of PhilFinance. So
sold and proceeds commingled with other assets of here, remember to apply 2241, it must refer to a specific
Philfinance, Cordovas status was converted into that of movable property. While money is a movable property, it is
an ordinary creditor for the value of such shares. not specific or determinate. It is already a generic thing, so
the claim of Cordova was for the payment of money.
ISSUES: Therefore 2241 is not applicable, but rather 2245 and is
1. whether petitioner should be considered as a deemed an ordinary creditor. What is the difference here?
preferred (and secured) creditor of Philfinance; Because if mahulog 2245, common credits shall be paid
2. whether petitioner can recover the full value of his pro-rata regardless of the dates. And you only have to
CSPI shares or merely 15% thereof like all other consider kung meron bang maiwan na assets si debtor
ordinary creditors of Philfinance after the payment of the credits under 2241, 2242, and
later on 2244. Kung wala na matira, wala ng paghatian ang
HELD: petitioner had become an ORDINARY creditor of common creditors under 2245. Under the facts of this
Philfinance. Certainly, petitioner had the right to case, konti nalang naiwan in which like all creditors, the
demand the return of the shares. He filed a complaint in rate of recovery is only 15% of their respective money
the liquidation proceedings. He sought instead to claims.
recover their monetary value.

The CSPI shares were specific or determinate movable


properties. But after they were sold, the money raised
from the sale became generic and were commingled Article 2242. With reference to specific immovable
with other assets of Philfinance. Unlike shares of stock, property and real rights of the debtor, the following
money is generic. This means that once a certain claims, mortgages and liens shall be preferred, and shall
amount is added to the cash balance, one can no longer constitute an encumbrance on the immovable or real
pinpoint the specific amount included which then right:
becomes part of a whole mass of money. (1) Taxes due upon the land or building;
(2) For the unpaid price of real property sold,
It thus became impossible to identify the exact upon the immovable sold;
proceeds of the sale of the CSPI shares. Petitioners only
remedy was to file a claim on the whole mass of these (3) Claims of laborers, masons, mechanics and
assets, to which unfortunately all other creditors of other workmen, as well as of architects,
Philfinance also had a claim. engineers and contractors, engaged in the
construction, reconstruction or repair of
Petitioners right of action against Philfinance was a buildings, canals or other works, upon said
claim properly to be litigated in the liquidation buildings, canals or other works;
proceedings. He had a right to the payment of the value
of his shares. His demand was of a pecuniary nature
(4) Claims of furnishers of materials used in the
since he was claiming the monetary value of his shares.
construction, reconstruction, or repair of
It was in this sense that he was a creditor of Philfinance.
buildings, canals or other works, upon said
buildings, canals or other works;
Like all the other ordinary creditors or claimants against
Philfinance, he was entitled to a rate of recovery of only
15% of his money claim. (5) Mortgage credits recorded in the Registry of

64
Property, upon the real estate mortgaged; BARRETO vs VILLANUEVA

FACTS: Rosario Cruzado sold all her right, title, and


(6) Expenses for the preservation or
interest and that of her children in the house and lot
improvement of real property when the law
herein involved to Villanueva for P19K. The purchaser
authorizes reimbursement, upon the
paid P1,500 in advance, and executed a promissory
immovable preserved or improved;
note for the balance. However, the buyer could only pay
P5,500 on account of the note, for which reason the
(7) Credits annotated in the Registry of Property, vendor obtained judgment for the unpaid balance. In
in virtue of a judicial order, by attachments or the meantime, the buyer Villanueva was able to secure
executions, upon the property affected, and a clean certificate of title and mortgaged the property
only as to later credits; to Barretto to secure a loan of P30K, said mortgage
having been duly recorded.
(8) Claims of co-heirs for warranty in the partition
of an immovable among them, upon the real Villanueva defaulted on the mortgage loan in favor of
property thus divided; Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming final
(9) Claims of donors or real property for asked for execution. Cruzado filed a motion for
pecuniary charges or other conditions recognition for her "vendor's lien" invoking Articles
imposed upon the donee, upon the 2242, 2243, and 2249 of the new Civil Code. After
immovable donated; 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
(10) Credits of insurers, upon the property insured, the mortgage credit of appellant Barretto should be
for the insurance premium for two years. paid pro rata from the proceeds.
(1923a)
ISSUE: Won a proceeding, like an insolvency
proceeding, is required before claims of preferred
creditors could be ascertained?

First, taxes due upon the building. Again that is the priority. HELD:
All the rest will concur.(same concept under Art. 2241) Under the system of the Civil Code of the Philippines,
*repeats the illustration under Art. 2241 but changed only taxes enjoy a similar absolute preference. All the
subject property from a car to a house and lot. remaining thirteen classes of preferred creditors under
Article 2242 enjoy no priority among themselves, but
Using the same example lets say instead of a car, we have must be paid pro-rata i.e., in proportion to the amount
a parcel of land. of the respective credits.
Fare market value is 1.5m,
Real property Taxes is 500k, The full application of Articles 2249 and 2242 demands
that there must be first some proceedings where the
unpaid price of 200k,
claims of all the preferred creditors may be bindingly
REM of 500k,
adjudicated, such as:
unpaid laborers, architects, etc is 300k.
1. insolvency,
If these are the credits in relation to a specific real or
2. the settlement of decedents estate under
immovable property, and then this property is sold for
Rule 87 of the Rules of Court, or
1.5m again, walang problema. Bayaran silang lahat. But
3. other liquidation proceedings of similar
what if let us say, meron pang unpaid laborers 500k. so
import.
kulang ito. Again, priority, real property taxes, you still have
1m remaining, but the remaining credit is 1.2m. so anong
This explains the rule of Article 2243 of the new Civil
mangyari ditto? 200k over 1m. 200k x1m. 1/6 over 1m.
Code that
yung portion nay un pambayad. What about the remaining
The claims or credits enumerated in the two preceding
balance of this 200 kasi di man sya manfully-paid. Mahulug
articles" shall be considered as mortgages or pledges of
siya dun sa other credits if under 2244 or 2245 kung di siya
real or personal property, or liens within the purview of
mag-apply sa 2244. If the proceeds in relation to the sale
legal provisions governing insolvency.
of specific immovable or movable property are not
sufficient for specially preferred credits, it does not mean
And the rule is further clarified in the Report of the
that it will not be paid with the remaining balance at all.
Code Commission, as follows:
Because the latter is pwede masalo sa 2244 or 2245. Again,
The question as to whether the Civil Code and the
that is if meron pang properties si debtor which can be
insolvency Law can be harmonized is settled by Article
sold to pay of the other credits.
2243. The preferences named in Articles 2261 and 2262
(now 2241 and 2242) are to be enforced in accordance
with the Insolvency Law."
Also take note of this term, refectionary credit. A
refectionary credit is an indebtedness incurred for the
Thus, it becomes evident that one preferred creditor's
repair or reconstruction of something previously made
third-party claim to the proceeds of a foreclosure sale
such as a repair or construction made necessary by the
(as in the case now before us) is not the proceeding
deterioration or destruction of the property. This credit
contemplated by law for the enforcement of
may be applied to Art. 2241 and 2242, yung expenses for
preferences under Article 2242, unless the claimant
improvements and repairs.
were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute
Now we have the case of Barretto vs Villanueva-

65
between two creditors will not enable the Court to question attached. Consequently, a notice of adverse
ascertain the pro-rata dividend corresponding to each, claim was annotated at the back of Transfer Certificate
because the rights of the other creditors likewise" of Title No. 86195.
enjoying preference under Article 2242 cannot be
ascertained. On August 26, 1968, a decision was rendered in Civil
Case No. 69228 in favor of the private respondent and
There being no insolvency or liquidation, the claim of against the spouses. A writ of execution was accordingly
the appellee, as unpaid vendor, did not require the issued but was returned unsatisfied.
character and rank of a statutory lien co-equal to the
mortgagee's recorded encumbrance, and must remain As the spouses did not have any properties to satisfy
subordinate to the latter. the judgment in Civil Case No. 69228, the private
respondent addressed a letter to the petitioner for the
So what I want to emphasize here, under Art. 2242 no delivery to him (private respondent) of his pro-rata
priority for those credits mentioned therein except for share in the value of the duplex-apartment in
taxes. The recurring theme as can be observed in the cases accordance with Article 2242 of the Civil Code. The
is to be able to apply the rules, there must be a proceeding petitioner refused to pay the pro-rata value prompting
where the claims of the creditors may be validly the private respondent to file the instant action. A
adjudicated. In the absence of insolvency proceedings (or decision was rendered in favor of the private
other equivalent general liquidation of the debtor's estate), Respondent.
the conflict between the parties now before us must be
decided pursuant to the well established principle ISSUE: whether or not Ramos is entitled to claim a pro-
concerning registered lands; that a purchaser in good faith rata share in the value of the property in question? NO
and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances RULING: Concurrence of credits occurs when the same
other than statutory liens and those recorded in the specific property of the debtor or all of his property is
certificate of title. There being no insolvency or liquidation, subjected to the claims of several creditors. The
the claim of the appellee, as unpaid vendor, did not require concurrence of credits raises no questions of
the character and rank of a statutory lien co-equal to the consequence were the value of the property or the
mortgagee's recorded encumbrance, and must remain value of all assets of the debtor is sufficient to pay in fall
subordinate to the latter. all the creditors. However, it becomes material when
said assets are insufficient for then some creditors of
necessity will not be paid or some creditors will not
obtain the full satisfaction of their claims. In this
PHILIPPINE SAVINGS vs LANTIN situation, the question of preference will then arise,
that is to say who of the creditors will be paid the all of
FACTS:Involved in this case is a duplex-apartment house the others.
on a lot covered by TCT No. 86195 situated at San Diego
Street, Sampaloc, Manila, and owned by the spouses The proceedings in the court below do not partake of
Filomeno and Socorro Tabligan. the nature of the insolvency proceedings or settlement
of a decedents estate. The action filed by Ramos was
The duplex-apartment house was built for the spouses only to collect the unpaid cost of the construction of the
by private respondent Candido Ramos, a duly licensed duplex apartment. It is far from being a general
architect and building contractor, at a total cost of liquidation of the estate of the Tabligan spouses.
P32,927.00. The spouses paid private respondent the
sum of P7,139.00 only. Hence, the latter used his own Insolvency proceedings and settlement of a decedents
money, P25,788.50 in all, to finish the construction of estate are both proceedings in rem which are binding
the duplex-apartment. against the whole world. All persons having interest in
the subject matter involved, whether they were notified
Meanwhile, the spouses Tabligan obtained from or not, are equally bound. Consequently, a liquidation
petitioner Philippine Savings Bank three (3) loans in the of similar import or "other equivalent general
total amount of P35,000.00, the purpose of which was liquidation must also necessarily be a proceeding in
to complete the construction of the duplex-apartment. rem so that all interested persons whether known to
the parties or not may be bound by such proceeding.
On December 19, 1966, the petitioner registered the
December 16, 1966 deed of real estate mortgage with In the case at bar, although the lower court found that
the Register of Deeds of Manila. At the time of the "there were no known creditors other than the plaintiff
registration of these mortgages, Transfer Certificate of and the defendant herein", this cannot be conclusive. It
Title No. 86195 was free from all liens and will not bar other creditors in the event they show up
encumbrances. and present their claims against the petitioner bank,
claiming that they also have preferred liens against the
The spouses failed to pay their monthly amortizations. property involved. Consequently, Transfer Certificate of
As a result thereof, the petitioner bank foreclosed the Title No. 101864 issued in favor of the bank which is
mortgages, and at the public auction held on July 23, supposed to be indefeasible would remain constantly
1969, was the highest bidder. unstable and questionable. Such could not have been
the intention of Article 2243 of the Civil Code although
Upon the other hand, the private respondent filed an it considers claims and credits under Article 2242 as
action against the spouses to collect the unpaid cost of statutory liens. Neither does the De Barretto case
the construction of the duplex-apartment. During its sanction such instability.
pendency, the private respondent succeeded in
obtaining the issuance of a writ of preliminary
attachment, and pursuant thereto, had the property in

66
Q1: what kind of proceeding is required to apply these with other qualified bidders. After evaluating the bids,
provisions (2241, 2242)? the municipal pre-qualification bids and awards
A1: it is not necessary to be an insolvency proceeding, but committee, headed by respondent Jose L. Salonga (then
a proceeding that would adjudicate the claims of all the incumbent municipal mayor of San Antonio) as
creditors. It may cover a proceeding regarding the estate of Chairman, awarded the contract to petitioners. On June
a deceased person, for example. 8, 1990, a Construction Agreement was entered into by
the Municipality of San Antonio thru respondent
Q2: was there such kind of proceeding here? Salonga and petitioner J.L. Bernardo Construction.
A2: None. The proceedings did not partake of the nature of
the insolvency proceedings or settlement of a decedents It is claimed by petitioners that under this Construction
estate. The action filed by Ramos was only to collect the Agreement, the Municipality agreed to assume the
unpaid cost of the construction of the duplex apartment. It expenses for the demolition, clearing and site filling of
is far from being a general liquidation of the estate of the the construction site in the amount of P1,150,000 and,
Tabligan spouses. in addition, to provide cash equity of P767,305.99 to be
remitted directly to petitioners.
Again take note, Concurrence of credits occurs when the
same specific property of the debtor or all of his property Petitioners allege that, although the whole amount of
is subjected to the claims of several creditors. The the cash equity became due, the Municipality refused
concurrence of credits raises no questions of consequence to pay the same, despite repeated demands and
were the value of the property or the value of all assets of notwithstanding that the public market was more than
the debtor is sufficient to pay in fall all the creditors. ninety-eight percent (98%) complete as of July 20, 1991.
However, it becomes material when said assets are
insufficient for then some creditors of necessity will not be On July 31, 1991, J.L. Bernardo Construction filed a
paid or some creditors will not obtain the full satisfaction complaint for breach of contract, specific performance,
of their claims. In this situation, the question of preference and collection of a sum of money, with prayer for
will then arise, that is to say who of the creditors will be preliminary attachment and enforcement of contractors
paid the all of the others. lien against the Municipality of San Antonio, Nueva Ecija
and Salonga, in his personal and official capacity as
As emphasize in the Barretto case and here in the case of municipal mayor.
Philippine Savings, there must be some proceeding where
the claims of all the preferred creditors may be bindingly On September 5, 1991, the Regional Trial Court issued
adjudicated such as an insolvency proceeding or the writ of preliminary attachment prayed for by
settlement of estate or other liquidation proceedings. Now plaintiffs. It also granted J.L. Bernardo Construction the
here it is merely an action for collection. Although the right to maintain possession of the public market and to
lower court found that there were no known creditors operate the same.
other than Philippine Savings and Ramos, this cannot be
conclusive. It will not bar other creditors to show up and ISSUE: Whether or not the grant of writ of attachment
present their claims against the bank claiming also they and the contractors lien proper?
have preferred liens.

In this case, the foreclosure was proper. Now both these HELD: There is no contractors lien in favor of
cases of Barretto and Philippine Savings emphasize the petitioners.
indefeasibility of a certificate of Torrens title. So, it is
indefeasible and to rule otherwise in favor of applying Articles 2241 and 2242 of the Civil Code enumerates
these rules on preference of credits would make the title certain credits which enjoy preference with respect to
to one's property unstable and questionable. Because specific personal or real property of the debtor.
anytime somebody would alleged that I have this preferred Specifically, the contractors lien claimed by petitioners
claim under Art. 2242. So here it is emphasizes the is granted under the third paragraph of Article 2242
principle that the purchaser in good faith and for value which provides that the claims of contractors engaged
takes registered land free from liens and encumbrances, in the construction, reconstruction or repair of buildings
other than statutory lien and those recorded on the or other works shall be preferred with respect to the
certificate of title, in respecting the indefeasibility of such specific building or other immovable property
title. So those enumerated under Art. 2241 and 2242 constructed.
would be considered as mortgages or pledges in a sense
that is really a lien or encumbrance of a specific property. However, Article 2242 only finds application when there
And this Art. 2243 is the basis. So what we have discussed is a concurrence of credits, i.e. when the same specific
earlier, the taxes in relation to the property are preferred. property of the debtor is subjected to the claims of
It shall be satisfied first. All the rest will concur. several creditors and the value of such property of the
debtor is insufficient to pay in full all the creditors. In
such a situation, the question of preference will arise,
that is, there will be a need to determine which of the
creditors will be paid ahead of the others. Fundamental
tenets of due process will dictate that this statutory lien
J.L. BERNARDO VS CA should then only be enforced in the context of some
kind of a proceeding where the claims of all the
FACTS: Sometime in 1990, the municipal government of preferred creditors may be bindingly adjudicated, such
San Antonio, Nueva Ecija approved the construction of as insolvency proceedings.
the San Antonio Public Market.
This is made explicit by Article 2243 which states that
the claims and liens enumerated in articles 2241 and
On April 20, 1990, J.L. Bernardo Construction, thru 2242 shall be considered as mortgages or pledges of
petitioner Santiago Sugay, submitted its bid together

67
real or personal property, or liens within the purview of other properties of the debtor that can be executed to pay
legal provisions governing insolvency. the obligation.

The action filed by petitioners in the trial court does not


partake of the nature of an insolvency proceeding. It is
basically for specific performance and damages. Thus, Atlantic vs. Herbal Cove
even if it is finally adjudicated that petitioners herein
actually stand in the position of unpaid contractors and FACTS:
are entitled to invoke the contractors lien granted In 1996, Atlantic Erectors (AE) and Herbal Cove (HCC)
under Article 2242, such lien cannot be enforced in the entered into a contract to construct townhouses. HCC
present action for there is no way of determining was not able to complete the project in time. AE then
whether or not there exist other preferred creditors filed for damages and won the suit. HCC was ordered to
with claims over the San Antonio Public Market. The pay in damages and fees. The cause of action is a
records do not contain any allegation that petitioners money claim by only one creditor. In 1997, AE caused
are the only creditors with respect to such property. The a notice of lispendens on several TCTs, which carried
fact that no third party claims have been filed in the over when the lots were further divided into 50 lots. In
trial court will not bar other creditors from 1998, HCC filed a motion to cancel the notice of
subsequently bringing actions and claiming that they lispendens, as AEs action is purely a personal action to
also have preferred liens against the property involved. collect a sum of money and damages, and does not
directly affect title to, use or possession of real
Q1: How about the fact that there were no other property.
creditors or 3rd parties asserting claims over the markert? In opposition, AE argued that the money claim
A1: Although there were no other claims over the market, constitutes a lien that can be enforced to secure
it does not bar other creditors from subsequently claiming payment for the said obligations. It argues that, to
because this is a specific performance case and not preserve the alleged improvement it had made on the
adjudication of claims. subject land, such annotation on the property titles of
respondent is necessary. On the other hand, HCC
argues that the annotation is bereft of any factual or
In this case although it is stated under paragraph 3(of Art. legal basis, because the action does not directly affect
2242), it only applies when there is concurrence of credits the title to the property, or the use or the possession
and as defined here in this case, there is concurrence of thereof. The annotation is baseless and cannot be made
credits if the same specific property of the debtor is through the enforcement of a contractors lien under
subjected to the claims of several creditors and the value Art. 2242 as said provision applies only to cases in
of such property of the debtor is insufficient to pay in full which there are several creditors carrying on a legal
all the creditors in such a situation. The question of action against an insolvent debtor.
preference will arise if there is a need to determine which
among the creditors should be paid ahead of the others. ISSUE:
However in this case, due process dictates that this WON money claims representing cost of materials and
statutory lien will only be enforced in the context of some labor are proper liens for annotations of lispendens on
proceeding where the claims of all preferred creditors will the property title.
be bindingly adjudicated such as an insolvency proceeding.
In this case the action filed by J.L. Bernardo does not RULING:
partake the nature of an insolvency proceeding because it No.
is only an action for specific performance and there is no As a general rule, the only instances in which a notice of
way in determining whether or not other preferred lispendens may be availed of are as follows: (a) an
creditors exist. action to recover possession of real estate; (b) an
action for partition; and (c) any other court
The action filed by petitioners in the trial court does not proceedings that directly affect the title to the land or
partake of the nature of an insolvency proceeding. It is the building thereon or the use or the occupation
basically for specific performance and damages. Thus, even thereof.
if it is finally adjudicated that petitioners herein actually A careful examination of petitioner's Complaint, as well
stand in the position of unpaid contractors and are entitled as the reliefs it seeks, reveals that no such lien or
to invoke the contractors lien granted under Article 2242, interest over the property was ever alleged. The
such lien cannot be enforced in the present action for Complaint merely asked for the payment of
there is no way of determining whether or not there exist construction services and materials plus damages,
other preferred creditors with claims over the San Antonio without mentioning -- much less asserting -- a lien or an
Public Market. The records do not contain any allegation encumbrance over the property. Verily, it was a purely
that petitioners are the only creditors with respect to such personal action and a simple collection case. It did not
property. The fact that no third party claims have been contain any material averment of any enforceable right,
filed in the trial court will not bar other creditors from interest or lien in connection with the subject property.
subsequently bringing actions and claiming that they also Even assuming that petitioner had sufficiently alleged
have preferred liens against the property involved. such lien or encumbrance in its Complaint, the
annotation of the Notice of Lis Pendens would still be
Similar to the earlier case of Philippine Savings Bank. So do unjustified, because a complaint for collection and
take note here that it does not mean that the obligation in damages is not the proper mode for the enforcement
favor of the contractor will now be extinguished. This case of a contractor's lien. Fundamental tenets of due
just tells us that we cannot use 2242 to assert contractors process will dictate that this statutory lien should then
lien over the proceeds of the sale of the property. The trial only be enforced in the context of some kind of a
court can still rule that the contractor as in this case is still proceeding where the claims of all the preferred
entitled to be paid. But it would still depend if there are creditors may be bindingly adjudicated, such as
insolvency proceedings.

68
Article 2242 finds application when there is a thus PNB and DBP instituted sometime on July and
concurrence of credits, i.e., when the same specific August 1984 extrajudicial foreclosure proceedings over
property of the debtor is subjected to the claims of the mortgaged properties.
several creditors and the value of such property of the In the meantime, between July 1982 to October 1983,
debtor is insufficient to pay in full all the creditors. In Marinduque Mining purchased and caused to be
such a situation, the question of preference will arise, delivered construction materials and other
that is, there will be a need to determine which of the merchandise from Remington Industrial Sales
creditors will be paid ahead of the others. In this case, Corporation The purchases remained unpaid as of
there is no concurrence of credit since there is only one August 1, 1984 when Remington filed a complaint for a
creditor. sum of money and damages against Marinduque
Mining for the value of the unpaid construction
materials and other merchandise purchased by
Marinduque Mining. Remington's original complaint
Q1: Was the notice of lis pendens here proper or not? SC was later amended to implead PNB and DBP in view of
notes of the instances when notice of lispendensmay be the foreclosure by the latter of the real and chattel
availed of; these are, mortgages).
a) In an action to recover possession of real
estate; ISSUE:
b) An action for partition; WON Remington can enforce its claim (for the
c) Any other court proceedings that directly payment of the construction materials purchasedby
affect the title to the land or the building Marinduque Mining) against DBP.
thereon or the use of the occupation
thereof. RULING: No.
Remington cannot enforce its lien against DBP because
there was no liquidation proceeding. The liquidation
Even though we call this contractors lien, it does not proceeding contemplated by the CC is not the
create a lien or interest over the subject property. Now, extrajudicial foreclosure done by DBP over Marinduque
2242 cannot be applied in this case. . The Complaint Minings properties. The kind of proceeding
merely asked for the payment of construction services and contemplated is where the claims of all the preferred
materials plus damages, without mentioning -- much less creditors may be bindingly adjudicated, such as
asserting -- a lien or an encumbrance over the property. insolvency, the settlement of decedent's estate under
Verily, it was a purely personal action and a simple Rule 87 of the Rules of Court, or other liquidation
collection case. It did not contain any material averment of proceedings of similar import. The extrajudicial
any enforceable right, interest or lien in connection with foreclosure instituted by PNB and DBP is not the
the subject property. liquidation proceeding contemplated by the Civil Code;
thus, Remington cannot claimits pro rata share from
Moreover again, in similar cases, Article 2242 finds DBP and PNB.
application when there is a concurrence of credits, i.e.,
when the same specific property of the debtor is
subjected to the claims of several creditors and the value Q1: whats the role of DBP here?
of such property of the debtor is insufficient to pay in full A1: it is a preferred creditor.
all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to Q2: but theres no proceeding?
determine which of the creditors will be paid ahead of the A2: Here, Remmington can only go after---
others. Fundamental tenets of due process will dictate
that this statutory lien should then only be enforced in Q3: Whats the basis of DBPs rights over the proceeds
the context of some kind of a proceeding where the over the properties? Because again, it is a mortgagee who
claims of all the preferred creditors may be bindingly foreclosed the property. That foreclosure proceeding is
adjudicated, such as insolvency proceedings. not the one contemplated by law to apply the rules on
preference of credits.
Neither Article 2242 of the Civil Code nor the enforcement
of the lien thereunder is applicable here, because In relation to concurrence and preference of credits, again
petitioners Complaint failed to satisfy the foregoing it is emphasized that in the absence of any liquidation
requirements. Nowhere does it show that respondents proceeding, the claim of the creditor cannot be enforced
property was subject to the claims of other creditors or against any mortgagee in good faith. As in the extrajudicial
was insufficient to pay for all concurring debts. Moreover, foreclosure executed by PNB and DBP is not the liquidation
the Complaint did not pertain to insolvency proceedings or proceeding contemplated by the Civil Code, then
to any other action in which the adjudication of claims of Remington cannot claim its pro-rata share from DBP.
preferred creditors could be ascertained.
Take note when to apply Arts. 2241 and 2242. Now lets
take a look at Art. 2244. It refers to ordinary preferred
credits. Unlike to Arts. 2241 and 2241, Art. 2244 must be in
Development Bank vs. CA order.

FACTS: Art. 2244. With reference to other property, real and


personal, of the debtor, the following claims or credits
Marinduque Mining-Industrial Corporation obtained shall be preferred in the order named:
from PNB and DBP various loan accommodations. To
secure the loans, Marinduque Mining mortgaged to 1) Proper funeral expenses for the debtor, or
PNB and DBP all its real and personal properties. children under his or her parental authority
Marinduque Mining failed to settle its loan obligations, who have no property of their own, when

69
approved by the court; Tropical.
2) Credits for services rendered the insolvent
by employees, laborers, or household Tropical was held subsidiarily liable by LA for the
helpers for one year preceding the unpaid wages applying Art. 110 of the Labor Code.
commencement of the proceedings in Thus, Tropical now questions the application of said
insolvency; labor code provision which refers to worker preference
3) Expenses during the last illness of the in case of bankruptcy or liquidation of an employer's
debtor or of his or her spouse and children business against a mortgage.
under his or her parental authority, if they
have no property of their own; ISSUE: WON Article 110 of the Labor Code is
4) Compensation due the laborers or their applicable in the case.
dependents under laws providing for
indemnity for damages in cases of labor RULING:
accident, or illness resulting from the NO
nature of the employment; Art. 110 should not be treated apart from other
5) Credits and advancements made to the laws but applied in conjunction with the pertinent
debtor for support of himself or herself, and provisions of the Civil Code and the Insolvency Law to
family, during the last year preceding the the extent that piece-meal distribution of the assets of
insolvency; the debtor is avoided.
6) Support during the insolvency proceedings,
and for three months thereafter; A declaration of bankruptcy or a judicial liquidation
7) Fines and civil indemnification arising from must be present before the worker's preference may be
a criminal offense; enforced. Thus, Article 110 of the Labor Code and its
8) Legal expenses, and expenses incurred in implementing rule cannot be invoked by the
the administration of the insolvents estate respondents in this case absent a formal declaration of
for the common interest of the creditors, bankruptcy or a liquidation order.
when properly authorized and approved by
the court; A preference applies only to claims which do not attach
9) Taxes and assessments due the national to specific properties. A lien creates a charge on a
government, other than those mentioned particular property. The right of first preference as
in Articles 2241, No. 1, and 2242, No. 1; regards unpaid wages recognized by Article 110 does
10) Taxes and assessments due any province, not constitute a lien on the property of the insolvent
other than those referred to in Articles debtor in favor of workers. It is but a preference of
2241, No. 1, and 2242, No. 1; credit in their favor, a preference in application. On the
11) Taxes and assessments due any city or other hand, DBP anchors its claim on a mortgage credit.
municipality, other than those indicated in A mortgage directly and immediately subjects the
Articles 2241, No. 1, and 2242, No. 1; property upon which it is imposed, whoever the
12) Damages for death or personal injuries possessor may be, to the fulfillment of the obligation
caused by a quasi-delict; for whose security it was constituted. It creates a real
13) Gifts due to public and private institutions right which is enforceable against the whole world. It is
of charity or beneficence; a lien on an identified immovable property, which a
14) Credits which, without special privilege, preference is not. A recorded mortgage credit is a
appear in (a) a public instrument; or (b) in a special preferred credit under Article 2242 (5) of the
final judgment, if they have been the Civil Code on classification of credits. The preference
subject of litigation. These credits shall have given by Article 1l0, when not falling within Article 2241
preference among themselves in the order (6) and Article 2242 (3), of the Civil Code and not
of priority of the dates of the instruments attached to any specific property, is all ordinary
and of the judgments, respectively. preferred credit although its impact is to move it from
second priority to first priority in the order of
So it is clear that Art. 2244 emphasizes order of preference preference established by Article 2244 of the Civil Code.
in the order named. However, we have to take note of
these services rendered by employees, labourers, and Maam: How do you reconcile the preference mentioned in
household helpers, we have the case of DBP v NLRC. Art. 110 of the Labor Code and those provisions here
under the Civil Code in relation to concurrence and
preference of credits?

DBP vs. NLRC Sir J: The SC ruled that it did not take preference or no. 1
preference or making better or higher the or should I say
FACTS: superior than the tax preference or dues. In fact, the tax
Leonor Ang is an employee of petitioner Tropical dues would always be preferred first, however, in relation
Philippine Woods Industries, Inc. (TPWII). to what (*interrupted)

DBP, a mortgagee of TPWII foreclosed the latters plant, Mam: In relation to what? We have to be specific..
equipments , and facilities. As a result, the operations
of stopped and Leonor Ang was verbally terminated.
Sir J: In relation to taxes that is found under Arts. 2241(1)
and 2242(1) the SC held that these would not be preferred
On December 14, 1987 aggrieved by the termination of
given that the obligation would fall under Art. 2241(6) and
her employment, private respondent filed with the
Art. 2242(3). Also what really happened was that the
Labor Arbiter a complaint for separation pay, 13th
legislature enacted this law it complicate 2 things because
month pay, vacation and sick leave pay, salaries and
in Art. 2243 there are still limitation within the 1 year prior
allowances against TPWII, its General Manager, and

70
the insolvency (inaudible) 1st it removed that 1 year Lahat ng proceeds na sobra na naiwan will be applied in
limitation and 2nd it gained a superior order and upgraded the order of credits enumerated in Art. 2244. Of course
preference from a second priority to first priority but only again, the second preference for the workers lien on
second to taxes falling under Art. 2241(1) unpaid wages moved to no. 1 and move expenses to no.2
hanggang maubos. Remember this is not pro-rata, it is in
Mam: To distinguish it from Arts. 2241 and 2242. Alright. the order provided.
You are already familiar with Art. 110 of the Labor Code
referring to worker preference in case of bankruptcy. The Now notice also here that we have taxes and assessments
employers and workers shall enjoy 1st preference as due to the government so magkasunod yan sila nauna ang
regards to their unpaid wages and other monetary claims favor sa National Govt then sa province then sa City and
any provision of the law to the contrary notwithstanding. Municipality. What would be the examples of taxes in
Such unpaid wages and monetary claims shall be paid in favour of the National Govt? Income taxes (not covered to
full before the claims of the government and other specific property). Take note that these refers to free
creditors may be paid. Now first thing that was emphasized property not subject to 2241 and 2242 and applied the
in this case is that in the absence of any proceedings to order enumerated under 2244 in consideration of Art. 110
enforce the rule as to the preference and concurrence of of the LC.
credit notwithstanding the absence thereof, the SC
nevertheless discussed the applicability or the non- Take note under no. 14 Eg. Promissory note that is duly
applicability of Art. 110 of the LC and how it relates with notarized. It is a public instrument, it does not enjoy
the other provisions in the Civil Code specifically special privilege in the absence of real estate mortgage and
concurrence and preference of credits. Art. 110 did not among these credits in the public instrument of judgment
necessarily repeal the provisions in Arts. 2241, 2242, and they will be in the order of priority of the dates of the
2244. In other words, the preference mentioned in Art. instruments and judgments, respectively.
110 did not alter Arts. 2241 and 2242. In other words, in
those articles, taxes in relation to the specific property or
those duties in favor of the government would still to be
preferred and then now the claims of the labourers in
relation to that work of the specific property will share Art. 2245. Credits of any other kind or class, or by any
pro-rata with the other credits. other right or title not comprised in the four preceding
articles, shall enjoy no preference.
How is this Art. 110 to be applied? That is in relation to Art.
2244. Now, the effect of Art. 110 is that hindi pwede yung What if the debtor still has proceeds of the sale of his
no. 2 is that the credit rendered in services is insolvent by assets and all the credits mentioned under Arts. 2241,
the labourers or household helpers will now become the 2242 and 2244 having paid. May sobra pa meron pang
no. 1 noh, first preference followed by the proper funeral common credits na hindi nabayaran. Now this time, they
expenses so that is the first effect. The second effect is that will share pro-rata. No preference and common credits
tinanggal na yung 1 year proceeding, the commencement shall be paid pro-rata regardless of the dates.
of the proceeding in insolvency. So here what happened?
Eto na yung preference of a workers preference ahead of We have the case of Republic v Peralta
the taxes and duties in favour of the government because
here tax dues are nos. 9, 10, and 11. Again, very relevant
ang Art. 2244 in the sense that you should take note to the
order as mentioned here and to which the application of
course is very much different as compared to Arts. 2241
and 2244. Here again there was no liquidation proceeding,
no declaration of a bankruptcy and judicial litigation so it Republic vs. Peralta
would be first premature to enforce the workers
preference. Now preference applies only to claims FACTS:
attached to the specific property is the right of the first
preference is recognized in Art. 110 again does not
In the voluntary insolvency proceedings commenced in
constitute a lien on the property of the insolvent debtor in
May 1977 by Quality Tobacco Corporation (the
favour of workers, a preference of credit in their favour.
"Insolvent"), the following claims of creditors were
Moreover, Art. 110 does not purport to create a lien in
filed:
favour of employees unpaid wages even upon all
properties or any particular property owned by their
employers. Here DBP anchored its claim to mortgage (i) P2,806,729.92, by the USTC Association of
credit. The properties subjected thereto it creates a real Employees and workers Union-PTGWO USTC as
right which is enforceable against the whole world. Lien on separation pay for their members. This amount plus an
the identified movable property which again must be additional sum of P280,672.99 as attorney's fees had
distinguish from a preference. The preference given by Art. been awarded by the National Labor Relations
110 when not falling under Art. 2241(6) and Art. 2242(3) is Commission in NLRC Case No. RB-IV-9775-77.
an ordinary preferred credit although its impact move to
second priority to the first priority under Art. 2244 of the (ii) P53,805.05 by the Federacion de la
Civil Code. Again, no conflict ang Art. 110 from Art. 2244. IndustriaTabaquera y OtrosTrabajadores de Filipinas
Take note of the order of preference which must be ("FOITAF), as separation pay for their members, an
followed under Art. 2244. So anong mangyari dito? There amount similarly awarded by the NLRC in the same
are other properties which can be sold and the proceeds NLRC Case.
would be applied in the order provided under Art. 2244.
Another scenario would be for example specific property (iii) P1,085,188.22 by the Bureau of Internal Revenue
would be sold tapos mabayaran na ang specific credit for tobacco inspection fees covering the period 1
tapos meron pang proceeds pano iapply yang proceeds?

71
October 1967 to 28 February 1973; 110 and in the context of insolvency termination or
separation pay is reasonably regarded as forming part
(iv) P276,161.00 by the Bureau of Customs for customs of the remuneration or other money benefits accruing
duties and taxes payable on various importations by the to employees or workers by reason of their having
Insolvent. These obligations appear to be secured by previously rendered services to their employer; as such,
surety bonds. 2 Some of these imported items are they fall within the scope of "remuneration or earnings
apparently still in customs custody so far as the record for services rendered or to be rendered ." Liability
before this Court goes. for separation pay might indeed have the effect of a
penalty, so far as the employer is concerned. So far as
concerns the employees, however, separation pay is
In its questioned Order of 17 November 1980, the trial
additional remuneration to which they become entitled
court held that the above-enumerated claims of USTC
because, having previously rendered services, they are
and FOITAF ("Unions") for separation pay of their
separated from the employer's service. The relationship
respective members embodied in final awards of the
between separation pay and services rendered is
National Labor Relations Commission were to be
underscored by the fact that separation pay is
preferred over the claims of the Bureau of Customs and
measured by the amount (i.e., length) of the services
the Bureau of Internal Revenue. The trial court, in so
rendered. This construction is sustained both by the
ruling, relied primarily upon Article 110 of the Labor
specific terms of Article 110 and by the major purposes
Code which reads thus:
and basic policy embodied in the Labor Code. It is also
the construction that is suggested by Article 4 of the
Article 110. Worker preference in case of bankruptcy Labor Code which directs that doubts assuming that
In the event of bankruptcy or liquidation of an any substantial rather than merely frivolous doubts
employer's business, his workers shall enjoy first remain-in the interpretation of the provisions of the
preference as regards wages due them for services labor Code and its implementing rules and regulations
rendered during the period prior to the bankruptcy or shall be "resolved in favor of labor."
liquidation, any provision of law to the contrary
notwithstanding. Union paid wages shall be paid in full
Article 110 must be read in relation to the provisions of
before other creditors may establish any claim to a
the Civil Code concerning the classification,
share in the assets of the employer.
concurrence and preference of credits, which provisions
find particular application in insolvency proceedings
The Solicitor General, in seeking the reversal of the where the claims of all creditors, preferred or non-
questioned Orders, argues that Article 110 of the Labor preferred, may be adjudicated in a binding manner.
Code is not applicable as it speaks of "wages," a term
which he asserts does not include the separation pay
Those provisions may be seen to classify credits against
claimed by the Unions. "Separation pay," the Solicitor
a particular insolvent into three general categories,
General contends, is given to a laborer for a separation
namely: (a) special preferred credits listed in Articles
from employment computed on the basis of the
2241 and 2242, (b) ordinary preferred credits listed in
number of years the laborer was employed by the
Article 2244; and (c) common credits under Article
employer; it is a form of penalty or damage against the
2245.
employer in favor of the employee for the latter's
dismissal or separation from service.
Turning first to special preferred credits under Articles
2241 and 2242, it should be noted at once that these
ISSUE 1: WON the above-enumerated claims of USTC
credits constitute liens or encumbrances on the specific
and FOITAF ("Unions") for separation pay of their
movable or immovable property to which they relate.
respective members embodied in final awards of the
Article 2243 makes clear that these credits "shall be
National Labor Relations Commission were to be
considered as mortgages or pledges of real or personal
preferred over the claims of the Bureau of Customs
property, or liens within the purview of legal provisions
and the Bureau of Internal Revenue.
governing insolvency." It should be emphasized in this
connection that "duties, taxes and fees due [on specific
HELD 1: Article 97 (f) of the Labor Code defines movable property of the insolvent] to the State or any
"wages" in the following terms: subdivision thereof" (Article 2241 [1]) and "taxes due
upon the insolvent's land or building (2242 [1])"stand
Wage' paid to any employee shall mean the first in preference in respect of the particular movable
remuneration or earnings, however designated, capable or immovable property to which the tax liens have
of being expressed in terms of money, whether fixed or attached. Article 2243 is quite explicit: "[T]axes
ascertained on a time, task, piece, or commission basis, mentioned in number 1, Article 2241 and number 1,
or other method of calculating the same, which is Article 2242 shall first be satisfied." The claims listed in
payable by an employer to an employee under a numbers 2 to 13 in Article 2241 and in numbers 2 to 10
written or unwritten contract of employment for work in Articles 2242, all come after taxes in order of
done or to be done, or for services rendered or to be precedence; such claims enjoy their privileged
rendered, and includes the fair and reasonable value, as character as liens and may be paid only to the extent
determined by the Secretary of Labor, of board, that taxes have been paid from the proceeds of the
lodging, or other facilities customarily furnished by the specific property involved (or from any other sources)
employer to the employee. 'Fair and reasonable value' and only in respect of the remaining balance of such
shall not include any profit to the employer or to any proceeds. What is more, these other (non-tax) credits,
person affiliated with the employer. although constituting liens attaching to particular
property, are not preferred one over another inter se.
We are unable to subscribe to the view urged by the Provided tax liens shall have been satisfied, non-tax
Solicitor General. For the specific purposes of Article liens or special preferred credits which subsist in

72
respect of specific movable or immovable property are ISSUE 2:
to be treated on an equal basis and to be satisfied
concurrently and proportionately. Put succinctly, What is the impact Article 110 of the labor Code has
Articles 2241 and 2242 jointly with Articles 2246 to2249 had on those provisions of the Civil Code?
establish a two-tier order of preference. The first tier
includes only taxes, duties and fees due on specific
HELD 2: A. Claim of the Bureau of Customs for Unpaid
movable or immovable property. All other special
Customs Duties and Taxes- Under Section 1204 of the
preferred credits stand on the same second tier to be
Tariff and Customs Code.
satisfied, paripassu and pro rata, out of any residual
value of the specific property to which such other
credits relate. Clearly, the claim of the Bureau of Customs for unpaid
customs duties and taxes enjoys the status of a specially
preferred credit under Article 2241, No. 1, of the Civil
Credits which are specially preferred because they
Code. only in respect of the articles importation of
constitute liens (tax or non-tax) in turn, take
which by the Insolvent resulted in the assessment of
precedence over ordinary preferred credits so far as
the unpaid taxes and duties, and which are still in the
concerns the property to which the liens have attached.
custody or subject to the control of the Bureau of
The specially preferred credits must be discharged first
Customs. The goods imported on one occasion are not
out of the proceeds of the property to which they
subject to a lien for customs duties and taxes assessed
relate, before ordinary preferred creditors may lay claim
upon other importations though also effected by the
to any part of such proceeds.
Insolvent. Customs duties and taxes which remain
unsatisfied after levy upon the imported articles on
If the value of the specific property involved is greater which such duties and taxes are due, would have to be
than the sum total of the tax liens and other specially paid out of the Insolvent's "free property" in
preferred credits, the residual value will form part of accordance with the order of preference embodied in
the "free property" of the insolvent i.e., property not Article 2244 of the Civil Code. Such unsatisfied customs
impressed with liens by operation of Articles 2241 and duties and taxes would fall within Article 2244, No. 9, of
2242. If, on the other hand, the value of the specific the Civil Code and hence would be ninth in priority.
movable or immovable is less than the aggregate of the
tax liens and other specially preferred credits, the
B. Claims of the Bureau of Internal Revenue for Tabacco
unsatisfied balance of the tax liens and other such
Inspection Fees Under Section 315 of the National
credits are to the treated as ordinary credits under
Internal Revenue Code ("old Tax Code")
Article 2244 and to be paid in the order of preference
there set up.
It follows that the claim of the Bureau of Internal
Revenue for unpaid tobacco inspection fees constitutes
In contrast with Articles 2241 and 2242, Article 2244
a claim for unpaid internal revenue taxes which gives
creates no liens on determinate property which follow
rise to a tax lien upon all the properties and assets,
such property. What Article 2244 creates are simply
movable and immovable, of the Insolvent as taxpayer.
rights in favor of certain creditors to have the cash and
Clearly, under Articles 2241 No. 1, 2242 No. 1, and
other assets of the insolvent applied in a certain
2246-2249 of the Civil Code, this tax claim must be
sequence or order of priority.
given preference over any other claim of any other
creditor, in respect of any and all properties of the
Only in respect of the insolvent's "free property" is an Insolvent.
order of priority established by Article 2244. In this
sequence, certain taxes and assessments also figure but
C. Claims of the Unions for Separation Pay of Their
these do not have the same kind of overriding
Members Article 110 of the Labor Code does not
preference that Articles 2241 No. 1 and 2242 No. I
purport to create a lien in favor of workers or
create for taxes which constituted liens on the
employees for unpaid wages either upon all of the
taxpayer's property. Under Article 2244,
properties or upon any particular property owned by
their employer. Claims for unpaid wages do not
(a) taxes and assessments due to the national therefore fall at all within the category of
government, excluding those which result in tax liens speciallypreferred claims established under Articles
under Articles 2241 No. 1 and 2242 No. 1 but including 2241 and 2242 of the Civil Code, except to the extent
the balance thereof not satisfied out of the movable or that such claims for unpaid wages are already covered
immovable property to which such liens attached, are by Article 2241, number 6. "claims for laborers' wages,
ninth in priority; (b) taxes and assessments due any on the goods manufactured or the work done;" or by
province, excluding those impressed as tax liens under Article 2242, number 3: "claims of laborers and other
Articles 2241 No. 1 and 2242 No. 1, but including the workers engaged in the construction, reconstruction or
balance thereof not satisfied out of the movable or repair of buildings, canals and other works, upon said
immovable property to which such liens attached, are buildings, canals or other works." To the extent that
tenth in priority; and claims for unpaid wages fall outside the scope of Article
2241, number 6 and 2242, number 3, they would come
(c) taxes and assessments due any city or municipality, within the ambit of the category of ordinary preferred
excluding those impressed as tax liens under Articles credits under Article 2244.
2241 No. I and 2242 No. 2 but including the balance
thereof not satisfied out of the movable or immovable Applying Article 2241, number 6 to the instant case, the
property to which such liens attached, are eleventh in claims of the Unions for separation pay of their
priority. members constitute liens attaching to the processed
leaf tobacco, cigars and cigarettes and other products

73
produced or manufactured by the Insolvent, but not to laborers of the Insolvent "for one year preceding the
other assets owned by the Insolvent. And even in commencement of the proceedings in insolvency."
respect of such tobacco and tobacco products Article 110 of the Labor Code establishes "first
produced by the Insolvent, the claims of the Unions preference" for services rendered "during the period
may be given effect only after the Bureau of Internal prior to the bankruptcy or liquidation, " a period not
Revenue's claim for unpaid tobacco inspection fees limited to the year immediately prior to the bankruptcy
shall have been satisfied out of the products so or liquidation. Thus, very substantial effect may be
manufactured by the Insolvent. given to the provisions of Article 110 without grievously
distorting the framework established in the Civil Code
Article 2242, number 3, also creates a lien or by holding, as we so hold, that Article 110 of the Labor
encumbrance upon a building or other real property of Code has modified Article 2244 of the Civil Code in two
the Insolvent in favor of workmen who constructed or respects: (a) firstly, by removing the one year limitation
repaired such building or other real property. Article found in Article 2244, number 2; and (b) secondly, by
2242, number 3, does not however appear relevant in moving up claims for unpaid wages of laborers or
the instant case, since the members of the Unions to workers of the Insolvent from second priority to first
whom separation pay is due rendered services to the priority in the order of preference established I by
Insolvent not (so far as the record of this case would Article 2244.
show) in the construction or repair of buildings or other
real property, but rather, in the regular course of the Accordingly, and by way of recapitulating the
manufacturing operations of the Insolvent. The Unions' application of Civil Code and Labor Code provisions to
claims do not therefore constitute a lien or the facts herein, the trial court should inventory the
encumbrance upon any immovable property owned by properties of the Insolvent so as to determine
the Insolvent, but rather, as already indicated, upon the specifically: (a) whether the assets of the Insolvent
Insolvent's existing inventory (if any of processed before the trial court includes stocks of processed or
tobacco and tobacco products. manufactured tobacco products; and (b) whether the
Bureau of Customs still has in its custody or control
Article 110 of the Labor Code did not sweep away the articles imported by the Insolvent and subject to the
overriding preference accorded under the scheme of lien of the government for unpaid customs duties and
the Civil Code to tax claims of the government or any taxes.
subdivision thereof which constitute a lien upon
properties of the Insolvent. It is frequently said that In respect of (a), if the Insolvent has inventories of
taxes are the very lifeblood of government. The processed or manufactured tobacco products, such
effective collection of taxes is a task of highest inventories must be subjected firstly to the claim of
importance for the sovereign. It is critical indeed for its theBureau of Internal Revenue for unpaid tobacco
own survival. It follows that language of a much higher inspection fees. The remaining value of such inventories
degree of specificity than that exhibited in Article 110 after satisfaction of such fees (or should such inspection
of the Labor Code is necessary to set aside the intent fees be satisfied out of other properties of the
and purpose of the legislator that shines through the Insolvent) will be subject to a lien in favor of the Unions
precisely crafted provisions of the Civil Code. It cannot by virtue of Article 2241, number 6. In case, upon the
be assumed simpliciter that the legislative authority, by other hand, the Insolvent no longer has any inventory
using in of processed or manufactured product, then the claim
of the Unions for separation pay would have to be
Article 110 the words "first preference" and "any satisfied out of the "free property" of the Insolvent
provision of law to the contrary notwithstanding" under Article 2244 of the Civil Code. as modified by
intended to disrupt the elaborate and symmetrical Article 110 of the Labor Code.
structure set up in the Civil Code. Neither can it be
assumed casually that Article 110 intended to subsume Turning to (b), should the Bureau of Customs no longer
the sovereign itself within the term "other creditors" in have any importations by the Insolvent still within
stating that "unpaid wages shall be paid in full before customs custody or control, or should the importations
other creditors may establish any claim to a share in the still held by the Bureau of Customs be or have become
assets of employer." Insistent considerations of public insufficient in value for the purpose, customs duties
policy prevent us from giving to "other creditors" a and taxes remaining unpaid would have only ninth
linguistically unlimited scope that would embrace the priority by virtue of Article 2244, number 9. In respect
universe of creditors save only unpaid employees. therefore of the Insolvent's "free property, " the claims
of the Unions will enjoy first priority under Article 2244
We, however, do not believe that Article 110 has had as modified and will be paid ahead of the claims of the
no impact at all upon the provisions of the Civil Code. Bureau of Customs for any customs duties and taxes
Bearing in mind the overriding precedence given to still remaining unsatisfied.
taxes, duties and fees by the Civil Code and the fact that
the Labor Code does not impress any lien on the It is understood that the claims of the Unions referred
property of an employer, the use of the phrase "first to above do not include the 10% claim for attorney's
preference" in Article 110 indicates that what Article fees. Attorney's fees incurred by the Unions do not
110 intended to modify is the order of preference stand on the same footing as the Unions' claims for
found in Article 2244, which order relates, as we have separation pay of their members.
seen, to property of the Insolvent that is not burdened
with the liens or encumbrances created or recognized Mam: First, do we have a liquidation
by Articles 2241 and 2242. We have noted that Article proceeding/insolvency proceeding that is required by law
2244, number 2, establishes second priority for claims in this case?
for wages for services rendered by employees or

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Cid: There was a voluntary proceeding. SC also pointed out that the claims as to the attorneys fees
are not deemed included for separation pay.
Mam: Yes this time, we already have a proceeding to which
we can apply all these articles.

*** Art. 2246. Those credits which enjoy preference with


respect to specific movables, exclude all others to the
Mam: Remember, we apply Art. 2241 to specific movable extent of the value of the personal property to which
property. In this case, what is the specific movable the preference refers.
property in relation to the claim of the BOC?
In relation thereto, we have Art. 2247
Cid: The imported goods Mam

Mam: Okay in relation to that of Tabacco


Art. 2247. If there are two or more credits with respect
*** to the same specific movable property, they shall be
satisfied pro rata, after the payment of duties, taxes
and fees due the State or any subdivision thereof.
Mam: Here this time, we already have insolvency __
proceeding involving voluntary __ proceeding involving the
claims of several creditors, unions including separation pay pro-rata this is our basis that 2-14 of Art. 2244 is pro-rata
for workers Tobacco fees in favour of the BIR, customs
duties and taxes payable on various importations by the
BOC.
Art. 2248. Those credits which enjoy preference in
The SC emphasized that taxes in favour of BOC and the BIR relation to specific real property or real rights, exclude
mentioned here in relation to specific movable properties all others to the extent of the value of the immovable
and therefore Art. 2241(1) shall be applied these customs or real right to which the preference refers.
duties and taxes in favour of BOC enjoy the status of a
specially preferred credit only in respect of the articles
importation. The goods imported on one location are not
subject again for customs duties and taxes assessed upon
other importations. Customs duties and taxes which Art. 2249. If there are two or more credits with respect
remained unsatisfied after levy upon the imported articles to the same specific real property or real rights, they
on which such duties and taxes are due will now then be shall be satisfied pro rata, after the payment of the
paid up of the insolvents free property under Art. 2244. So taxes and assessments upon the immovable property
kung kulang yung imported goods to pay off the customs or real right.
duties in favour of the BOC, then saan mahulog? Art.
2244(9) in favour of the government because that is a Arts. 2248-2249 are similar to Arts. 2246-2247 it is just that
National tax. As to the claim of the BIR for __ inspection this Arts. 2248-2249 refer to immovable properties. Still
fees Art. 2241 is also applicable even in respect of any the same.
properties insolvent in relation to Art. 2241.

Separation pay construed in favour of the labor unions.


Claims for unpaid wages do not fall within the catergory of
Art. 2250. The excess, if any, after the payment of the
specially preferred claims under Arts. 2241 and 2242
credits which enjoy preference with respect to specific
unless it is covered by par. 6 of Art. 2241 and par. 3 of Art.
property, real or personal, shall be added to the free
2242. Now again in those provisions, wala silang
property which the debtor may have, for the payment
preference to share together with all other credits after
of the other credits. (1928a)
taxes.

Other credits here refer to the enumerations under Art.


SC pointed out that it cannot be assumed that the
2244 in the order made taking into consideration Art. 110
legislative authority by using in Article 110 the words "first
of the LC.
preference" and "any provision of law to the contrary
notwithstanding" intended to disrupt the elaborate and
symmetrical structure set up in the Civil Code. Neither can
it be assumed casually that Article 110 intended to
subsume the sovereign itself within the term "other Art. 2251. Those credits which do not enjoy any
creditors" in stating that "unpaid wages shall be paid in full preference with respect to specific property, and those
before other creditors may establish any claim to a share in which enjoy preference, as to the amount not paid,
the assets of employer." Again, it only indicates that it is shall be satisfied according to the following rules:
only intended to modify the order of preference in Art.
2244 to which from No. 2 it will now be first in the (1) In the order established in Article 2244;
preference and the 1 year period will be removed. So the
effect first is removing the 1 year limitation and moving
unclaimed wages of labourers and workers from 2 nd to 1st (2) Common credits referred to in Article 2245 shall be
priority as provided under Art. 2244. paid pro rata regardless of dates.

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Again, it emphasized the order in Art. 2244 and if there
still remaining proceeds it shall be applied to common
credits as mentioned under Art. 2245 but this time pro-
rata regardless of the dates.

This rule on preference of credits is not often ask in the bar


exams, some say that hindi na daw siya ganun ka-relevant
but it is not just common why? Because you apply this only
when there is a proceeding. I requires a liquidation and
insolvency proceedings or the settlement of ones estate,
in the absence of that you cannot apply rules on
concurrence and preference of credits. But once you have
the proceeding, thats the time when you can apply these
rules on concurrence and preference of credits. Among the
proceedings mentioned, nothing in the said proceedings
made mention who among the creditors will be preferred,
that would be answered by these rules.

Act No. 1508

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