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G.R. No. 169211, March 6, 2013 Star Two (SPVAMC), Inc.

, PetitionersvsPaper City Corporation


of the Philippines, Respondent.
Facts:
From 1990-1991, Paper City applied for and was
grantedfour (4) loans and credit accomodations
by Rizal Commercial BankingCorporation
(RCBC), now substituted by Star Two (SPV-AMC),
Inc. Theloans were secured by four (4) Deeds of
Continuing ChattelMortgages on Paper City's
machineries and equipment.However, RCBC
eventually executed a unilateralCancellation of
Deed of Contining Chattel Mortgage.In 1992,
RCBC, as the trustee bank, together
withMetrobank and Union Bank, entered into a
Mortgage Trust Indenture,which will be known
hereinafter as MTI, with Paper City. In the
saidMTI, Paper City acquired additional loans
secured by five (5) Deeds of Real Estate
Mortgage, plus real and personal properties in
anannex to the MTI, which covered the
machineries and equipment ofPaper City.The
MTI was later on amended and supplemented
three(3) times, wherein the loan was increased
and included the samemortgages with an
additional building and other improvements
inthe plant site.Paper City was able to comply
woth the loans but only until1997 due to an
econmic crisis. And because of the default in
thepayment, RCBC filed a petition for extrajudicial foreclosure againstthe real estate
executed by Paper City including all
theimprovements. As highest bidders, the three
banks were issued a Certificate of Sale. Paper
City filed a complaint aleging that the salewas
null and void due to lack of prior notice.During
the pendency of the complaint, Paper City filed
with the trial court a motion to remove
machinery out of the foreclosed land and
building, saying that the same were not
included in the foreclosure of the real estate
mortgage. The trial court deniedthe motion,
ruling that the machineries and equipment were
included. In Paper City's Motion for
Reconsideration, the trial courtgranted the same
and justified the reversal by finding that
themachineries and equipment are chattels by

agreement thru the four Deeds of Continuing


Chattel Mortgages; and that the deed
ofcancellation executed by RCBC of said
mortgage was not validbecause it was one
unilaterally. RCBC's own Motion
for Reconsideration was denied. The case was
elevated to the CA on appeal.
RCBC alleged:
1. That Paper City gave its consent to consider t
he disputedmachineries and equipment as real
properties when they signed theMTI's and all its
amendments;
2. That the machineries and equipment are the
same as inthe MTI's, hence treated by
agreement of the parties as real properties.
In its comment, Paper City argued:
1. They did not consent to consider the disputed
machineryies and equipment as real property;
2. That the disputed machineries and equipment
remainedwithin the purview of the existing
chattel mortgages.
The CA affirmed the orders of the trial court
because it relied on the plain language of the
MTI's. Hence, the petition.
Issue:
Whether or not the subject machineries and
equipment wereconsidered real properties and
should therefore be included in theextra-judicial
foreclosure which in turn were sold to the banks.
Held:
The SC said that repeatedly in the MTI's, the
parties stipulated that the properties mortgaged
by Paper City to RCBC are various parcels of
land including buildings and existing
improvements thereon as well as the
machineries and equipment.The Court
reiterated the rule that in contracts (in this case
the MTI's), if the language used is clear as day
and readily understandable by an ordinary
reader, there is no need for construction. The
case at bar is covered by the rule. The plain

language and literal interpretation of the MTI's


must be applied. The petitioner, other creditor
banks, and Paper City intended from the very
first indenture that the machineries
and equipment in the annex in the MTI's
are included.The Court also said that it was error
for the CA to hold that the machineries and
equipment in the MTI's are personal property,for
in fact the MTI's did not describe the same as
personal property. And finally, the real estate
mortgage over the machineries and equipment
is even in full accord with the classification of
such properties by the Civil Code as immoveable
property.

Garcia claims that the stipulation appointing


Villar, the mortgagee, as the mortgagors
attorney-in-fact, to sell the property in case of
default in the payment of the loan, is in violation
of the prohibition onpactum commissorium, as
stated under Article 2088 of the Civil Code, viz:

Art. 2088. The creditor cannot appropriate the


things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary
is null and void.

Thus:
Art. 415. The following are immovable property:
Land, buildings, roads and constructions of all
kinfs adhered to thesoil; xxxx5. Machinery,
receptacles, instruments or implements
intended bythe owner of the tenement for an
industry or works wich may becarried on in a
building or on a piece of land, and which
tenddirectly to meet the needs of the said
industry or works
garcia vs villar gr-158891
The mortgagee's purchase of the subject
property did not violate the prohibition on
pactum commissorium. The power of attorney
provision above did not provide that the
ownership over the subject property would
automatically pass to the mortgagee upon the
mortgagor's failure to pay the loan on time.
What it granted was the mere appointment of
the mortgagee as attorney-in-fact, with
authority to sell or otherwise dispose of the
subject property, and to apply the proceeds to
the payment of the loan. This provision is
customary in mortgage contracts, and is in
conformity with Article 2087 of the Civil Code, G.R. No. 158891
Prohibition on pactum commissorium

The power of attorney provision in the Deed of


Real Estate Mortgage reads:

5. Power of Attorney of MORTGAGEE.


Effective upon the breach of any condition of
this Mortgage, and in addition to the remedies
herein stipulated, the MORTGAGEE is likewise
appointed attorney-in-fact of the MORTGAGOR
with full power and authority to take actual
possession of the mortgaged properties, to sell,
lease any of the mortgaged properties, to collect
rents, to execute deeds of sale, lease, or
agreement that may be deemed convenient, to
make repairs or improvements on the
mortgaged properties and to pay the same, and
perform any other act which the MORTGAGEE
may deem convenient for the proper
administration of the mortgaged
properties. The payment of any expenses
advanced by the MORTGAGEE in connection
with the purpose indicated herein is also
secured by this Mortgage. Any amount received
from the sale, disposal or administration
abovementioned maybe applied by assessments
and other incidental expenses and obligations
and to the payment of original indebtedness
including interest and penalties thereon. The
power herein granted shall not be revoked
during the life of this Mortgage and all acts
which may be executed by the MORTGAGEE by
virtue of said power are hereby ratified.[38]

The following are the elements of pactum


commissorium:

(1) There should be a property mortgaged by


way of security for the payment of the principal
obligation; and

(2) There should be a stipulation for automatic


appropriation by the creditor of the thing
mortgaged in case of non-payment of the
principal obligation within the stipulated period.

scope of her rights as the owner of the subject


property. The subject property was transferred
to Villar by virtue of another and separate
contract, which is the Deed of Sale. Garcia
never alleged that the transfer of the subject
property to Villar was automatic upon Galass
failure to discharge her debt, or that the sale
was simulated to cover up such automatic
transfer.
x x x."
Mortgage; pactum commissorium. The following
are the elements of pactum commissorium:
(1) There should be a property mortgaged by
way of security for the payment of the principal
obligation; and

[39]

Villars purchase of the subject property did not


violate the prohibition on pactum
commissorium. The power of attorney provision
above did not provide that the ownership over
the subject property would automatically pass
to Villar upon Galass failure to pay the loan on
time. What it granted was the mere
appointment of Villar as attorney-in-fact, with
authority to sell or otherwise dispose of the
subject property, and to apply the proceeds to
the payment of the loan.[40] This provision is
customary in mortgage contracts, and is in
conformity with Article 2087 of the Civil Code,
which reads:

Art. 2087. It is also of the essence of these


contracts that when the principal obligation
becomes due, the things in which the pledge or
mortgage consists may be alienated for the
payment to the creditor.

Galass decision to eventually sell the subject


property to Villar for an
additional P1,500,000.00 was well within the

(2) There should be a stipulation for automatic


appropriation by the creditor of the thing
mortgaged in case of non-payment of the
principal obligation within the stipulated period.
Villars purchase of the subject property did not
violate the prohibition on pactum
commissorium. The power of attorney
provision above did not provide that the
ownership over the subject property would
automatically pass to Villar upon Galass failure
to pay the loan on time. What it granted was the
mere appointment of Villar as attorney-in-fact,
with authority to sell or otherwise dispose of the
subject property, and to apply the proceeds to
the payment of the loan. This provision is
customary in mortgage contracts, and is in
conformity with Article 2087 of the Civil Code.
Galass decision to eventually sell the subject
property to Villar for an
additional P1,500,000.00 was well within the
scope of her rights as the owner of the subject
property. The subject property was transferred
to Villar by virtue of another and separate
contract, which is the Deed of Sale. Garcia never
alleged that the transfer of the subject property
to Villar was automatic upon Galass failure to
discharge her debt, or that the sale was
simulated to cover up such automatic

transfer. Pablo P. Garcia vs. Yolanda Valdez


Villar; G.R. No. 158891, June 27, 2012.

Sps. Yap vs. Sps. Dy, et al. (GR No. 171868

NOTE: Lot 3 was not among the foreclosed


properties bought by DRBI at public auction.

July 27, 2011)DRBI vs. Sps. Dy, et al. (GR


No. 171991)
Facts:
Sps. Tirambulo are the registered owners of
several parcels of land in Negros Oriental (Lots
1,3,4,5,6,8 and846). In 1976, they executed a
Real Estate Mortgage over Lots 1,4,5,6 and 8 in
favor of Rural Bank ofDumaguete, Inc. (Now
Dumaguete Rural Bank, Inc.

DRBI) to secure a P105,000 loan. Later, they


obtained asecond loan for P28,000 and also
executed a Real Estate Mortgage over Lots 3
and 846 in favor of the samebank.Subsequently,
the Tirambulos sold all the mortgaged properties to
Sps. Dy and Sps. Maxinos without theconsent of
DRBI. Upon default of the Tirambulos to pay
their loans to DRBI, the latter extrajudicially
foreclosedthe first mortgage and sold Lots
1,4,5,6 and 8 at public auction, wherein the
DRBI was proclaimed the highestbidder and
bought said lots for P216,040.93. The
Certificate of Sale
states that

the sale is subject to therights of redemption of


the mortgagor(s) or any other persons
authorized by law to do so, within
a period of one (1) year from registration hereof
.
However, the Certificate of Sale was not
registered untilalmost a year later, or on June
24, 1983.Days after the registration, the DRBI
sold Lots 1,

and 6 to Sps. Yap under a Deed of Sale with


Agreement toMortgage.

In August 1983 (within the redemption period),


the Sps. Yap filed a
Motion for Writ of Possession
alleging thathave acquired all the rights and
interests of DRBI over the foreclosed and the
immediate possession of thesame because the 1-yr
redemption period had lapsed without any redemption
being made. Upon motion of theYaps, it was ordered
withdrawn for unknown reason. However, 3 days
later, the Yaps again filed the saidmotion, which
was granted by the trial court, consequently, a
Writ of Possession over Lots 1,
3
and 6 was issuedin favor of the Yaps.Before the
expiration of the redemption period, the Dys
and Maxinos attempted to redeem Lots 1, 3 and
6 forP40,000 but DRBI and Yaps refused,
contending that the redemption should be for
the full amount of thewinning bid of
P216,040.93 plus interest for all the foreclosed
properties. Thus, the Dys and the Maxinos went
to
the office of the sheriff and paid P50,625.29
(40,000 principal + 10,625.29 interests and
sheriffs commission) to
effect the redemption. A Certificate of
Redemption was issued for Lots 1 and 6 only
stating that
Lot 3 is notincluded in the foreclosure
proceedings.
Atty. Diputado (Clerk of Court and Provincial
Sheriff) duly notifiedthe Yaps of the said
redemption and the non-inclusion of Lot 3
among the foreclosed properties.

However, in aletter to Atty. Diputado from the


Yaps, they refused to take delivery of the
redemption price arguing thatone of the
characteristics of a mortgage is its indivisibility
and that one cannot redeem only some of
thelots foreclosed because all the parcels were
sold for a single price at the auction sale.

The Dys and the Maxinos filed a complaint for


accounting, injunction, declaration of nullity (for
Lot 3) ofthe Deed of Sale with Agreement to
Mortgage, and damages
against the Yaps and DRBI. Thereafter, the
Dys and the Maxinos consigned to the trial court
an additional sum of P83,850.50 + sheriffs
commission fee of
P419.25 representing the remaining balance of
the purchase price that the Yaps still owed DRBI
by virtue of thesale to them by the DRBI of Lots
1, 3 and 6.Meanwhile, the Yaps told DRBI that no
redemption has been made by the Tirambulos or
their successors-in-interest and requested DRBI
to consolidate its title over the foreclosed
properties by requesting the ProvincialSheriff to
execute the final deed of sale in favor of the
bank so that the latter can transfer the titles of
the twoforeclosed properties to them. On the
same date, they wrote the Maxinos that they
were formally turning overthe possession of Lot
3 to the Maxinos, and informed them that they
intended to consolidate ownership over
Lots 1 and 6 since there was no redemption as
contemplated by law. Included in the letter was
a liquidation ofthe copra proceeds harvested for
Lots 1, 3 and 6.Later,
the Yaps filed a case for consolidation of
ownership, annulment of certificate of
redemption, anddamages
against the Dys, the Maxinos, the Provincial
Sheriff and DRBI.Both cases were tried jointly.
The Yaps, through counsel, filed a motion to

withdraw from the provincial sheriffthe


redemption money amounting to P50,373.42,
which was granted by the court after
presentation of the SPAexecuted by Francisco
Yap in favor of his brother, Valiente Yap to
receive the redemption money.The trial court
rendered judgment in favor of the Yaps,
dismissing the compliant of Dy and Maxino
spouses aswell as the counterclaim of the bank
and the Yaps for lack of factual and legal basis,
while the Yaps case wasgranted, declaring them
as the exclusive owners of Lot 1 and 6, for
failure of the Dys and the Maxinos to redeemthe
properties within 1 year from the auction sale;
and directing the provincial sheriff to execute
the Final Deedof Sale in favor of the bank, and
the latter to transfer the subject properties to
the Yaps.Upon motion of the DRBI, the trial court
amended the aforesaid decision declaring as
null and void theCertificate of Redemption, the
Deed of Sale made by Tirambulo and Estorco in
favor of the Dys and the Maxinoscovering all the
7 parcels of land in question; and declaring the
Yaps as the exclusive owners of Lot 1 and
6, forfailure of the Dys and the Maxinos to
redeem the properties within 1 year from the
auction sale. Aggrieved by the above ruling, the
Dys and the Maxinos elevated the case to CA,
which reversed the amendeddecision of the trial
court, holding that the sale with respect to Lot 3
was null and void; the redemption made bythe
Dys and the Maxinos as valid; ordering the Yaps to
deliver possession and ownership to the Dys
andMaxinos and to tender and deliver the
corresponding amount of income out of the 3
parcels until finality of judgment; and for DRBI
to pay damages to the Dys and the Maxinos.
Further, the CA also ruled that there is
nonecessity in discussing the validity of the
redemption
.
It found that the bank was in bad faith and
thereforecannot insist on the protection of the
law regarding the need for compliance with all
the requirements for a validredemption while
estoppel and unjust enrichment operate against
the Yaps who had already withdrawn

theredemption money.On MR of the Yaps, the CA


amended its decision deleting the delivery of
possession and ownership to the Dysand the
Maxinos, and the tendering of corresponding
amount of income from the said parcels
of land.Hence, the

proportionate extinguishment of the pledge or


mortgage as long as the debt isnot completely
satisfied.

consolidated petitions assailing the appellate


courts decision.

rn the pledge or cancel the mortgage, to the


prejudice of the other heirs who have notbeen
paid.From these provisions is excepted the case
in which, there being severalthings given in
mortgage or pledge, each one of these
guarantees only adeterminate portion of the
credit.The debtor, in this case, shall have a right
to the extinguishment of the pledgeor mortgage
as the portion of the debt for which each thing is
speciallyanswerable is satisfied.

Issue:
Whether or not the doctrine of indivisibility of
mortgage is applicable in the case at bar
Ruling:NO.
We cannot subscribe to the Yaps argument on
the indivisibility of the
mortgage. As held in the caseof
Philippine National Bank v. De los Reyes
,
[44]
the doctrine of indivisibility of mortgage does
not apply once themortgage is extinguished by
a complete foreclosure thereof as in the instant
case. The Court held:The parties were
accordingly embroiled in a hermeneutic
disparity on their aforesaid contendingpositions.
Yet, the rule on the indivisibility of mortgage
finds no application to the case at bar.The
particular provision of the Civil Code referred to
provides:
Art. 2089.
A pledge or mortgage is indivisible, even
though the debt may bedivided among the
successors in interest of the debtor or of the
creditor.
Therefore, the debtors heir who has paid a part
of the debt cannot ask for the

Neither can the creditors heir who received his


share of the debt retu

From the foregoing, it is apparent that what the


law proscribes is the foreclosure of only aportion
of the property or a number of the several
properties mortgaged corresponding to
theunpaid portion of the debt where before
foreclosure proceedings partial payment was
made bythe debtor on his total outstanding loan
or obligation. This also means that the debtor
cannotask for the release of any portion of the
mortgaged property or of one or some of the
severallots mortgaged unless and until the loan
thus, secured has been fully paid,
notwithstanding thefact that there has been a
partial fulfillment of the obligation. Hence, it is
provided that thedebtor who has paid a part of
the debt cannot ask for the proportionate
extinguishment of themortgage as long as
the debt is not completely satisfied.That the
situation obtaining in the case at bar is not
within the purview of the aforesaid rule
onindivisibility is obvious since the aggregate
number of the lots which comprise the
collaterals forthe mortgage had already been
foreclosed and sold at public auction. There is
no partialpayment nor partial extinguishment of
the obligation to speak of. The aforesaid
doctrine, whichis actually intended for the
protection of the mortgagee, specifically refers
to the release of themortgage which secures the
satisfaction of the indebtedness and naturally
presupposes that themortgage is existing

. Once the mortgage is extinguished by a


complete foreclosurethereof, said doctrine
of indivisibility ceases to apply since, with
the full payment of thedebt, there is
nothing more to secure
.
[45]
(Emphasis supplied.)Nothing in the law prohibits
the piecemeal redemption of properties sold at
one foreclosure proceeding. In fact,in several
early cases decided by this Court, the right of
the mortgagor or redemptioner to redeem one
or someof the foreclosed properties was
recognized.Clearly, the Dys and Maxinos can
effect the redemption of even only two of the
five properties foreclosed. Andsince they can
effect a partial redemption, they are not
required to pay the P216,040.93 considering
that it is thepurchase price for all the five
properties foreclosed.So what amount should
the Dys and Maxinos pay in order for their
redemption of the two properties be
deemedvalid considering that when the five
properties were auctioned, they were not
separately valued?
Contrary to the Yaps contention, the amount
paid by the Dys and Maxinos within the
redemption period

for theredemption of just two parcels of


land was not only P40,000.00 but totaled
to P134,223.92
(P50,373.42paid on May 28, 1984 plus
P83,850.50 paid on June 19, 1984). That is more
than
60% of the purchase pricefor the five
foreclosed properties, to think the Dys and
Maxinos were only redeeming two
properties.

Wefind that it can be considered a sufficient


amount if we were to base the proper purchase
price on the proportionof the size of Lots 1 and 6
with the total size of the five foreclosed
properties, which had the following
respectivesizes:Lot 1 61,371 square metersLot 6
16,087 square metersLot 5 2,900 square meters
Lot 4 27,875 square metersLot 8 39,888 square
metersTOTAL 148,121 square metersThe two
subject properties to be redeemed, Lots 1 and 6,
have a total area of 77,458 square meters or
roughly52% of the total area of the foreclosed
properties. Even with this rough approximation,
we rule that there is noreason to invalidate the
redemption of the Dys and Maxinos since they
tendered 60% of the total purchase pricefor
properties constituting only 52% of the total
area. However, there is a need to remand the
case forcomputation of the pro-rata value of
Lots 1 and 6 based on their true values at that
time of redemption for thepurposes of
determining if there is any deficiency or
overpayment on the part of the Dys and
Maxinos.
Disposition:
Petitions are DENIED. CA decision is AFFIRMED
with MODIFICATION that the case be
REMANDED
to trialcourt for computation of the pro-rata
value of properties covered by Lot 1 and 6 at
the time of redemption todetermine if there is a
deficiency to be settled by or overpayment to
be refunded to respondent Spouses ZosimoDy,
Sr. and Natividad Chiu and Spouses Marcelino C.
Maxino and Remedios Lasola with regard to
theredemption money they paid

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