REPUBLIC ACT No.
1956 "If the offense mentioned in this Article affects any
AN ACT AMENDING ARTICLE ONE HUNDRED
AND EIGHTY-SIX OF THE REVISED PENAL
CODE, CONCERNING MONOPOLIES AND
COMBINATIONS IN RESTRAINT OF TRADE.
Section 1. Article one hundred and eighty-six of the
Revised Penal Code is amended to read as follows:
"Art. 186. Monopolies and combinations in restraint
of trade. The penalty of prison correctional in its
minimum period of a fine ranging from two hundred
to six thousand pesos, or both, shall be imposed
upon:
"1. Any person who shall enter into any
contract or agreement or shall take part in
any conspiracy or combination in the form
of a trust or otherwise, in restraint of trade
or commerce or to prevent by artificial
means free competition in the market;
"2. Any person who shall monopolize any
merchandise or object of trade or
commerce, or shall combine with any
other person or persons to monopolize
said merchandise or object in order to alter
the price thereof by spreading false
rumors or making use of any other artifice
to restrain free competition in the market;
"3. Any person who, being a manufacturer,
producer, or processor of any
merchandise or object of commerce or an
importer of any merchandise or object of
commerce from any foreign country, either
as principal or agent, wholesaler or
retailer, shall combine, conspire or agree
in any manner with any person likewise
engaged in the manufacture, production,
processing, assembling or importation of
such merchandise or object of commerce
or with any other persons not so similarly
engaged for the purpose of making
transactions prejudicial to lawful
commerce, or of increasing the market
price in any part of the Philippines, of any
such merchandise or object of commerce
manufactured, produced, processed,
assembled in or imported into the
Philippines, or of any article in the
manufacture of which such manufactured,
produced, processed, or imported
merchandise or object of commerce is
used.
DECISION
food substance, motor fuel or lubricants, or other
articles of prime necessity, the penalty shall be
that of prison mayor in its minimum and medium
periods, it being sufficient for the imposition
thereof that the initial steps have been taken
toward carrying out the purposes of the
combination.
"Any property possessed under any contract or by
any combination mentioned in the preceding
paragraphs, and being the subject thereof, shall
be forfeited to the Government of the Philippines.
"Whenever any of the offenses described above is
committed by a corporation or association, the
president and each one of the directors or
managers of said corporation or association or its
agent or representative in the Philippines in case
of a foreign corporation or association, who shall
have knowingly permitted or failed to prevent the
commission of such offenses, shall be held liable
as principals thereof."
Section 2. This Act shall take effect upon its
approval.
REVISED RULES OF COURT
RULE 88 SECTION 7
Section 7. Order of payment if estate insolvent —
If the assets which can be appropriated for the
payment of debts are not sufficient for that
purpose, the executor or administrator shall pay
the debts against the estate, observing the
provisions of Articles 1059 and 2239 to 2251 of
the Civil Code.
CASES
G.R. No. 143866. August 22, 2005
POLIAND INDUSTRIAL LIMITED, Petitioners,
vs.
NATIONAL DEVELOPMENT COMPANY,
DEVELOPMENT BANK OF THE PHILIPPINES,
and THE HONORABLE COURT OF APPEALS
(Fourteenth Division) respondents.
G.R. No. 143877. August 22, 2005
NATIONAL DEVELOPMENT
COMPANY, Petitioners,
vs.
POLIAND INDUSTRIAL LIMITED, Respondent.
and Marubeni Benelux. On October 10, 1979,
TINGA, J.:
Before this Court are two Rule 45 consolidated
petitions for review seeking the review of
the Decision1 of the Court of Appeals (Fourth
Division) in CA-G.R. CV No. 53257, which
modified the Decision of the Regional Trial Court,
Branch 61, Makati City in Civil Case No. 91-2798.
Upon motion of the Development Bank of the
Philippines (DBP), the two petitions were
consolidated since both assail the
same Decision of the Court of Appeals.
In G.R. No. 143866, petitioner Poliand Industrial
Limited (POLIAND) seeks judgment declaring the
National Development Company (NDC) and the
DBP solidarily liable in the amount of
US$2,315,747.32, representing the maritime lien
in favor of POLIAND and the net amount of loans
incurred by Galleon Shipping Corporation
(GALLEON). It also prays that NDC and DBP be
ordered to pay the attorney’s fees and costs of the
proceedings as solidary debtors. In G.R. No.
143877, petitioner NDC seeks the reversal of the
Court of Appeals’ Decision ordering it to pay
POLIAND the amount of One Million Nine
Hundred Twenty Thousand Two Hundred Ninety-
Eight and 56/100 United States Dollars
(US$1,920,298.56), corresponding to the maritime
lien in favor of POLIAND, plus interest.
ANTECEDENTS
The following factual antecedents are matters of
record.
Between October 1979 and March 1981, Asian
Hardwood Limited (Asian Hardwood), a Hong
Kong corporation, extended credit
accommodations in favor of GALLEON totaling
US$3,317,747.32.2 At that time, GALLEON, a
domestic corporation organized in 1977 and
headed by its president, Roberto Cuenca, was
engaged in the maritime transport of goods. The
advances were utilized to augment GALLEON’s
working capital depleted as a result of the
purchase of five new vessels and two second-
hand vessels in 1979 and competitiveness of the
shipping industry. GALLEON had incurred an
obligation in the total amount of US$3,391,084.91
in favor of Asian Hardwood.
To finance the acquisition of the vessels,
GALLEON obtained loans from Japanese lenders,
namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd.
GALLEON, through Cuenca, and DBP executed
a Deed of Undertaking3 whereby DBP guaranteed
the prompt and punctual payment of GALLEON’s
borrowings from the Japanese lenders. To secure
DBP’s guarantee under the Deed of Undertaking,
GALLEON promised, among others, to secure a
first mortgage on the five new vessels and on the
second-hand vessels. Thus, GALLEON executed
on January 25, 1982 a mortgage contract over five
of its vessels namely, M/V "Galleon Honor," M/V
"Galleon Integrity," M/V "Galleon Dignity," M/V
"Galleon Pride," and M/V "Galleon Trust" in favor of
DBP.4
Meanwhile, on January 21, 1981, President
Ferdinand Marcos issued Letter of Instruction (LOI)
No. 1155, directing NDC to acquire the entire
shareholdings of GALLEON for the amount
originally contributed by its shareholders payable in
five (5) years without interest cost to the
government. In the same LOI, DBP was to advance
to GALLEON within three years from its effectivity
the principal amount and the interest thereon of
GALLEON’s maturing obligations.
On August 10, 1981, GALLEON, represented by its
president, Cuenca, and NDC, represented by
Minister of Trade Roberto Ongpin, forged
a Memorandum of Agreement,5 whereby NDC and
GALLEON agreed to execute a share purchase
agreement within sixty days for the transfer of
GALLEON’s shareholdings. Thereafter, NDC
assumed the management and operations of
GALLEON although Cuenca remained president
until May 9, 1982.6 Using its own funds, NDC paid
Asian Hardwood on January 15, 1982 the amount of
US$1,000,000.00 as partial settlement of
GALLEON’s obligations.7
On February 10, 1982, LOI No. 1195 was issued
directing the foreclosure of the mortgage on the five
vessels. For failure of GALLEON to pay its debt
despite repeated demands from DBP, the vessels
were extrajudicially foreclosed on various dates and
acquired by DBP for the total amount of
₱539,000,000.00. DBP subsequently sold the
vessels to NDC for the same amount.8
On April 22, 1982, the Board of Directors of
GALLEON amended the Articles of Incorporation
changing the corporate name from Galleon
Shipping Corporation to National Galleon Shipping
Corporation and increasing the number of directors
from seven to nine.9
Asian Hardwood assigned its rights over the
outstanding obligation of GALLEON of
US$2,315,747.32 to World Universal Trading and
Investment Company, S.A. (World Universal),
embodied in a Deed of Assignment executed on
April 29, 1989.10 World Universal, in turn, assigned
the credit to petitioner POLIAND sometime in July
1989.11
On March 24, 1988, then President Aquino issued
Administrative Order No. 64, directing NDC and
Philippine Export and Foreign Loan Guarantee
Corporation (now Trade and Investment
Development Corporation of the Philippines) to
transfer some of their assets to the National
Government, through the Asset Privatization Trust
(APT) for disposition. Among those transferred to
the APT were the five GALLEON vessels sold at the
foreclosure proceedings.
On September 24, 1991, POLIAND made written
demands on GALLEON, NDC, and DBP for the
satisfaction of the outstanding balance in the
amount of US$2,315,747.32.12 For failure to heed
the demand, POLIAND instituted a collection suit
against NDC, DBP and GALLEON filed on October
10, 1991 with the Regional Trial Court, Branch 61,
Makati City. POLIAND claimed that under LOI No.
1155 and the Memorandum of Agreement between
GALLEON and NDC, defendants GALLEON, NDC,
and DBP were solidarily liable to POLIAND as
assignee of the rights of the credit advances/loan
accommodations to GALLEON. POLIAND also
claimed that it had a preferred maritime lien over the
proceeds of the extrajudicial foreclosure sale of
GALLEON’s vessels mortgaged by NDC to DBP.
The complaint prayed for judgment ordering NDC,
DBP, and GALLEON to pay POLIAND jointly and
severally the balance of the credit advances/loan
accommodations in the amount of US$2,315,747.32
and attorney’s fees of ₱100,000.00 plus 20% of the
amount recovered. By way of an alternative cause
of action, POLIAND sought reimbursement from
NDC and DBP for the preferred maritime lien of
US$1,193,298.56.13
In its Answer with Compulsory Counterclaim and
Cross-claim, DBP denied being a party to any of the
alleged loan transactions. Accordingly, DBP argued
that POLIAND’s complaint stated no cause of action
against DBP or was barred by the Statute of Frauds
because DBP did not sign any memorandum to act
as guarantor for the alleged credit advances/loan
accommodations in favor of POLIAND. DBP also
denied any liability under LOI No. 1155, which it
described as immoral and unconstitutional, since it
was rescinded by LOI No. 1195. By way of
its Affirmative Allegations and Defenses, DBP
countered that it was unaware of the maritime lien
on the five vessels mortgaged in its favor and that
as far as GALLEON’s foreign borrowings are
concerned, DBP agreed to act as guarantor
thereof only under the conditions laid down under
the Deed of Undertaking. DBP prayed for the
award of actual, moral and exemplary damages
and attorney’s fees against POLIAND as
compulsory counterclaim. In the event that it be
adjudged liable for the payment of the loan
accommodations and the maritime liens, DBP
prayed that its co-defendant GALLEON be
ordered to indemnify DBP for the full amount.14
For its part, NDC denied any participation in the
execution of the loan accommodations/credit
advances and acquisition of ownership of
GALLEON, asserting that it acted only as
manager of GALLEON. NDC specifically denied
having agreed to the assumption of GALLEON’s
liabilities because no purchase and sale
agreement was executed and the delivery of the
required shares of stock of GALLEON did not take
place.15
Upon motion by POLIAND, the trial court dropped
GALLEON as a defendant, despite vigorous
oppositions from NDC and DBP. At the pre-trial
conference on April 29, 1993, the trial court issued
an Order limiting the issues to the following: (1)
whether or not GALLEON has an outstanding
obligation in the amount of US$2,315,747.32; (2)
whether or not NDC and DBP may be held
solidarily liable therefor; and (3) whether or not
there exists a preferred maritime lien of
₱1,000,000.00 in favor of POLIAND.16
After trial on the merits, the court a quo rendered
a decision on August 9, 1996 in favor of
POLIAND. Finding that GALLEON’s loan
advances/credit accommodations were duly
established by the evidence on record, the trial
court concluded that under LOI No. 1155, DBP
and NDC are liable for those obligations. The trial
court also found NDC liable for GALLEON’s
obligations based on the Memorandum of
Agreement dated August 1981 executed between
GALLEON and NDC, where it was provided that
NDC shall prioritize repayments of GALLEON’s
valid and subsisting liabilities subject of a
meritorious lawsuit or which have been arranged
and guaranteed by Cuenca. The trial court was of
the opinion that despite the subsequent issuance
of LOI No. 1195, NDC and DBP’s obligation under
LOI No. 1155 subsisted because "vested rights of
the parties have arisen therefrom." Accordingly,
the trial court interpreted LOI No. 1195’s directive
to "limit and protect" to mean that "DBP and NDC
should not assume or incur additional exposure
with respect to GALLEON."17
The trial court dismissed NDC’s argument that
the Memorandum of Agreement was merely a
preliminary agreement, noting that under
paragraph nine thereof, the only condition for the
payment of GALLEON’s subsisting loans by NDC
was the determination by the latter that those
obligations were incurred in the ordinary course of
GALLEON’s business. The trial court did not
regard the non-execution of the stock purchase
agreement as fatal to POLIAND’s cause since its
non-happening was solely attributable to NDC.
The trial court also ruled that POLIAND had
preference to the maritime lien over the proceeds
of the extrajudicial foreclosure sale of GALLEON’s
vessels since the loan advances/credit
accommodations utilized for the payment of
expenses on the vessels were obtained prior to
the constitution of the mortgage in favor of DBP.
In sum, NDC and DBP were ordered to pay
POLIAND as follows:
WHEREFORE, premises above considered,
judgment is hereby rendered for plaintiff as
against defendants DBP and NDC, who are
hereby ORDERED as follows:
1. To jointly and severally PAY plaintiff POLIAND
the amount of TWO MILLION THREE HUNDRED
FIFTEEN THOUSAND SEVEN HUNDRED
FORTY SEVEN AND 21/100 [sic] United States
Dollars (US$2,315,747.32) computed at the
official exchange rate at the time of payment, plus
interest at the rate of 12% per annum from 25
September 1991 until fully paid;
2. To PAY the amount of ONE MILLION
(₱1,000,000.) Pesos, Philippine Currency, for and
as attorney’s fees; and
3. To PAY the costs of the proceedings.
SO ORDERED.18
Both NDC and DBP appealed the trial court’s
decision.
The Court of Appeals rendered a modified
judgment, absolving DBP of any liability in view of
POLIAND’s failure to clearly prove its action
against DBP. The appellate court also discharged
NDC of any liability arising from the credit
advances/loan obligations obtained by GALLEON
on the ground that NDC did not acquire ownership
of GALLEON but merely assumed control over its
management and operations. However, NDC was
held liable to POLIAND for the payment of the
preferred maritime lien based on LOI No. 1195
which directed NDC to "discharge such maritime
liens as may be necessary to allow the foreclosed
vessels to engage on the international shipping
business," as well as attorney’s fees and costs of
suit. The dispositive portion of the Decision reads:
WHEREFORE, the assailed decision is MODIFIED,
in accordance with the foregoing findings, as
follows:
The case against defendant-appellant DBP is
hereby DISMISSED.
Defendant-appellant NDC is hereby ordered to pay
plaintiff-appellee POLIAND the amount of
US$1,920,298.56 plus legal interest effective
September 12, 1984.
The award of attorney’s fees and cost of suit is
addressed only against NDC.
Costs against defendant-appellant NDC.
SO ORDERED.19
Not satisfied with the modified judgment, both
POLIAND and NDC elevated it to this Court via two
separate petitions for review on certiorari. In G.R.
No. 143866 filed on August 21, 2000, petitioner
POLIAND raises the following arguments:
RESPONDENT COURT OF APPEALS
COMMITTED GRAVE AND REVERSIBLE
ERRORS IN ITS QUESTIONED DECISION DATED
29 JUNE 2000 AND DECIDED QUESTIONS
CONTRARY TO LAW AND THE APPLICABLE
DECISIONS OF THE HONORABLE COURT
WHEN IT MODIFIED THE DECISION DATED 09
AUGUST 1996 RENDERED BY THE REGIONAL
TRIAL COURT (BRANCH 61) CONSIDERING
THAT:
A.
CONTRARY TO THE FINDINGS OF
RESPONDENT COURT OF APPEALS,
RESPONDENT NDC NOT ONLY TOOK OVER
TOTALLY THE MANAGEMENT AND CONTROL
OF GALLEON BUT ALSO ASSUMED
OWNERSHIP OF GALLEON PURSUANT TO LOI
NO. 1155 AND THE MEMORANDUM OF
AGREEMENT DATED 10 AUGUST 1981; THUS,
RESPONDENT NDC’S ACQUISITION OF FULL
OWNERSHIP AND CONTROL OF GALLEON
CARRIED WITH IT THE ASSUMPTION OF THE
LATTER’S LIABILITIES TO THIRD PARTIES
SUCH AS ASIAN HARDWOOD, PETITIONER
POLIAND’S PREDECESSOR-IN-INTEREST.
B.
RESPONDENT COURT OF APPEALS, IN
VIOLATION OF THE CONSTITUTION AND THE
RULES OF COURT, DISMISSED THE CASE
AGAINST RESPONDENT DBP WITHOUT
STATING CLEARLY AND DISTINCTLY THE
REASONS FOR SUCH A DISMISSAL.
C.
CONTRARY TO THE FINDINGS OF
RESPONDENT COURT OF APPEALS,
PETITIONER POLIAND WAS ABLE TO
ESTABLISH THAT RESPONDENT DBP IS
SOLIDARILY LIABLE, TOGETHER WITH
RESPONDENT NDC, WITH RESPECT TO THE
NET TOTAL AMOUNT OWING TO PETITIONER
POLIAND.
D.
RESPONDENT COURT OF APPEALS GRAVELY
ERRED ALSO IN NOT FINDING THAT
RESPONDENT DBP IS JOINTLY AND
SOLIDARILY LIABLE WITH RESPONDENT NDC
FOR THE PAYMENT OF MARITIME LIENS PLUS
INTEREST PURSUANT TO SECTION 17 OF
PRESIDENTIAL DECREEE 1521.20
On August 25, 2000, NDC filed its petition, docketed
as G.R. No. 143877, imputing the following errors to
the Court of Appeals:
I.
THE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONER NDC IS LIABLE TO PAY
GALLEON’S OUTSTANDING OBLIGATION TO
RESPONDENT POLIAND IN THE AMOUNT OF
US$ 1,920,298.56, TO SATISFY THE
PREFERRED MARITIME LIENS OVER THE
PROCEEDS OF THE FORECLOSURE SALE OF
THE FIVE GALLEON VESSELS.
(A) PRESIDENTIAL DECREE NO. 1521
OTHERWISE KNOWN AS THE ‘SHIP MORTGAGE
DECREE OF 1978 IS NOT APPLICABLE IN THE
CASE AT BAR.
(B) PETITIONER NDC DOES NOT HOLD THE
PROCEEDS OF THE FORECLOSURE SALE OF
THE FIVE (5) GALLEON VESSELS.
(C) THE FORECLOSURE SALE OF THE FIVE (5)
GALLEON VESSELS EXTINGUISHES ALL
CLAIMS AGAINST THE VESSELS.
II.
THE COURT OF APPEALS ERRED IN
AWARDING ATTORNEY’S FEES TO
RESPONDENT POLIAND.21
The two petitions were consolidated considering
that both petitions assail the same Court of
Appeals’ Decision, although on different fronts. In
G.R. No. 143866, POLIAND questions the
appellate court’s finding that neither NDC nor DBP
can be held liable for the loan accommodations to
GALLEON. In G.R. No. 143877, NDC asserts that
it is not liable to POLIAND for the preferred
maritime lien.
ISSUES
The bone of contention revolves around two main
issues, namely: (1) Whether NDC or DBP or both
are liable to POLIAND on the loan
accommodations and credit advances incurred by
GALLEON, and (2) Whether POLIAND has a
maritime lien enforceable against NDC or DBP or
both.
RULING of the COURT
I. Liability on loan accommodations
and credit advances incurred by GALLEON
The Court of Appeals reversed the trial court’s
conclusion that NDC and DBP are both liable to
POLIAND for GALLEON’s debts on the basis of
LOI No. 1155 and the Memorandum of
Agreement. It ratiocinated thus:
With respect to appellant NDC, resolution of the
matters raised in its assignment of errors hinges
on whether or not it acquired the shareholdings of
GALLEON as directed by LOI 1155; and if in the
negative, whether or not it is liable to pay
GALLEON’s outstanding obligation.
The Court answers the issue in the negative. The
MOA executed by GALLEON and NDC following
the issuance of LOI 1155 called for the execution
of a "formal share purchase agreement and the
transfer of all the shareholdings of seller to Buyer."
Since no such execution and consequent transfer
of shareholdings took place, NDC did not acquire
ownership of GALLEON. It merely assumed
"actual control over the management and
operations" of GALLEON in the exercise of which
it, on January 15, 1982, after being satisfied of the
existence of GALLEON’s obligation to ASIAN
HARDWOOD, partially paid the latter One Million
($1,000,000.00) US dollars.22
....
With respect to defendant-appellant DBP,
POLIAND failed to clearly prove its cause of
action against it. This leaves it unnecessary to
dwell on DBP’s other assigned errors, including
that bearing on its claim for damages and
attorney’s fees which does not persuade.23
POLIAND’s cause of action against NDC is
premised on the theory that when NDC acquired
all the shareholdings of GALLEON, the former
also assumed the latter’s liabilities, including the
loan advances/credit accommodations obtained
by GALLEON from POLIAND’s predecessors-in-
interest. In G.R. No. 143866, POLIAND argues
that NDC acquired ownership of GALLEON
pursuant to paragraphs 1 and 2 of LOI No. 1155,
which was implemented through the execution of
the Memorandum of Agreement. It believes that
no conditions were required prior to the
assumption by NDC of GALLEON’s ownership
and subsisting loans. Even assuming that
conditions were set, POLIAND opines that the
conditions were deemed fulfilled pursuant to
Article 1186 of the Civil Code because of NDC’s
apparent intent to prevent the execution of the
share purchase agreement.24
On the other hand, NDC asserts that it could not
have acquired GALLEON’s equity and,
consequently, its liabilities because LOI No. 1155
had been rescinded by LOI No. 1195, and
therefore, became inoperative and non-existent.
Moreover, NDC, relying on the pronouncements
in Philippine Association of Service Exporters, Inc.
et al. v. Ruben D. Torres25 and Parong, et al. v.
Minister Enrile,26 is of the opinion that LOI No.
1155 does not have the force and effect of law
and cannot be a valid source of obligation.27 NDC
denies POLIAND’s contention that it deliberately
prevented the execution of the share purchase
agreement considering that Cuenca remained
GALLEON’s president seven months after the
signing of the Memorandum of
Agreement.28 NDC contends that
the Memorandum of Agreement was a mere
preliminary agreement between Cuenca and
Ongpin for the intended purchase of GALLEON’s
equity, prescribing the manner, terms and
conditions of said purchase.29
NDC, not liable under LOI No. 1155
As a general rule, letters of instructions are simply
directives of the President of the Philippines, issued
in the exercise of his administrative power of
control, to heads of departments and/or officers
under the executive branch of the government for
observance by the officials and/or employees
thereof.30 Being administrative in nature, they do
not have the force and effect of a law and, thus,
cannot be a valid source of obligation. However,
during the period when then President Marcos
exercised extraordinary legislative powers, he
issued certain decrees, orders and letters of
instruction which the Court has declared as having
the force and effect of a statute. As pointed out by
the Court in Legaspi v. Minister of
Finance,31 paramount considerations compelled
the grant of extraordinary legislative power to the
President at that time when the nation was beset
with threats to public order and the purpose for
which the authority was granted was specific to
meet the exigencies of that period, thus:
True, without loss of time, President Marcos made it
clear that there was no military take-over of the
government, and that much less was there being
established a revolutionary government, even as he
declared that said martial law was of a double-
barrelled type, unfamiliar to traditional
constitutionalists and political scientists—for two
basic and transcendental objectives were intended
by it: (1) the quelling of nation-wide subversive
activities characteristic not only of a rebellion but of
a state of war fanned by a foreign power of a
different ideology from ours, and not excluding the
stopping effectively of a brewing, if not a strong
separatist movement in Mindanao, and (2) the
establishment of a New Society by the institution of
disciplinary measures designed to eradicate the
deep-rooted causes of the rebellion and elevate the
standards of living, education and culture of our
people, and most of all the social amelioration of the
poor and underprivileged in the farms and in the
barrios, to the end that hopefully insurgency may
not rear its head in this country again.32
Thus, before a letter of instruction is declared as
having the force and effect of a statute, a
determination of whether or not it was issued in
response to the objectives stated in Legaspi is
necessary. Parong, et al. v. Minister
Enrile33differentiated between LOIs in the nature of
mere administrative issuances and those forming
part of the law of the land. The following conditions
must be established before a letter of instruction
may be considered a law:
To form part of the law of the land, the decree, order
or LOI must be issued by the President in the
exercise of his extraordinary power of legislation as
contemplated in Section 6 of the 1976 amendments
to the Constitution, whenever in his judgment, there
exists a grave emergency or threat or imminence
thereof, or whenever the interim Batasan Pambansa
or the regular National Assembly fails or is unable to
act adequately on any matter for any reason that in
his judgment requires immediate action.34
Only when issued under any of the two
circumstances will a decree, order, or letter be
qualified as having the force and effect of law. The
decree or instruction should have been issued
either when there existed a grave emergency or
threat or imminence or when the Legislature failed
or was unable to act adequately on the matter. The
qualification that there exists a grave emergency or
threat or imminence thereof must be interpreted to
refer to the prevailing peace and order conditions
because the particular purpose the President was
authorized to assume legislative powers was to
address the deteriorating peace and order situation
during the martial law period.
There is no doubt that LOI No. 1155 was issued on
July 21, 1981 when then President Marcos was
vested with extraordinary legislative powers. LOI
No. 1155 was specifically directed to DBP, NDC
and the Maritime Industry Authority to undertake the
following tasks:
LETTER OF INSTRUCTIONS NO. 1155
DEVELOPMENT BANK OF THE PHILIPPINES
NATIONAL DEVELOPMENT COMPANY
MARITIME INDUSTRY AUTHORITY
DIRECTING A REHABILITATION PLAN FOR
GALLEON SHIPPING CORPORATION
....
1. NDC shall acquire 100% of the shareholdings of
Galleon Shipping Corporation from its present
owners for the amount of ₱46.7 million which is the
amount originally contributed by the present
shareholders, payable after five years with no
interest cost.
2. NDC to immediately infuse ₱30 million into
Galleon Shipping Corporation in lieu of is
previously approved subscription to Philippine
National Lines. In addition, NDC is to provide
additional equity to Galleon as may be required.
3. DBP to advance for a period of three years from
date hereof both the principal and the interest on
Galleon's obligations falling due and to convert
such advances into 12% preferred shares in
Galleon Shipping Corporation.
4. DBP and NDC to negotiate a restructuring of
loans extended by foreign creditors of Galleon.
5. MARINA to provide assistance to Galleon by
mandating a rational liner shipping schedule
considering existing freight volumes and to
immediately negotiate a bilateral agreement with
the United States in accordance with UNCTAD
resolutions.
....
Although LOI No. 1155 was undoubtedly issued at
the time when the President exercised legislative
powers granted under Amendment No. 6 of the
1973 Constitution, the language and purpose of
LOI No. 1155 precludes this Court from declaring
that said LOI had the force and effect of law in the
absence of any of the conditions set out
in Parong. The subject matter of LOI No. 1155 is
not connected, directly or remotely, to a grave
emergency or threat to the peace and order
situation of the nation in particular or to the public
interest in general. Nothing in the language of LOI
No. 1155 suggests that it was issued to address
the security of the nation. Obviously, LOI No. 1155
was in the nature of a mere administrative
issuance directed to NDC, DBP and MARINA to
undertake a policy measure, that is, to rehabilitate
a private corporation.
NDC, not liable under the Corporation Code
The Court cannot accept POLIAND’s theory that
with the effectivity of LOI No. 1155,
NDC ipso facto acquired the interests in
GALLEON without disregarding applicable
statutory requirements governing the acquisition
of a corporation. Ordinarily, in the merger of two or
more existing corporations, one of the combining
corporations survives and continues the combined
business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the
surviving corporation.35 The merger, however,
does not become effective upon the mere
agreement of the constituent corporations.36
As specifically provided under Section 7937 of
said Code, the merger shall only be effective upon
the issuance of a certificate of merger by the
Securities and Exchange Commission (SEC),
subject to its prior determination that the merger is
not inconsistent with the Code or existing laws.
Where a party to the merger is a special
corporation governed by its own charter, the Code
particularly mandates that a favorable
recommendation of the appropriate government
agency should first be obtained. The issuance of
the certificate of merger is crucial because not
only does it bear out SEC’s approval but also
marks the moment whereupon the consequences
of a merger take place. By operation of law, upon
the effectivity of the merger, the absorbed
corporation ceases to exist but its rights, and
properties as well as liabilities shall be taken and
deemed transferred to and vested in the surviving
corporation.38
The records do not show SEC approval of the
merger. POLIAND cannot assert that no
conditions were required prior to the assumption
by NDC of ownership of GALLEON and its
subsisting loans. Compliance with the statutory
requirements is a condition precedent to the
effective transfer of the shareholdings in
GALLEON to NDC. In directing NDC to acquire
the shareholdings in GALLEON, the President
could not have intended that the parties disregard
the requirements of law. In the absence of SEC
approval, there was no effective transfer of the
shareholdings in GALLEON to NDC. Hence, NDC
did not acquire the rights or interests of
GALLEON, including its liabilities.
DBP, not liable under LOI No. 1155
POLIAND argues that paragraph 3 of LOI No.
1155 unequivocally obliged DBP to advance the
obligations of GALLEON.39 DBP argues that
POLIAND has no cause of action against it under
LOI No. 1155 which is void and
unconstitutional.40
The Court affirms the appellate court’s ruling that
POLIAND does not have any cause of action
against DBP under LOI No. 1155. Being a mere
administrative issuance, LOI No. 1155 cannot be
a valid source of obligation because it did not
create any privity of contract between DBP and
POLIAND or its predecessors-in-interest. At best,
the directive in LOI No. 1155 was in the nature of
a grant of authority by the President on DBP to
enter into certain transactions for the satisfaction of
GALLEON’s obligations. There is, however, nothing
from the records of the case to indicate that DBP
had acted as surety or guarantor, or had otherwise
accommodated GALLEON’s obligations to
POLIAND or its predecessors-in-interest.
II. Liability on maritime lien
On the second issue of whether or not NDC is liable
to POLIAND for the payment of maritime lien, the
appellate court ruled in the affirmative, to wit:
Non-acquisition of ownership of GALLEON
notwithstanding, NDC is liable to pay ASIAN
HARDWOOD’s successor-in-interest POLIAND the
equivalent of US$1,930,298.56 representing the
proceeds of the loan from Asian Hardwood which
were spent by GALLEON for ship modification and
salaries of crew, to satisfy the preferred maritime
liens over the proceeds of the foreclosure sale of
the 5 vessels.41
POLIAND contends that NDC can no longer raise
the issue on the latter’s liability for the payment of
the maritime lien considering that upon appeal to
the Court of Appeals, NDC did not assign it as an
error.42 Generally, an appellate court may only
pass upon errors assigned. However, this rule is not
without exceptions. In the following instances, the
Court ruled that an appellate court is accorded a
broad discretionary power to waive the lack of
assignment of errors and consider errors not
assigned:
(a) Grounds not assigned as errors but affecting the
jurisdiction of the court over the subject matter;
(b) Matters not assigned as errors on appeal but are
evidently plain or clerical errors within contemplation
of law;
(c) Matters not assigned as errors on appeal but
consideration of which is necessary in arriving at a
just decision and complete resolution of the case or
to serve the interests of a justice or to avoid
dispensing piecemeal justice;
(d) Matters not specifically assigned as errors on
appeal but raised in the trial court and are matters
of record having some bearing on the issue
submitted which the parties failed to raise or which
the lower court ignored;
(e) Matters not assigned as errors on appeal but
closely related to an error assigned;
(f) Matters not assigned as errors on appeal but
upon which the determination of a question properly
assigned, is dependent.43
It is noteworthy that the question of NDC and DBP’s
liability on the maritime lien had been raised by
POLIAND as an alternative cause of action against
NDC and DBP and was passed upon by the trial
court. The Court of Appeals, however, reversed the
trial court’s finding that NDC and DBP are liable to
POLIAND for the payment of the credit advances
and loan accommodations and instead found NDC
to be solely liable on the preferred maritime lien
although NDC did not assign it as an error.
The records, however, reveal that the issue on the
liability on the preferred maritime lien had been
properly raised and argued upon before the Court of
Appeals not by NDC but by DBP who was also
adjudged liable thereon by the trial court. DBP’s
appellant’s brief44 pointed out POLIAND’s failure to
present convincing evidence to prove its alternative
cause of action, which POLIAND disputed in its
appellee’s brief.45 The issue on the maritime lien is
a matter of record having been adequately
ventilated before and passed upon by the trial court
and the appellate court. Thus, by way of exception,
NDC is not precluded from again raising the issue
before this Court even if it did not specifically assign
the matter as an error before the Court of Appeals.
Besides, this Court is clothed with ample authority
to review matters, even if they are not assigned as
errors in the appeal if it finds that their consideration
is necessary in arriving at a just decision of the
case.46
Articles 578 and 580 of the Code
of Commerce, not applicable
NDC cites Articles 57847 and 58048 of the Code of
Commerce to bolster its argument that the
foreclosure of the vessels extinguished all claims
against the vessels including POLIAND’s
claim.49 Article 578 of the Code of Commerce is not
relevant to the facts of the instant case because it
governs the sale of vessels in a foreign port. Said
provision outlines the formal and registration
requirements in order that a sale of a vessel on
voyage or in a foreign port becomes effective as
against third persons. On the other hand, the
resolution of the instant case depends on the
determination as to which creditor is entitled to the
proceeds of the foreclosure sale of the vessels.
Clearly, Article 578 of the Code of Commerce is
inapplicable.
Article 580, while providing for the order of
payment of creditors in the event of sale of a
vessel, had been repealed by the pertinent
provisions of Presidential Decree (P.D.) No. 1521,
otherwise known as the Ship Mortgage Decree of
1978. In particular, Article 580 provides that in
case of the judicial sale of a vessel for the
payment of creditors, the debts shall be satisfied
in the order specified therein. On the other hand,
Section 17 of P.D. No. 152150 also provides that
in the judicial or extrajudicial sale of a vessel for
the enforcement of a preferred mortgage lien
constituted in accordance with Section 2 of P.D.
No. 1521, such preferred mortgage lien shall have
priority over all pre-existing claims against the
vessel, save for those claims enumerated under
Section 17, which have preference over the
preferred mortgage lien in the order stated therein.
Since P.D. No. 1521 is a subsequent legislation
and since said law in Section 17 thereof confers
on the preferred mortgage lien on the vessel
superiority over all other claims, thereby
engendering an irreconcilable conflict with the
order of preference provided under Article 580 of
the Code of Commerce, it follows that the Code of
Commerce provision is deemed repealed by the
provision of P.D. No. 1521, as the posterior law.51
P.D. No. 1521 is applicable, not the
Civil Code provisions on
concurrence/preference of
credits
Whether or not the order of preference under
Section 17, P.D. No. 1521 may be properly
applied in the instant case depends on the
classification of the mortgage on the GALLEON
vessels, that is, if it falls within the ambit of
Section 2, P.D. No. 1521, defining how a preferred
mortgage is constituted.
NDC and DBP both argue that POLIAND’s claim
cannot prevail over DBP’s mortgage credit over
the foreclosed vessels because the mortgage
executed in favor of DBP pursuant to the October
10, 1979 Deed of Undertakingsigned by
GALLEON and DBP was an ordinary ship
mortgage and not a preferred one, that is, it was
not given in connection with the construction,
acquisition, purchase or initial operation of the
vessels, but for the purpose of guaranteeing
GALLEON’s foreign borrowings.52
Section 2 of P.D. No. 1521 recognizes the
constitution of a mortgage on a vessel, to wit:
SECTION 2. Who may Constitute a Ship
Mortgage. — Any citizen of the Philippines, or any
association or corporation organized under the
laws of the Philippines, at least sixty per cent of
the capital of which is owned by citizens of the
Philippines may, for the purpose of financing the
construction, acquisition, purchase of vessels or
initial operation of vessels, freely constitute a
mortgage or any other lien or encumbrance on his
or its vessels and its equipment with any bank or
other financial institutions, domestic or foreign.
If the mortgage on the vessel is constituted for the
purpose stated under Section 2, the mortgage
obtains a preferred status provided the formal
requisites enumerated under Section 453 are
complied with. Upon enforcement of the preferred
mortgage and eventual foreclosure of the vessel,
the proceeds of the sale shall be first applied to
the claim of the mortgage creditor unless there are
superior or preferential liens, as enumerated
under Section 17, namely:
SECTION 17. Preferred Maritime Lien, Priorities,
Other Liens. — (a) Upon the sale of any
mortgaged vessel in any extra-judicial sale or by
order of a district court of the Philippines in any
suit in rem in admiralty for the enforcement of a
preferred mortgage lien thereon, all pre-existing
claims in the vessel, including any possessory
common-law lien of which a lienor is deprived
under the provisions of Section 16 of this Decree,
shall be held terminated and shall thereafter
attach in like amount and in accordance with the
priorities established herein to the proceeds of the
sale. The preferred mortgage lien shall have
priority over all claims against the vessel, except
the following claims in the order stated: (1)
expenses and fees allowed and costs taxed by
the court and taxes due to the Government; (2)
crew's wages; (3) general average; (4) salvage
including contract salvage; (5) maritime liens
arising prior in time to the recording of the
preferred mortgage; (6) damages arising out of
tort; and (7) preferred mortgage registered
prior in time.
(b) If the proceeds of the sale should not be
sufficient to pay all creditors included in one
number or grade, the residue shall be divided
among them pro rata. All credits not paid, whether
fully or partially shall subsist as ordinary credits
enforceable by personal action against the debtor.
The record of judicial sale or sale by public auction
shall be recorded in the Record of Transfers and
Encumbrances of Vessels in the port of
documentation. (Emphasis supplied.)
There is no question that the mortgage executed in
favor of DBP is covered by P.D. No. 1521. Contrary
to NDC’s assertion, the mortgage constituted on
GALLEON’s vessels in favor of DBP may
appropriately be characterized as a preferred
mortgage under Section 2, P.D. No. 1521 because
GALLEON constituted the same for the purpose of
financing the construction, acquisition, purchase of
vessels or initial operation of vessels. While it is
correct that GALLEON executed the mortgage in
consideration of DBP’s guarantee of the prompt
payment of GALLEON’s obligations to the Japanese
lenders, DBP’s undertaking to pay the Japanese
banks was a condition sine qua non to the
acquisition of funds for the purchase of the
GALLEON vessels. Without DBP’s guarantee, the
Japanese lenders would not have provided the
funds utilized in the purchase of the GALLEON
vessels. The mortgage in favor of DBP was
therefore constituted to facilitate the acquisition of
funds necessary for the purchase of the vessels.
NDC adds that being an ordinary ship mortgage, the
Civil Code provisions on concurrence and
preference of credits and not P.D. No. 1521 should
govern. NDC contends that under Article 2246, in
relation to Article 2241 of the Civil Code, the credits
guaranteed by a chattel mortgage upon the thing
mortgaged shall enjoy preference (with respect to
the thing mortgaged), to the exclusion of all others
to the extent of the value of the personal property to
which the preference exists.54 Following NDC’s
theory, DBP’s mortgage credit, which is fourth in the
order of preference under Article 2241, is superior
to POLIAND’s claim, which enjoys no preference.
NDC’s argument does not persuade the Court.
The provision of P.D. No. 1521 on the order of
preference in the satisfaction of the claims against
the vessel is the more applicable statute to the
instant case compared to the Civil Code provisions
on the concurrence and preference of credit.
General legislation must give way to special
legislation on the same subject, and generally be so
interpreted as to embrace only cases in which the
special provisions are not applicable.55
POLIAND’s alternative cause of action for the
payment of maritime liens is based on Sections 17
and 21 of P.D. No. 1521. POLIAND also contends
that by virtue of the directive in LOI No. 1195 on
NDC to discharge maritime liens to allow the
vessels to engage in international business, NDC is
liable therefor.56
POLIAND’s maritime lien is superior
to DBP’s mortgage lien
Before POLIAND’s claim may be classified as
superior to the mortgage constituted on the vessel,
it must be shown to be one of the enumerated
claims which Section 17, P.D. No. 1521 declares as
having preferential status in the event of the sale of
the vessel. One of such claims enumerated under
Section 17, P.D. No. 1521 which is considered to be
superior to the preferred mortgage lien is a maritime
lien arising prior in time to the recording of the
preferred mortgage. Such maritime lien is described
under Section 21, P.D. No. 1521, which reads:
SECTION 21. Maritime Lien for Necessaries;
persons entitled to such lien. — Any person
furnishing repairs, supplies, towage, use of dry dock
or marine railway, or other necessaries to any
vessel, whether foreign or domestic, upon the order
of the owner of such vessel, or of a person
authorized by the owner, shall have a maritime lien
on the vessel, which may be enforced by suit
in rem, and it shall be necessary to allege or prove
that credit was given to the vessel.
Under the aforequoted provision, the expense must
be incurred upon the order of the owner of the
vessel or its authorized person and prior to the
recording of the ship mortgage. Under the law, it
must be established that the credit was extended to
the vessel itself.57
The trial court found that GALLEON’s advances
obtained from Asian Hardwood were used to cover
for the payment of bunker oil/fuel, unused stores
and oil, bonded stores, provisions, and repair and
docking of the GALLEON vessels.58 These
expenses clearly fall under Section 21, P.D. No.
1521.
The trial court also found that the advances from
Asian Hardwood were spent for ship modification
cost and the crew’s salary and wages. DBP
contends that a ship modification cost is omitted
under Section 17, P.D. No. 1521, hence, it does not
have a status superior to DBP’s preferred mortgage
lien.
As stated in Section 21, P.D. No. 1521, a maritime
lien may consist in "other necessaries spent for the
vessel." The ship modification cost may properly be
classified under this broad category because it was
a necessary expenses for the vessel’s navigation.
As long as an expense on the vessel is
indispensable to the maintenance and navigation
of the vessel, it may properly be treated as a
maritime lien for necessaries under Section 21,
P.D. No. 1521.
With respect to the claim for salary and wages of
the crew, there is no doubt that it is also one of the
enumerated claims under Section 17, P.D. No.
1521, second only to judicial costs and taxes due
the government in preference and, thus, having a
status superior to DBP’s mortgage lien.
All told, the determination of the existence and the
amount of POLIAND’s claim for maritime lien is a
finding of fact which is within the province of the
courts below. Findings of fact of lower courts are
deemed conclusive and binding upon the
Supreme Court except when the findings are
grounded on speculation, surmises or conjectures;
when the inference made is manifestly mistaken,
absurd or impossible; when there is grave abuse
of discretion in the appreciation of facts; when the
factual findings of the trial and appellate courts are
conflicting; when the Court of Appeals, in making
its findings, has gone beyond the issues of the
case and such findings are contrary to the
admissions of both appellant and appellee; when
the judgment of the appellate court is premised on
a misapprehension of facts or when it has failed to
notice certain relevant facts which, if properly
considered, will justify a different conclusion; when
the findings of fact are conclusions without citation
of specific evidence upon which they are based;
and when findings of fact of the Court of Appeals
are premised on the absence of evidence but are
contradicted by the evidence on record.59 The
Court finds no sufficient justification to reverse the
findings of the trial court and the appellate court in
respect to the existence and amount of maritime
lien.
Only NDC is liable on the maritime lien
POLIAND maintains that DBP is also solidarily
liable for the payment of the preferred maritime
lien over the proceeds of the foreclosure sale by
virtue of Section 17, P.D. No. 1521. It claims that
since the lien was incurred prior to the constitution
of the mortgage on January 25, 1982, the
preferred maritime lien attaches to the proceeds of
the sale of the vessels and has priority over all
claims against the vessels in accordance with
Section 17, P.D. No. 1521.60
In its defense, DBP reiterates the following
arguments: (1) The salary and crew’s wages
cannot be claimed by POLIAND or its
predecessors-in-interest because none of them is
a sailor or mariner;61 (2) Even if conceded,
POLIAND’s preferred maritime lien is
unenforceable pursuant to Article 1403 of the Civil
Code; and (3) POLIAND’s claim is barred by
prescription and laches.62
The first argument is absurd. Although POLIAND
or its predecessors-in-interest are not sailors
entitled to wages, they can still make a claim for
the advances spent for the salary and wages of
the crew under the principle of legal subrogation.
As explained in Philippine National Bank v. Court
of Appeals,63 a third person who satisfies the
obligation to an original maritime lienor may claim
from the debtor because the third person is
subrogated to the rights of the maritime lienor over
the vessel. The Court explained as follows:
From the foregoing, it is clear that the amount
used for the repair of the vessel M/V "Asean
Liberty" was advanced by Citibank and was
utilized for the purpose of paying off the original
maritime lienor, Hong Kong United Dockyards,
Ltd. As a person not interested in the fulfillment of
the obligation between PISC and Hong Kong
United Dockyards, Ltd., Citibank was subrogated
to the rights of Hong Kong United Dockyards, Ltd.
as a maritime lienor over the vessel, by virtue of
Article 1302, par. 2 of the New Civil Code. By
definition, subrogation is the transfer of all the
rights of the creditor to a third person, who
substitutes him in all his rights. Considering that
Citibank paid off the debt of PISC to Hong Kong
United Dockyards, Ltd. it became the transferee of
all the rights of Hong Kong Dockyards, Ltd. as
against PISC, including the maritime lien over the
vessel M/V "Asian Liberty."64
DBP’s reliance on the Statute of Frauds is
misplaced. Article 1403 (2) of the Civil Code,
which enumerates the contracts covered by the
Statue of Frauds, is inapplicable. To begin with,
there is no privity of contract between POLIAND
or its predecessors-in-interest, on one hand, and
DBP, on the other. POLIAND hinges its claim on
the maritime lien based on LOI No. 1195 and P.D.
No. 1521, and not on any contract or agreement.
Neither can DBP invoke prescription or laches
against POLIAND. Under Article 1144 of the Civil
Code, an action upon an obligation created by law
must be brought within ten years from the time the
right of action accrues. The right of action arose
after January 15, 1982, when NDC partially paid off
GALLEON’s obligations to POLIAND’s predecessor-
in-interest, Asian Hardwood. At that time, the
prescriptive period for the enforcement by action of
the balance of GALLEON’s outstanding obligations
had commenced. Prescription could not have set in
because the prescriptive period was tolled when
POLIAND made a written demand for the
satisfaction of the obligation on September 24,
1991, or before the lapse of the ten-year
prescriptive period. Laches also do not lie because
there was no unreasonable delay on the part of
POLIAND in asserting its rights. Indeed, it instituted
the instant suit seasonably.
All things considered, however, the Court finds that
only NDC is liable for the payment of the maritime
lien. A maritime lien is akin to a mortgage lien in that
in spite of the transfer of ownership, the lien is not
extinguished. The maritime lien is inseparable from
the vessel and until discharged, it follows the
vessel. Hence, the enforcement of a maritime lien is
in the nature and character of a proceeding quasi in
rem.65 The expression "action in rem" is, in its
narrow application, used only with reference to
certain proceedings in courts of admiralty wherein
the property alone is treated as responsible for the
claim or obligation upon which the proceedings are
based.66 Considering that DBP subsequently
transferred ownership of the vessels to NDC, the
Court holds the latter liable on the maritime lien.
Notwithstanding the subsequent transfer of the
vessels to NDC, the maritime lien subsists.
This is a unique situation where the extrajudicial
foreclosure of the GALLEON vessels took place
without the intervention of GALLEON’s other
creditors including POLIAND’s predecessors-in-
interest who were apparently left in the dark about
the foreclosure proceedings. At that time,
GALLEON was already a failing corporation having
borrowed large sums of money from banks and
financial institutions. When GALLEON defaulted in
the payment of its obligations to DBP, the latter
foreclosed on its mortgage over the GALLEON
ships. The other creditors, including POLIAND’s
predecessors-in-interest who apparently had earlier
or superior rights over the foreclosed vessels, could
not have participated as they were unaware and
were not made parties to the case.
On this note, the Court believes and so holds that
the institution of the extrajudicial foreclosure
proceedings was tainted with bad faith. It took place
when NDC had already assumed the management
and operations of GALLEON. NDC could not have
pleaded ignorance over the existence of a prior or
preferential lien on the vessels subject of
foreclosure. As aptly held by the Court of Appeals:
NDC’s claim that even if maritime liens existed over
the proceeds of the foreclosure sale of the vessels
which it subsequently purchased from DBP, it is not
liable as it was a purchaser in good faith fails, given
the fact that in its "actual control over the
management and operations" of GALLEON, it was
put on notice of the various obligations of
GALLEON including those secured from ASIAN
HARDWOOD as in fact it even paid ASIAN
HARDWOOD US$1,000,000.00 in partial settlement
of GALLEON’s obligations, before it (NDC)
mortgaged the 5 vessels to DBP on January 25,
1982.
Parenthetically, LOI 1195 directed NDC to
"discharge such maritime liens as may be
necessary to allow the foreclosed vessels to engage
on the international shipping business."
In fine, it is with respect to POLIAND’s claim for
payment of US$1,930,298.56 representing part of
the proceeds of GALLEON’s loan which was spent
by GALLEON "for ship modification and salaries of
crew" that NDC is liable.67
Thus, NDC cannot claim that it was a subsequent
purchaser in good faith because it had knowledge
that the vessels were subject to various liens. At the
very least, to evince good faith, NDC could have
inquired as to the existence of other claims against
the vessels apart from DBP’s mortgage lien.
Considering that NDC was also in a position to
know or discover the financial condition of
GALLEON when it took over its management, the
lack of notice to GALLEON’s creditors suggests that
the extrajudicial foreclosure was effected to
prejudice the rights of GALLEON’s other creditors.
NDC also cannot rely on Administrative Order No.
64,68 which directed the transfer of the vessels to
the APT, on its hypothesis that such transfer
extinguished the lien. APT is a mere conduit
through which the assets acquired by the National
Government are provisionally held and managed
until their eventual disposal or privatization.
Administrative Order No. 64 did not divest NDC of
its ownership over the GALLEON vessels because
APT merely holds the vessels in trust for NDC until
the same are disposed. Even if ownership was
transferred to APT, that would not be sufficient to
discharge the maritime lien and deprive POLIAND
of its recourse based on the lien. Such denouement
would smack of denial of due process and taking
of property without just compensation.
NDC’s liability for attorney’s fees
The lower court awarded attorney’s fees to
POLIAND in the amount of ₱1,000,000.00 on
account of the amount involved in the case and
the protracted character of the litigation.69 The
award was affirmed by the Court of Appeals as
against NDC only.70
This Court finds no reversible error with the award
as upheld by the appellate court. Under Article
220871 of the Civil Code, attorney’s fees may be
awarded inter alia when the defendant’s act or
omission has compelled the plaintiff to incur
expenses to protect his interest or in any other
case where the court deems it just and equitable
that attorney’s fees and expenses of litigation be
recovered.
One final note. There is a discrepancy between
the dispositive portion of the Court of
Appeals’ Decision and the body thereof with
respect to the amount of the maritime lien in favor
of POLIAND. The dispositive portion ordered NDC
to pay POLIAND "the amount of
US$1,920,298.56" plus interest72 despite a
finding that NDC’s liability to POLIAND represents
the maritime lien73 which according to the
complaint74 is the alternative cause of action of
POLIAND in the smaller amount of
US$1,193,298.56, as prayed for by POLIAND in
its complaint.
The general rule is that where there is conflict
between the dispositive portion or the fallo and the
body of the decision, the fallo controls. This rule
rests on the theory that the fallo is the final order
while the opinion in the body is merely a
statement ordering nothing. However, where the
inevitable conclusion from the body of the decision
is so clear as to show that there was a mistake in
the dispositive portion, the body of the decision
will prevail.75 In the instant case, it is clear from
the trial court records and the Court of Appeals’
Rollo that the bigger amount awarded in the
dispositive portion of the Court of
Appeals’ Decision was a typographical mistake.
Considering that the appellate
court’s Decision merely affirmed the trial court’s
finding with respect to the amount of maritime lien,
the bigger amount stated in the dispositive portion
of the Court of Appeals’ Decision must have been
awarded through indavertence.
WHEREFORE, both Petitions in G.R. No. 143866
and G.R. No. 143877 are DENIED.
The Decision of the Court of Appeals in CA-G.R.
CV No. 53257 is MODIFIED to the extent that
National Development Company is liable to
Poliand Industrial Limited for the amount of One
Million One Hundred Ninety Three Thousand Two
Hundred Ninety Eight US Dollars and Fifty-Six US
Cents (US$ 1,193,298.56), plus interest of
12% per annum computed from 25 September
1991 until fully paid. In other respects,
said Decision is AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
G.R. No. 18520 September 26, 1922
INVOLUNTARY INSOLVENCY OF PAUL
STROCHECKER, appellee,
vs.
ILDEFONSO RAMIREZ, creditor and appellant.
WILLIAM EDMONDS, assignee.
Lim & Lim for appellant.
Ross & Lawrence and Antonio T. Carrascoso, jr.,
for the Fidelity & Surety Co.
ROMUALDEZ, J.:
The question at issue in this appeal is, which of
the two mortgages here in question must be given
preference? Is it the one in favor of the Fidelity &
Surety Co., or that in favor of Ildefonso Ramirez.
The first was declared by the trial court to be
entitled to preference.
In the lower court there were three mortgagees
each of whom claimed preference. They were the
two above mentioned and Concepcion Ayala. The
latter's claim was rejected by the trial court, and
from that ruling she did not appeal.
There is no question as to the priority in time of
the mortgage in favor of the Fidelity & Surety Co.
which was executed on March 10, 1919, and
registered in due time in the registry of property,
that in favor of the appellant being dated
September 22, 1919, and registered also in the
registry.
The appellant claims preference on these
grounds: (a) That the first mortgage above-
mentioned is not valid because the property which
is the subject-matter thereof is not capable of
being mortgaged, and the description of said
property is not sufficient; and (b) that the amount
due the appellant is a purchase price, citing article
1922 of the Civil Code in support thereof, and that
his mortgage is but a modification of the security
given by the debtor on February 15, 1919, that is,
prior to the mortgage executed in favor of the
Fidelity & Surety Co.
As to the first ground, the thing that was mortgaged
to this corporation is described in the document as
follows:
. . . his half interest in the drug business
known as Antigua Botica Ramirez (owned
by Srta. Dolores del Rosario and the
mortgagor herein referred to as the
partnership), located at Calle Real Nos.
123 and 125, District of Intramuros,
Manila, Philippine Islands.
With regard to the nature of the property thus
mortgaged, which is one-half interest in the
business above described, such interest is a
personal property capable of appropriation and not
included in the enumeration of real properties in
article 335 of the Civil Code, and may be the subject
of mortgage. All personal property may be
mortgaged. (Sec. 2, Act No. 1508.)
The description contained in the document is
sufficient. The law (sec. 7, Act No. 1508) requires
only a description of the following nature:
The description of the mortgaged property
shall be such as to enable the parties to
the mortgage, or any other person, after
reasonable inquiry and investigation, to
identify the same.
Turning to the second error assigned, numbers 1, 2,
and 3 of article 1922 of the Civil Code invoked by
the appellant are not applicable. Neither he, as
debtor, nor the debtor himself, is in possession of
the property mortgaged, which is, and since the
registration of the mortgage has been, legally in
possession of the Fidelity & Surety Co. (Sec. 4, Act
No. 1508; Meyers vs. Thein, 15 Phil., 303.)
In no way can the mortgage executed in favor of the
appellant on September 22, 1919, be given effect
as of February 15, 1919, the date of the sale of the
drug store in question. On the 15th of February of
that year, there was a stipulation about a persons
security, but not a mortgage upon any property, and
much less upon the property in question.
Moreover, the appellant cannot deny the
preferential character of the mortgage in favor of the
Fidelity & Surety Co. because in the very document
executed in his favor it was stated that his mortgage
was a second mortgage, subordinate to the one
made in favor of the Fidelity & Surety Co.
The judgment appealed from is affirmed with costs
against the appellant. So ordered.
G.R. No. L-26293 March 24, 1927
Involuntary insolvency of "Central Capiz."
TIMOTEO UNSON, CLARA LACSON, ANTONIO
BELO and JOSE ALTAVAS, claimants-appellees,
vs.
URQUIJO, ZULOAGA & ESCUBI, claimants-
appellants.
Montinola and Montinola and Araneta and Zaragoza
for appellants.
Felipe Ysmael for appellees.
VILLA-REAL, J.:
This appeal was taken by Urquijo, Zuloaga and
Escubi from an order of the Court of First Instance
of Iloilo, the dispositive part of which reads as
follows:
Wherefore, it is ordered that the assignee
in this insolvency proceeding, as soon as
possible after this judgment has become
final, pay from the funds of the same
which have been deposited, the following
amounts:
The sum of thirty thousand pesos
(P30,000) to the claimants Timotea Unson
and Clara Lacson;
The sum of eight thousand pesos (8,000)
to the claimant Jose Altavas; and
The sum of eleven thousand pesos
(P11,000) to the claimant Antonio Belo.
The balance of the said funds, after the
payment of the said three claims which the
court held should be given special
preference in the order above-mentioned,
shall be special distributed pro rata among
the other creditors of the insolvent whose
claims have been admitted and approved,
in accordance with section 50 of Act No.
1956 on insolvency.
In support of their appeal the appellants assign the
following alleged errors as committed by the trial
court in its order, to wit:
I. The lower court erred in not holding
that the attachment in favor of Timoteo
Unson and Clara Lacson did not
constitute a lien due to fatal defects in
the levy thereof.
II. The lower court erred in not holding
that there is no sufficient evidence in the
record of this case as to the levy of an
attachment in favor of either Antonio
Belo or Jose Altavas.
III. The lower court erred in holding that
the appellants cannot invoke in favor of
their claim a vendor's lien as preference
taking the ground that the property sold
by the appellants to the Central Capiz
were real property and not personal
property.
IV. The lower court erred in holding that
the sale of all the property of the Central
Capiz for a lump sum, including the
personal property on which the
appellants claim a vendor's lien, is fatal
to their right to establish a preference.
V. The lower court erred in not allowing
the appellants to introduce evidence as
to the value of the personal property on
which they claim a vendor's lien, in
proportion to what realized at the sale of
all the property of the Central Capiz.
VI. Assuming that the appellees had
acquired a valid lien by attachment, the
lower court erred in holding that said lien
is superior to the preferred credit of the
appellants.
The pertinent facts necessary for the solution of
the questions raised in this appeal, and regarding
which there is no question, are the following:
On July 14, 1919, Urquijo, Suloaga and Escubi
sold certain personal property described in Exhibit
10-D to the Capiz Central for the sum of P210,000
of which only P50,000 was paid.
On August 9, 1920, Urquijo, Zuloaga and Escubi
filed a complaint in the Court if First Instance of
Iloilo (civil case No. 1794) against the Capiz
Central for the recovery of the sum of P160,000
plus interest, said amount being the unpaid
balance of the price of the machinery. In that
complaint the herein appellants prayed that their
claim against the Capiz Central be given
preference, but the lower court held that the was a
matter for the insolvency court to decide.
On August 12, 1921, Timoteo Unson and Clara
Lacson file a complaint in the Court of First
Instance of Capiz (civil cause No. 1475) against
the Capiz Central for the recovery of P163,643.88
as indemnity for damages. On the same date a
writ of attachment (Exhibit C) was issued in favor
of the plaintiffs and levied upon all of the property
of the defendant company.
Subsequently, Jose Altavas (civil case No. 1543)
and Antonio Belo(civil cause No. 1548) each filed
a complaint against the Capiz Central praying for
an attachment, which was issued, the same
having been levied on the property of said Central
on March 29, 1922 and April 26,1922,
respectively.
While the four aforementioned causes against the
Capiz Central were pending, it was adjudged
insolvent on September 5, 1922, an assignee
having been appointed to whom, in accordance
with the law, all of the property of the Capiz
Central was conveyed.
Before Urquijo, Zuloaga and Escubi filed their
claim in the insolvency proceeding, all of the
property of the Capiz Central, including the
personal property sold by the former to the latter,
was sold to the Pilar Sugar Central for the sum of
P80,000, plus interest, which amounted to P266.
All of these sums were, by order of the court,
deposited in the Iloilo Branch of the Bank of the
Philippine Islands, in order to protect the interests
of the preferred creditors, the assignee being
enjoined from making any payment out of said
funds without judicial authorization. The appellants
were not notified of said sale.
On March 26, 1925, judgment was rendered in
favor of Urquijo, Zuloaga and Escubi for the sum
of P90,000, in accordance with an agreement
entered into between the latter and the assignee.
On August 7, 1925, the plaintiffs Timoteo Unson
and Clara Lacson, with the authorization of the
Court of Iloilo in which the insolvency proceedings
were being held, entered into a compromise
agreement with Walter A. Smith, as petition the
Court of First Instance of Capiz to render
judgment in civil case No. 1475 of said court in
favor of the said plaintiffs Timoteo Unson and
Clara Lacson for the sum of P30,000 as indemnity
for liquidated damages, leaving it to the court of
First Instance of Iloilo to decide the question on
the preference of said claim in view of the
attachment on all the personal property of the Capiz
Central secured by them on August 12, 1921, and
considering the judgment to be rendered as a claim
duly presented in accordance with the Insolvency
Law. In view of said agreement and in accordance
with the terms thereof, on August 10, 1925, the
Court of First Instance of Capiz rendered judgment
in favor of Timoteo Unson and Clara Lacson for the
sum of P30,000.
On August 3, 1923, Jose Altavas and Walter A.
Smith, as assignee of the Capiz Central, with the
authorization of the competent court entered into a
compromise agreement by virtue of which they
petitioned the Court of First Instance of Capiz to
render judgment in civil cause 1543, in which Jose
Altavas was plaintiff and the Capiz Central the
defendant, for the sum of P8,000 in favor of said
plaintiff, reserving the right to the latter to raise in
the Court of First Instance of Iloilo the question of
preference of said claim in view of the attachment
he had obtained in said case on the property of the
Capiz Central, through the presentation of said
judgment, which should be considered as a claim
duly presented in the insolvency proceeding. In view
of said compromise agreement and in accordance
therewith, on August 11, 1925, the Court of First
Instance of Capiz rendered judgment in favor of
Jose Altavas for the sum of P8,000.
On the same date, that is, August 3, 1925, Antonio
Belo and Walter A. Smith, as assignee of the Capiz,
Central, entered into a compromise agreement in
civil case No. 1548 of the Court of First Instance of
Capiz, in which Antonio Belo was the plaintiff and
the Capiz Central the defendant, by virtue of which
they petitioned said court to render judgment in
favor of the said plaintiff for the sum of P11,000, as
full payment of all his claims, reserving the right to
said plaintiff to raise the question of preference in
view of the attachment, which had been obtained in
said civil cause against the property of the Capiz
Central, through the presentation of the said
judgment which should be considered as a claim
duly presented in the insolvency proceeding. In view
of this agreement and in accordance therewith, the
Court of the First Instance of Capiz rendered
judgment in favor of Jose Belo for the sum of
P11,000.
The court holding the proceeding in insolvency
approved all of said compromise agreements.
In accordance with the compromise agreement
entered into between Timoteo Unson and Clara
Lacson and the assignee, the former on August 11,
1925 presented their claim in the insolvency
proceeding for the sum of P30,000, based upon the
judgment in their favor above mentioned, claiming a
right of preference by virtue of the first attachment
secured by them and levied on the property of the
insolvent company the "Central Capiz". Urquijo,
Suloaga and Escubi, in an objection dated August
15, 1925, opposed said claim of preference of
Timoteo Unson and Clara Lacson.
On August 17, 1925, Urquijo, Zuloaga and Escubi
filed a claim for the sum of P30,000 based on the
judgment rendered in their favor, claiming a right of
preference by virtue of their lien as sellers of certain
movable property specified in the claim. On the
same date, August 17, 1925, Timoteo Unson and
Clara Lacson filed an opposition to this claim of
preference.
On August 18, 1925, Jose Altavas filed a claim for
the sum of P8,000, based upon the judgment
entered in his favor, alleging that he had a
preferential right though inferior to that of Timoteo
Unson and Clara Lacson by virtue of the second
attachment levied upon the property of the Capiz
Central in his favor. Urquijo , Zuloaga and Escubi
objected to this claim of preference at the hearing
on August 25, 1925.
On August 18, 1925, Antonio Belo filed a claim for
the sum of P11,000, based on the judgment entered
in his favor, alleging that he had a preferential right
subordinate to that of Timoteo Unson and Clara
Lacson by virtue of the third attachment levied on
the property of the Capiz Central in his favor. At the
hearing held on August 25, 1925, Urquijo, Zuloaga
and Escubi also objected to this claim of preference.
The four claims above-mentioned, together with
others, were heard on August 25,1925, and on
September 24, 1925, the lower court issued an
order from which this appeal was taken.
The first assignment of error raises the question of
the validity of the attachment levied in favor of
Timoteo Unson and Clara Lacson on the property of
the Capiz Central, and the second assignment of
error raises the question of the alleged attachments
levied on the property of the Capiz Central in favor
of Jose Altavas and Antonio Belo, respectively.
Aside from the substantial compliance with the law
for the validity of the attachment issued in favor of
Timoteo Unson and Clara Lacson and levied on the
property of the Capiz Central, the assignee, who
represents the creditors (Alexandria Bank vs.
Herbert, 3 Law. ed., 479) entered into a
compromise agreement with each of the creditors,
impliedly acknowledging the existence of the
respective liens in his favor and leaving, for the
determination of the court in the insolvency
proceeding, the question of the preferential right of
said creditors. This compromise agreements
entered into between the assignee and the
respective creditors were approved by the
competent court, and the appellants, as creditors,
are bound by the acts of their legal representative,
approved by the court. (32 C. J., par. 125, page
860).
The third error alleged to have been committed by
the trial court is the fact that it found that the
appellants had lost their preferential right to the
price of the machinery and the grinder which had
been sold to the Capiz Central, from the moment
that it was installed on the estate and became real
property by destination.
The only question, then, to determine under this
assignment of error is whether or not the vendor
of personal property which has become real by
destination loses his preferential right to the
purchase price of the same.
Article 1922, paragraph No. 1, of the Civil Code,
reads as follows:
With respect to determinate personal
property of the debtor, the following are
preferred:
Credits for the construction, repair,
preservation, or purchase price of
personal property in the possession of
the debtor, to the extent of the value of
the same.
The law gives the vendor a real right in the
personal property sold for the price of the sale
while said property remains in the possession of
the purchaser. It certainly would be contrary to
equity and justice if the owner of the article sold
could not collect the purchase price of the same
while it is in the possession of the purchaser.
Manresa, commenting on the article under
consideration, says the following:
And as to credits arising from the
purchase price of personal property in
the possession of the debtor, it is, of
course, evident that the persons to
whom such credits belong are, in a
sense, creditors by reason of ownership,
and it may be said as to them, as well as
with respect to prior ones, that there is
no person bound, but that a juridical
relation exists between the creditor,
rather than the debtor, and the object
with which the credit must be paid. This
is the reason why said preference is not
absolutely, but relatively, granted, and
limited only to those specific things
which subject the obligation, from which
said credits arise, directly to their
performance. (Vol XII, p. 679.)
If the personal property sold, while in the
possession of the purchaser is subject to the
payment of its price, and the vendor has a real
right therein, whatever use the purchaser may
make of it, so long as it does not lose its form and
substance and conserves its identity, the vendor
does not lose his right to said thing for its price.
Not because it suits the purchaser's purpose to
give it a destination that, according to article 334,
case 5, converts it into real property must the
vendor lose his right while the thing sold remains
in the possession of the purchaser in its entirety in
order to protect his credit. To hold otherwise
would be to violate the spirit of the law and to
permit the right of preference, which the law
grants the vendor, to be subject to the will of the
purchaser.
The eminent French jurist, M. Troplong, first Chief
Justice of the French Court of Cassation,
commenting on the creditor's right of preference to
the purchase price of personal property in
possession of the debtor which becomes real by
destination, says in his work entitled "Driot Civil
Explique. — Privileges et Hypotheques,"
paragraph 113, p. 125, translated into English, the
following:
While the price is unpaid, the vendor has
a real right to the thing. It cannot be
admitted that the purchaser in imparting
to it a purely metaphysical character,
and in changing its destination for his
won convenience, has been able to alter
the precise and intimate rights of the
vendor and to deprive him of his
compensation; it is not within his power
to give to things sold but an imperfect
destination subordinate to the rights of
the vendor.
It is a different thing when the acquirer
has changed the species of the thing,
and when by means of this transformation
the thing delivered is no longer what it
was. In this case, it is understood that the
loss of the privilege is based on the loss of
the thing itself.
But in the present hypothesis, the thing
subsists in all its parts, as it originally
existed. There has been only one change,
— that of its destination. This change, as it
affects only the moral quality of the thing,
is widely different from the change arising
from the conversion of one species into
another, and it would seem that it should
not produce the same effects.
This opinion of the said French commentator
merited the honor of being cited and adopted in
various decisions of the Supreme Court and of the
Circuit Court of Appeals of Louisiana.
In the case of Lapene and Jack vs. McCan &
Son (28 La. Ann., 749, 751), which dealt with steam
boilers which were installed on a sugar-cane
plantation, Mr. Justice Wyly, in his concurring
opinion, said:
'I agree with the district judge that
defendants, having judgment with vendor's
privileged on the four boilers could
endorce it by seizing and selling the said
boilers separately from the plantation.
When they were set up at the sugar-house
the vendor's privilege was upon them, and
I now of no law whereby the purchasers
could destroy the privilege by using the
property for the purpose it was adapted. I
cannot consent that a vendor's privilege on
a movable can be lost simply because the
purchaser may use it on his plantation. If
such were the case, the vendor's privilege
would furnish but little security in an
agricultural district. The law has not
declared that the use of a movable by a
purchaser shall destroy the vendor's
privilege.'
The foregoing opinion was cited with approval by
the Supreme Court of Louisiana in the case
of Carlin vs. Gordy (32 La. Ann., 1285). This was a
case between a mortgagee and a subsequent
vendor of a mill and machinery for the manufacture
of sugar, who claimed a right of preference by virtue
of the sale, and the court said:
Defendant had a privilege on these
movables, perfectly valid not only as
between the parties but against all third
persons. The purchaser subsequently set
up this mill and machinery upon his
plantation. They were thereby converted
into immovables by destination; but this
conversion did not and could not operate
to the prejudice of the vendor's privilege
existing thereon prior to their attachment
to the plantation. . . . The evidence fully
establishes that the mill and machinery in
this case can be removed without damage
to the sugar-house; and the case falls fully
within the facts and principles of the case
of Lapene and Jacks vs. McCan (28 La.
Ann., 749), the doctrine of which case is
much more satisfactory to our minds than
the contrary doctrine of Gray vs.
Burguieres (12 La. Ann., 227), where we
think the court puts too narrow an
interpretation upon the expressions of
Troplong. The concurring opinion of
Justice Wyly in the case of Lapene and
Jacks vs. McCan, while perhaps too broad
in its general statements, we think is
thoroughly correct so far as it applies to
movables, which, though attached to a
plantation, are capable of removal without
damage to the structures in which they are
contained, or with which they are
connected. In such case there is no
reason why the vendor's privilege which
attached to them as movables are, in
some cases, affected by the changes
which may take place in the nature or
destination of the things. But such
changes must be so radical as to create a
new species of things and destroy that
species which originally existed — as to
use the illustration of Cujas, when a pine
or cypress log is converted into a ship, or
when wool is converted into a garment, or
when marble is made into a statue. In the
case at bar the mill and machinery has
made of them. They remain the mill and
machinery which were sold; and the
privilege subsists in all its force. Had their
destination as immovables been effected
in such manner as to preclude their
detachment without injury to independent
rights to ownership in the soil or
structures, the privilege might have been
subjected to such limitation in its exercise
as would prevent the separate sale or
removal of the thing subjected to it. But
where, as in this case, no such difficulty
exists, or, if at all, to an inappreciable
extent, we see no reason for imposing
any restriction upon the rights of the
privileged creditor. The privilege of the
vendor is founded on the right of
property. Payment of the price is
essential to the vesting of an
indefeasible title in the vendee. The
vendor's right to, and securities for, the
payment of the price have always
commended themselves to the favorable
consideration of our courts.
See also case of Baldwin vs. Young (47 La. Ann.,
1466); Walburn-Swenson Co. vs. Darell (49 La.
Ann., 1044); Hall vs. Hawley (49 La. Ann.,
1046); Association vs. Johnston (51 la. Ann., 470);
and Swoop vs. St. Martin (110 La. 237).
And, finally, in the case of the State Trust Co. vs.
De La Vergne Refrigerating Mach. Co. (105 Fed.
Rep., 468), the Circuit Court of Appeals of
Louisiana, after citing with approval the doctrines
laid down in the cases above cited, said the
following: "This seems to be in accord with the
equities of the case as they are regarded in De
L'Isle vs. Succession of Moss (34 La. Ann., 166):
The privilege accorded for the payment
of the unpaid price of sale, is one of
great value, resting on considerations of
the plainest equity. It would indeed be
unjust to place an unpaid vendor on a
footing of equality with the other
creditors of the purchaser, and permit
these to devour his substance; for it is
only on the condition that the price of the
thing sold has been paid, that the
purchaser acquires indefeasible title of
ownership to the property, and that his
creditors can be paid. It confers rights of
a high character, superior to those which
flow from a mortgage. . . . It is the price
which is protected by the privilege. By
the sale the vendor increase the estate
of the purchaser. It would be iniquitous
to permit the property sold to become
the prey of the creditors of the
purchaser, without requiring, as a
condition precedent, the payment of its
cost. . . . The word "price" signifies the
sum stipulated as the equivalent of the
things sold, and also every incident
taken into consideration for the fixing of
the price, put to the debit of the vendee,
and agreed to by him.
In view of the authoritative opinion of the
distinguished French commentator on the matter,
and of the doctrine laid down by the Supreme
Court of Louisiana, whose Civil Code is based on
the Code Napoleon, confirmed by the Circuit
Court of Appeals of the same State, there cannot
be the slightest doubt that in Civil law, the vendor
of personal property converted into real by
destination but retaining its form, substance and
identity, does not lose the privilege to the
purchase price granted him, as against any other
creditor, by article 1922, paragraph No. 1, of the
Civil Code, notwithstanding said metaphysical
change.
The fourth assignment of error raises the question
as to whether or not after the sale of the Capiz
Central for a lump sum without the machinery in
question having been separated therefrom before
the sale, appellants may still claim their
preferential right to the purchase price of the
machinery.
It is not disputed that the machinery in question, in
spite of having been incorporated in the Capiz
Central, conserves its form and substance, and its
identity has not been altered in any manner
whatsoever. Having reached the conclusion that
the vendor's lien for the price of the personal
property sold continues even when the latter is
converted into real property by destination, the
fact that the machinery was not separated from
the Capiz Central to be sold apart does not
deprive the vendor of such lien because even
though said machinery was sold together with the
Central for a lump sum, its proportional value in
the sale may be determined.
In the case of McMicking vs. Tremoya (14 Phil.,
252), cited by the appellees, this court held that
Holliday, Wise & Co. and no preferential right to
the proceeds of the sale of the goods because
they had not been able to prove that the goods
selected and claimed by them as sold on credit
had not been paid for.
In the case of McMicking vs. Co Piaco (24 Phil.,
439) also cited by the appellees, the goods sold
by the sheriff came partly from one creditor and
partly from another, and neither had been able to
identify which came from him; and due to the lack
of identification, this court held that neither of the
claimants had established his right of preference.
On the other hand, in the case of Rubert &
Guamis vs. Luengo & Martinez (8 Phil., 554), in
which the sheriff sold under a writ of execution
issued in favor of Rubert and Guamis, for the lump
sum of P500 not only the cinematographic films to
which the plaintiffs had preferential right for the
unpaid purchase price, but also the
cinematographic apparatus in which they had
neither interest nor right this court held that
notwithstanding that conjunction, said plaintiffs had
preferential right to a proportional part of the
proceeds of the sale corresponding to the films,
inasmuch as the proportional value of the same in
the sale could be determined and deducted from the
P500 received from the joint sale.
Briefly, then, since the machinery in question has
not lost its identity either before, during, or after its
sale as an integral part of the Capiz Central for the
lump sum of P80,266 its proportional value in the
sale can be determined and the appellants have a
preferential right to said proportional value for the
unpaid price.
The fifth assignment of error is a corollary of the
former, and having arrived at the conclusion that the
appellants have preferential right to a proportional
part of the proceeds of the sale of the Capiz
Central, corresponding to the machinery in
question, the lower court erred in not permitting the
appellants to introduce evidence in order to
determine such proportional part of the proceeds of
the sale, which amounted to P80,266.
In regard to the sixth assignment of error, the lien
established by article 1922, paragraph No. 1, of the
Civil Code on personal property sold in possession
of the purchaser for the price thereof is superior to
any real right of lien, such as mortgage and
attachment, and, as we have seen, if is recognized
not only in this jurisdiction (Hunter, Kerr &
Co. vs. Murray, 48 Phil., 499; Roman vs. Herridge,
47 Phil., 98; Tec Bi & Co. vs. Chartered Bank of
India, Australia and China, 41 Phil., 819; Kuenzle &
Streiff vs. Villanueva, 41 Phil., 611), but also in the
State of Louisiana whose Revised Civil Code is
based on the Code on the matter (Carlin vs. Gordy,
32 La. 1285; De L'Isle vs. Succession of Moss, 34
La. Ann., 166; Baldwin vs. Refrigerating Mach. Co.,
105 Fed. Rep., 468).
In the last mentioned case, State Trust Co., vs. De
la Vergne Refrigerating Machine Co., the Circuit of
Appeals held that:
Under the statute of Louisiana (Rev. Civ.
Code, arts. 3271, 3273, 3274), as
construed by the supreme court of the
state, a vendor's privilege in respect to a
movable which has been attached to realty
 is not lost as against a mortgagee of the
realty by a failure to record the same, but
the thing sold remains a movable, and
subject to the privilege, so long as it has
not lost its identity, and can be separated
from the land, tenement, or building to
which it has been attached without injury
thereto.
Summarizing we have:
(a) That the right of preference established by
article 1922, paragraph No. 1, of the Civil Code, in
favor of the vendor to personal property sold and in
the possession of the purchaser, for the price
thereof is not lost by the mere fact that such
personal property is converted into real property by
destination, whenever the form and substance are
not changed and it has not lost its identity.
(b) That neither does the vendor lose such
preference notwithstanding the fact that the
personal property converted into real property,
without having lost its identity, is sold with the real
property to which it is attached, for a lump sum, and
the vendor has not requested its separation before
the sale.
(c) That by article 1922, paragraph No. 1, of the
Civil Code and the decisions of this court,
interpreting it, as will as by the Revised Civil Code
of Louisiana and the decisions of the Supreme
Court and Circuit Court of Appeals of said State, the
preference granted the vendor to the personal
property sold and in possession of the purchaser for
the price thereof, is superior to any other real right
or lien, such as mortgage and attachment.
In view of the foregoing the order appealed from is
reversed; the credit of the appellants Urquijo,
Zuloaga and Escubi to the proportional part of the
proceeds of the sale of the Capiz Central
corresponding to the proportional part of the
machinery not paid for is declared preferential, and
it is ordered that the record be remanded to the
court of origin for the determination of said
proportional part to which the appellants have
preferential right. So ordered.
G.R. No. L-12812 September 29, 1959
FILIPINAS COLLEGES, INC., plaintiff-appellee,
vs.
MARIA GARCIA TIMBANG, ET AL., defendants.
------------------------------
G.R. No. L-12813 September 29, 1959
MARIA GARCIA TIMBANG, ET AL., plaintiffs.
MARIA GARICA TIMBANG, plaintiff-appellant,
vs.
MARIA GERVACIO BLAS, defendant-appellee.
De Guzman and Fernandez for appellee Filipinas
Colleges, Inc.
San Huan, Africa and Benedicto for appellant
Maria Garcia Timbang.
Nicanor S. Sison for appellee Maria Gervacio
Blas.
BARRERA, J.:
This is an appeal taken from an order of the Court
of First Instance of Manila dated May 10, 1957 (a)
declaring the Sheriff's certificate of sale covering a
school building sold at public auction null and void
unless within 15 days from notice of said order the
successful bidders, defendants-appellants
spouses Maria Garcia Timbang and Marcelino
Timbang, shall pay to, appellee Maria Gervacio
Blas directly or through the Sheriff of Manila the
sum of P5,750.00 that the spouses Timbang had
bid for the building at the Sheriff's sale; (b)
declaring the other appellee Filipinas Colleges,
Inc. owner of 24,500/3,285,934 undivided interest
in Lot No. 2-a covered by certificate of tile No
45970, on which the building sold in the auction
sale is situated; and (c) ordering the sale in public
auction of the said undivided interest of the
Filipinas Colleges, Inc., in lot No. 2-a
aforementioned to satisfy the unpaid portion of the
judgment in favor of appellee Blas and against
Filipinas Colleges, Inc. in the amount of P8,200.00
minus the sum of P5,750.00 mentioned in (a)
above.
The order appealed from is the result of three
motions filed in the court a quo in the course of
the execution of a final judgment of the Court of
Appeals rendered in 2 cases appealed to it in
which the spouses Timbang, the Filipinas
Colleges, Inc., and Maria Gervacio Blas were the
parties. IN that judgment of the Court of Appeals,
the respective rights of the litigants have been
adjudicated as follows:1âwphïl.nêt
(1) Filipinas Colleges, Inc. was declared
to have acquired the rights of the
spouses Timbang in and to lot No. 2-a
mentioned above and in consideration
thereof, Filipinas Colleges, Inc., was
ordered to pay the spouses Timbang the
amount of P15,807.90 plus such other
amounts which said spouses might have
paid or had to pay after February, 1953,
to Hoskins and Co. Inc., agent of the
Urban Estates, Inc., original vendor of
the lot. Filipinas Colleges, Inc. original
vendor of the total amount with the court
within 90 days after the decision shall
have become final.
(2) Maria Gervacio Blas was declared to
be a builder in good faith of the school
building constructed on the lot in
question and entitled to be paid the
amount of P19,000.00 for the same.
Filipinas Colleges, Inc., purchaser of the
said building was ordered to deliver to
Blas stock certificate (Exh. C) for 108
shares of Filipinas Colleges, Inc. with a
par value of P10,800.00 and to pay Blas
the sum of P8,200.00 of the house.
(3) In case Filipinas Colleges, Inc. failed
to deposit the value of the land, which
after liquidation was fixed at P32,859.34,
within the 90-day period set by the court,
Filipinas Colleges would lose all its rights
to the land and the spouses Timbang
would then become the owners thereof.
In that eventuality, the Timbangs would
make known to the court their option
under Art. 448 of the Civil Code whether
they would appropriate the building in
question, in which even they would have
to pay Filipinas Colleges, Inc. the sum of
P19,000.00, or would compel the latter
to acquire the land and pay the price
thereof.
Filipinas Colleges, Inc. having failed to pay or
deposit the sum of P32,859.34 within the time
prescribed, the spouses Timbang, in compliance
with the judgment of the Court of Appeals, on
September 28, 1956, made known to the court
their decision that they had chosen not of
appropriate the building but to compel Filipinas
Colleges, Inc., for the payment of the sum of
P32,859,34. The motion having been granted, a
writ of execution was issued on January 8, 1957.
On January 16, 1957, appellee Blas in turn filed a
motion for execution of her judgment of P8,200.00
representing the unpaid portion of the price of the
house sold to Filipinas Colleges, Inc. Over the
object of the Timbangs, the court grated the
motion and the corresponding writ of execution
was issued on January 30, 1957, date of the
granting of the motion for execution, Blas through
counsel, sent a letter to the Sheriff of Manila
advising him of her preferential claim or lien on the
house to satisfy the unpaid balance of the purchase
price thereof under Article 2242 of the Civil Code,
and to withhold from the proceed of the auction sale
the sum of P8,200.00. Levy having been made on
the house in virtue of the writs of execution, the
Sheriff of Manila on March 5, 1957, sold the building
in public auction in favor of the spouses Timbang,
as the highest bidders, in the amount of P5,750.00.
Personal properties of Filipinas Colleges, Inc. were
also auctioned for P245.00 in favor of the spouses
Timbang.
As a result of these actuation, three motion were
subsequently filed before the lower court:
(1) By appellee Blas, praying that the
Sheriff of Manila and/or the Timbang
spouses be ordered to pay and deliver to
her the sum of P5,750.00 representing the
proceeds of the auction sale of the
building of Filipinas Colleges, Inc. over
which she has a lien of P8,200.00 for the
unpaid balance of the purchase price
thereof;.
(2) Also by the appellee Bals, praying that
there being still two unsatisfied executions,
one for the sum of P32,859.34 in favor the
land involved, Lot No. 2-a, be sold at
public auction; and (3) By Filipinas
Colleges, Inc. praying that because its
properties, the house and some personal
properties, have been auctioned for
P5,750.00 and P245.00 respectively in
favor of the Timbang spouses who applied
the proceeds to the partial payment of the
sum of P32,859.34 value of the land, Lot
No. 2-a, it (Filipinas Colleges, Inc.) be
declared part owner of said lot to the
extent of the total amount realized from
the execution sale of its
properties.1âwphïl.nêt
The Timbang spouses presented their opposition to
each and all of these motion. After due hearing the
lower court rendered its resolution in the manner
indicated at the beginning of this decision, from
which the Timbangs alone have appealed.
In assailing the order of the court a quo directing the
appellants to pay appellee Blas the amount of their
bid (P5,750.00) made at the public auction,
appellants' counsel has presented a novel, albeit
ingenious, argument. It is contended that because
the builder in good faith has failed to pay the price
of the land after the owners thereof exercised their
option under Article 448 of the Civil Code, the
builder lost his right of retention provided in Article
546 and by operation of Article 445, the appellants
as owners of the land automatically became the
owners ipso facto, the execution sale of the house
in their favor was superfluous. Consequently, they
are not bound to make good their bid of P5,750.00
as that would be to make goods to pay for their own
property. By the same token, Blas claim for
preference on account of the unpaid balance of the
purchase price of the house does not apply
because preference applies only with respect to the
property of the debtor, and the Timbangs, owners of
the house, are not the debtors of Blas.
This Court cannot accept this oversimplification of
appellants' position. Article 448 and 546 of the Civil
Code defining the right of the parties in case a
person in good faith builds, sows or plants on the
land of another, respectively provides:
ART. 448. The owner of the land on which
anything has been built, sown or plated in
good faith shall have the right to
appropriate as his own the works, sowing
or planting, after payment of the indemnify
provided for in article 546 and 548, or to
obligate the one who built or planted to
pay the price of the land, and the one who
sowed, the proper rent. However, the
builder or planter cannot be obliged to buy
the land if its value is considerably more
than that of the building or trees. In such
case, he shall pay reasonable rent, if the
owner of the land does not choose to
appropriate the building or trees after
proper indemnity. The parties shall agree
upon the terms of the lease and in case of
disagreement, the court shall fix the terms
thereof.
ART. 546. Necessary expenses shall be
refunded to every possessor; but only the
possessor in good faith may retain the
thing until he has reimbursed therefor.
Useful expenses shall be refunded only to
the possessor in good faith with the same
right of retention the person who has
defeated him in the possession having to
option of refunding the amount of
expenses or of paying the case in value
which thing may have acquired by reason
thereof.
Under the terms of these article, it is true that the
owner of the land has the right to choose between
appropriating the building by reimbursing the
builder of the value thereof or compelling the
builder in good faith to pay for his land. Even this
second right cannot be exercised if the value of
the land is considerably more than that of the
building. In addition to the right of the builder to be
paid the value of his improvement, Article 546
gives him the corollary right of retention of the
property until he is indemnified by the owner of the
land. There is nothing in the language of these
two article, 448 and 546, which would justify the
conclusion of appellants that, upon the failure of
the builder to pay the value of the land, when such
is demanded by the land-owner, the latter
becomes automatically the owner of the
improvement under Article 445. The case of
Bernardo vs. Bataclan, 66 Phil., 590 cited by
appellants is no authority for this conclusion.
Although it is true it was declared therein that in
the event of the failure of the builder to pay the
land after the owner thereof has chosen this
alternative, the builder's right of retention provided
in Article 546 is lost, nevertheless there was
nothing said that as a consequence thereof, the
builder loses entirely all rights over his own
building. The question is; what is the recourse or
remedy left to the parties in such eventuality
where the builder fails to pay the value of the
land? While the Code is silent on this Court in the
cases of Miranda vs. Fadullon, et al., 97 Phil.,
801; 51 Off. Gaz., [12] 6226; Ignacio vs. Hilario,
76 Phil., 605 and the cited case of Bernardo vs.
Bataclan, supra.
In the first case, this Court has said:
A builder in good faith not be required to
pay rentals. he has right to retain the
land on which he has built in good faith
until he is reimbursed the expenses
incurred by him. Possibly he might be
made to pay rental only when the owner
of the land chooses not to appropriate
the improvement and requires the
builder in good faith to pay for the land
but that the builder is unwilling or unable
to pay the land, and then they decide to
leave things as they are and assume the
relation of lessor and lessee, and should
they disagree as to the amount of rental
then they can go to the court to fix that
amount. (Emphasis supplied)
Should the parties not agree to leave things as
they are and to assume the relation of lessor and
lessee, another remedy is suggested in the case
of Ignacio vs. Hilario, supra, wherein the court has
ruled that the owner of the land in entitled to have
the improvement removed when after having
chosen to sell his land to the other party, i.e., the
builder in good faith fails to pay for the same.
A further remedy is indicated in the case
of Bernardo vs. Bataclan, supra, where this Court
approved the sale of the land and the
improvement in a public auction applying the
proceeds thereof first to the payment of the value
of the land and the excess, if any, to be delivered
to the owner of the house in payment thereof.
The appellants herein, owners o the land, instead
of electing any of the alternative above indicated
chose to seek recovery of the value of their land
by asking for a writ of execution; levying on the
house of the builder; and selling the same in
public auction. Sand because they are the highest
bidder in their own auction sale, they now claim
they acquired title to the building without necessity
of paying in cash on account of their bid. In other
words, they in effect pretend to retain their land
and acquire the house without paying a cent
therefor.
This contention is without merit. This Court has
already held in Matias vs. The Provincial Sheriff of
Nueva Ecija (74 Phil., 326) that while it is the
inveriable practice, dictated by common sense,
that where the successful bidder is the execution
creditor himself, he need not pay down the
amount of the bid if it does not exceed the amount
of his judgement, nevertheless, when their is a
claim by a third-party, to the proceeds of the sale
superior to his judgment credit, the execution
creditor, as successful bidder, must pay in cash
the amount of his bid as a condition precedent to
the issuance to him of the certificate of sale. In the
instant case, the Court of Appeals has already
adjudged that appellee Blas is entitled to the
payment of the unpaid balance of the purchase
price of the school building. Blas is actually a lien
on the school building are concerned. The order of
the lower court directing the Timbang spouses, as
successful bidders, to pay in cash the amount of
their bid in the sum of P5,750.00 is therefore
correct.
With respect to the order of the court declaring
appellee Filipinas Colleges, Inc. part owner of the
land to the extent of the value of its personal
properties sold at public auction in favor of the
Timbang, this Court Likewise finds the same as
justified, for such amount represents, in effect, a
partial payment of the value of the land. If this
resulted in the continuation of the so-called
involuntary partnership questioned by the difference
between P8,200.00 — the unpaid balance of the
purchase price of the building and the sum of
P5,750.00 — amount to be paid by the Timbangs,
the order of the court directing the sale of such
undivided interest of the Filipinas Colleges, Inc. is
likewise justified to satisfy the claim of the appellee
Blas.
Considering that the appellant spouses Marcelino
Timbang and Maria Garcia Timbang may not
voluntarily pay the sum of P5,750.00 as ordered,
thereby further delaying the final termination of this
case, the first part of the dispositive portion of the
order appealed from is modified in the sense that
upon failure of the Timbang spouses to pay to the
Sheriff or to Manila Gervacio Blas said sum of
P5,750.00 within fifteen (15) days from notice of the
final judgment, an order of execution shall issue in
favor of Maria Gervasio Blas to be levied upon all
properties of the Timbang spouses not exempt from
execution for the satisfaction of the said amount.
In all other respects, the appealed order of the
court a quo is hereby affirmed, with costs against
the appellants.
It is so ordered.
G.R. No. L-14938 January 28, 1961
MAGDALENA C. DE BARRETO, ET AL., plaintiffs-
appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-
appellees.
Bausa, Ampil & Suarez for plaintiffs-appellants.
Esteban Ocampo for defendants-appellees.
GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and
as administratix of the intestate estate of her
deceased husband Pedro Cruzado in Special
Proceedings No. 4959 of the Court of First Instance
of Manila, obtained from the defunct Rehabilitation
Finance Corporation (hereinafter referred to as the
RFC a loan in the amount of P11,000.00. To secure
payment thereof, she mortgaged the land then
covered by Transfer Certificate of Title No. 61358
issued in her name and that of her deceased.
husband. As she failed to pay certain installments
on the loan, the mortgage was foreclosed and the
RFC acquired the property for P11,000.00, subject
to her rights as mortgagor to re-purchase the same.
On July 26, 1951, upon her application, the land
was sold back to her conditionally for the amount of
P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953
Rosario Cruzado, as guardian of her minor children
in Special Proceedings No. 14198 of the Court of
First Instance of Manila, was authorized by the
court, to sell with the previous consent of the RFC
the land in question together with the improvements
thereon for a sum not less than P19,000. Pursuant
to such authority and with the consent of the RFC,
she sold to Pura L. Villanueva for P19,000.00 "all
their rights, interest,' title and dominion and over the
herein described parcel of land together with the
existing improvements thereon, including one use
and an annex thereon; free from all charges and
encumbrances, , with the exception of the sum of
P11,009.52, is stipulated interest thereon, which the
vendor, is still presently obligated to the RFC and
which the vendee herein now assumes to pay to the
RFC under the same terms and conditions specified
in that deed of sale dated July 26, 1951." Having
paid in advance the sum of P500.00, Pura L.
Villanueva, the vendee, in consideration of the
aforesaid sale, executed in favor of the vendor
Rosario Cruzado a promissory note dated March 9,
1953, undertaking to pay the balance of P17,500.00
in monthly installments. On April 22, 1953, she
made an additional payment of P5,500.00 on the
promissory note. She was, subsequently, able to
secure in her name Transfer Certificate of Title No.
32526 covering the house and lot above referred to,
and on July 10, 1953, she mortgaged the said
property to Magdalena C. Barretto as security for a
loan the amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the
remaining installments on the unpaid balance of
P12,000.00 her promissory note for the sale of the
property in question, a complaint for the recovery of
the same from her and her husband was filed on
September 21, 1963 by Rosario Cruzado in her own
right and in her capacity as judicial guardian of her
minor children. Pending trial of the case, a lien was
constituted upon the property in the nature of a levy
in attachment in favor of the Cruzados said lien
being annotated at the back of Transfer Certificate
of Title No. 32526. After trial, decision was rendered
ordering Pura Villanueva and her husband, jointly
and severally, to pay Rosario Cruzado the sum of
P12,000.00, with legal interest thereon from the
date of the filing of the complaint until fully paid
plus the sum of P1,500.00 as attorney's fees.
Pura Villanueva having, likewise, failed to pay her
indebtedness of P30,000.00 to Magdalena C.
Barretto, the latter, jointly with her husband,
instituted against the Villanueva spouses an
action for foreclosure of mortgage, impleading
Rosario Cruzado and her children as parties
defendants. On November 11, 1956, decision was
rendered in the case absolving the Cruzados from
the complaint and sentencing the Villanuevas to
pay the Barrettos, jointly and severally, the sum of
P30,000.00, with interest thereon at the rate of
12% per annum from January 11, 1954 plus the
sum of P4,000.00 as attorney's fees. Upon the
finality of this decision, the Barrettos filed a motion
for the issuance of a writ of execution which was
granted by the lower court on July 31, 1958. On
August 14, 1958, the Cruzados filed their
"Vendor's Lien" in the amount of P12,000.00, plus
legal interest, over the real property subject of the
foreclosure suit, the said amount representing the
unpaid balance of the purchase price of the said
property. Giving due course to the line, the court
on August 18, 1958 ordered the same annotated
in Transfer Certificate of Title No. 32526 of the
Registry of Deeds of Manila, decreeing that
should the realty in question be sold at public
auction in the foreclosure proceedings, the
Cruzados shall be credited with their pro-rata
share in the proceeds thereof, "pursuant to the
provision of articles 2248 and 2249 of the new
Civil Code in relation to Article 2242, paragraph 2
of the same Code." The Barrettos filed a motion
for reconsideration on September 12, 1958, but on
that same date, the sheriff of Manila, acting in
pursuance of the order of the court granting the
writ of execution, sold at public auction the
property in question. As highest bidder, the
Barrettos themselves acquired the properties for
the sum of P49,000.00.
On October 4, 1958, 'the Court of First Instance
issued an order confirming the aforesaid sale and
directing the Register of Deeds of the City of
Manila to issue to the Barrettos the corresponding
certificate of title, subject, however, to the order of
August 18, 1958 concerning,. the vendor's lien.
On the same date, the motion of the Barettos
seeking reconsideration of the order of the court
giving due course to the said vendor's lien was
denied. From this last order, the Barretto spouses
interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court, of First
Instance of Manila in Civil Case No. 20075 .
awarding the amount of P12,000.00 in favor of
Rosario Cruzado and her minor children . cannot
constitute a basis for the vendor's lien filed by the
appellee Rosario Cruzado, appellants allege that
the action in said civil case was merely to recover
the balance of a promissory note. But while,
apparently, the action was to recover the
remaining obligation of promissor Pura Villanueva
on the note, the fact remains that Rosario P.
Cruzado as guardian of her minor children, was
an unpaid vendor., of the realty in question, and
the promissory note, was, precisely, for the unpaid
balance of the price of the property bought by,
said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates
the claims, mortgage and liens that constitute an
encumbrance on specific immovable property, and
among them are: .
(2) For the unpaid price of real property
sold, upon the immovable sold; and
(5) Mortgage credits recorded in the
Registry of Property."
Article 2249 of the same Code provides that "if
there are two or more credits with respect to the
same specific real property or real rights, they
shall be satisfied pro-rata after the payment of the
taxes and assessment upon the immovable
property or real rights.
Application of the above-quoted provisions to the
case at bar would mean that the herein appellee
Rosario Cruzado as an unpaid vendor of the
property in question has the right to share pro-rata
with the appellants the proceeds of the foreclosure
sale.
The appellants, however, argue that inasmuch as
the unpaid vendor's lien in this case was not
registered, it should not prejudice the said
appellants' registered rights over the property.
There is nothing to this argument. Note must be
taken of the fact that article 2242 of the new Civil
Code enumerating the preferred claims,
mortgages and liens on immovables, specifically
requires that . unlike the unpaid price of real
property sold . mortgage credits, in order to be
given preference, should be recorded in the
Registry of Property. If the legislative intent was to
impose the same requirement in the case of the
vendor's lien, or the unpaid price of real property
sold, the lawmakers could have easily inserted the
same qualification which now modifies the mortgage
credits. The law, however, does not make any
distinction between registered and unregistered
vendor's lien, which only goes to show that any lien
of that kind enjoys the preferred credit status.
Appellants also argue that to give the unrecorded
vendor's lien the same standing as the registered
mortgage credit would be to nullify the principle in
land registration system that prior unrecorded
interests cannot prejudice persons who
subsequently acquire interests over the same
property. The Land Registration Act itself, however,
respects without reserve or qualification the
paramount rights of lien holders on real property.
Thus, section 70 of that Act provides that .
Registered land, and ownership therein
shall in all respects be subject to the same
burdens and incidents attached by law to
unregistered land. Nothing contained in
this Act shall in any way be construed to
relieve registered land or the owners
thereof from any rights incident to the
relation of husband and wife, or from
liability to attachment on mesne process or
levy, on execution, or from liability to any
lien of any description established by law
on land and the buildings thereon, or the
interest of the owners of such land or
buildings, or to change the laws of
descent, or the rights of partition between
co-owners, joint tenants and other co-
tenants or the right to take the same by
eminent domain, or to relieve such land
from liability to be appropriated in any
lawful manner for the payment of debts, or
to change or affect in any other way any
other rights or liabilities created by law and
applicable to unregistered land, except as
otherwise expressly provided in this Act or
in the amendments thereof, (Emphasis
supplied)
As to the point made that the articles of the Civil
Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to
say that nothing in the law shows any such
limitation. If we are to interpret this portion of the
Code as intended only for insolvency cases, then
other creditor-debtor relationships where there are
concurrence of credits would be left without any
 rules to govern them, and it would render
Insurance Co., Inc. Manila Case No. 38118 ART. 2249. If there are two or more and Cosmopolitan Insurance Co., Inc., the
purposeless the special laws an insolvency. credits with respect to the same specific appellees' credits must be deemed preferred to that
real property or real rights, they shall be of appellants. To satisfy them pro rata would erase
Premises considered, the order appealed from isCayco
4. Florentino Attachment writ in CFI October 29, 1958 26,787.50
satisfied pro rata, after the payment of the difference between earlier and later credits
hereby affirmed. Costs against the appellants.
and Jose Rizal Case No. 5238 the taxes and assessments upon the provided for by subpar. (7) of Article 2242
Fernandez Zorilla immovable property or real aforementioned.
G.R. No. L-23888 March 18, 1967
right.1äwphï1.ñët
FRANCISCO C. MANABAT, in his Wherefore, the judgment appealed from ruling
5. capacity as
Victoria Dimayuga Attachment writ in CFI May 23, 1960 12,500.00
Provincial Sheriff of Laguna, Branch I, plaintiff- The above provision of the new Civil Code altered preference is hereby affirmed. No costs. So
Manila Case No. 3878
appellee, the set-up under the old one5in that while ordered.
vs. previously the rule provided for was priority of
LAGUNA FEDERATION OF FACOMAS, 6. JoseINC.,
MarforiETand Execution writ CFI September 26, 1960 9,410.00
payment in regard to credits referring to the same
AL., defendants-appellees. Josefina Reyes Cavite Case No. 6480- specific real property, now the general rule is pro G.R. No. L-21836 April 22, 1975
FLORENTINO CAYCO and JOSE FERNANDEZ R rata.
ZORILLA, defendants-appellants. CARRIED LUMBER COMPANY, plaintiff-appellee,
Nonetheless, even under the new system, not all vs.
7. Pastor Canillas Attachment writ in CFI November 23, 1960 credits25,552.00
referring to the same specific real property
E. Voltaire Garcia for defendants-appellants. AGRICULTURAL CREDIT AND COOPERATIVE
Manila Case No. 38872 come under the pro rata rule. Article 2249
Enrique C. Villanueva and Felixberto V. Castillo for FINANCING ADMINISTRATION
plaintiff-appellee. itself, supra, expressly provides that taxes and (ACCFA), defendant-appellant.
8. Trinidad Calatin Execution writ in CFI November 29, 1960 3,450.00 upon the real property are to be paid
assessments
BENGZON, J.P., J.: Laguna Case No. B- first. Primicias, Del Castillo and Macaraeg for plaintiff-
191 appellee.
In a suit filed by Laguna Federation of Facomas, Similarly, the rule of pro rata does not apply to the
Inc. against Nieves M. Vda. de Roxas,1a judgment credits mentioned in subpar. (7) of Article 2242 of Deogracias E. Lerma and Domingo D. Panis for
for the plaintiff was rendered. And9.pursuant
Rosauro Taningco
to it, a Reg. of Deeds denied Not registered 9,000.00
the Civil Code: defendant-appellant.
writ of execution was issued on February, and Simplicio
8, 1960, registration of deed
by virtue of which Francisco Manabat,Ramos the provincial mortgage; registrability ART. 2242. With reference to specific
sheriff, sold at public auction on November 24, 1960 became object of suit in immovable property and real rights of the AQUINO, J.:ñé+.£ªwph!1
all rights, titles and interests of Nieves M. Vda. de Supreme Court, L- debtor, the following claims, mortgages
Roxas in ten (10) parcels of land for a total price of 15242.3 and liens shall be preferred, and shall This is a case regarding concurrence and
P37,000. constitute an encumbrance on the preference of credits.
After stipulation of facts and submission of immovable or real right:
Discovering, however, that the parcels of land sold The Agricultural Credit and Cooperative Financing
documentary evidence by the parties, the Court of Administration (ACCFA) * appealed on pure
were subject to registered liens such as writs of xxx xxx xxx
First Instance ruled, in its decision of December 6, questions of law from the decision of the Court of
execution and attachment annotated at the back of 1961, that the aforementioned defendants- (7) Credits annotated in the Registry of
the respective title certificates, the sheriff instituted First Instance of Pangasinan, holding that the
claimants are entitled to the proceeds of the sale Property, in virtue of a judicial order, by Carried Lumber Company has a lien over the
an action for interpleader on February 21, 1961 in in the order of preference in accordance with the attachments or executions, upon the
the same Court of First Instance of Laguna,2for the warehouse and ricemill building of the Sta. Barbara
dates of the registration of their credits. property affected, and only as to later Facoma in the amount of P5,610.50 plus P45 as
different creditors or lienholders to litigate among credits.
themselves and determine their rights to the From said judgment only Florentino Cayco and sheriff's fee (Civil Case No. D-1174).
P37,000 proceeds of the sale. Jose Fernandez Zorilia appealed.4And finding that It being expressly provided that said credits are In that decision it was further held that the lien was
it involves a question purely of law, the Court of preferred "only as to later credits", it follows that superior to the ACCFA's mortgage credit and that
As a result, the following pertinent claims were Appeals, by resolution of November 12, 1964, has the same limitation applies as to their preference
thereafter asserted: the company was entitled to the material
certified their appeal to Us. among themselves; i.e., for purposes of satisfying possession of the warehouse and ricemill building if
several credits annotated by attachments or the ACCFA did not satisfy its claim. Moreover, the
Date of Registration of TheAmount
only issue
of presented is whether the rule to
executions, the rule is still preference according to ACCFA was ordered to pay the company the sum of
Nature of Annotation Credit follow in the satisfaction of the credits involved is
Claim priority of the credits in the order of time. For, P2,000 as expenses, damages and attorney's fees
that of preference in the order of dates of
otherwise, the result would be absurd: the plus costs (99-100 Record on Appeal).
ation Attachment writ in CFI October 10, 1958 registration,
P17,448.00as held by the court a quo, or
preference of an attachment or execution lien over
nc. Laguna Case sc-152. distribution pro rata, as appellants maintain. The documentary evidence and the parties'
later credits, as above provided for, could easily
Appellants' reasoning is that this is an instance of be defeated by simply obtaining writs of stipulation disclose the following facts:
maco Attachment writ in CFI October 13, 1958 several credits referring to the same specific real
3,735.00 attachment or execution, and annotating them, no
Lumber company's materialman's lien. — From
Laguna Case SC-153 property; and that the rule in such case is to matter how much later.
October 11 to November 8, 1954 the Sta. Barbara
satisfy all the aforesaid credits pro rata, following Farmer's Cooperative Marketing Association, Inc.
It not being disputed that appellants' credit is
Article 2249 of the Civil Code: (Facoma) purchased on credit from the Carried
Attachment writ in CFI October 20, 1958 12,650.00 "later" than those of appellees Laguna Federation
of Facomas, Inc., Valeriana Lim-aco de Almeda Lumber Company lumber and materials which were
used in the construction of the Facoma's warehouse
(Exh. H and H-1). The company extended credit to
the Facoma after having been informed by the
ACCFA's General Manager in a telegram dated
October 23, 1954 that a loan of P27,200 had been
approved for the construction of the Facoma's
warehouse (Exh. G and G-1).
On October 27, 1954, after the company had
supplied the Facoma with lumber and construction
materials worth P4,999.40, they executed a contract
whereby it was agreed that the company would sell
lumber and construction materials to the Facoma
with a value not exceeding P27,200 (Exh. F-1).
For the construction of the warehouse, the company
actually delivered to the Facoma Lumber and
construction materials valued at P8,233.55. The
Facoma made partial payments. As of January 1,
1955 it had not paid to the company the balance of
its account amounting to P4,733.55. On May 18,
1959 the company sued the Facoma for the
recovery of that amount (Exh. F). In a decision
dated September 26, 1960, based on a
compromise, the lower court ordered the Facoma to
pay the company the sum of P5,500 in monthly
installments from October 31, 1960 to March 31,
1961, subject to the acceleration proviso that failure
on the part of the Facoma to pay any installment
would render the whole unpaid balance due and
demandable (Exh. A, Civil Case No. D-899; 24-25
Record on Appeal).
In view of the Facoma's failure to pay the stipulated
installments, the Carried Lumber Company secured
a writ of execution to enforce the judgment. The
sheriff levied upon the Facoma's lease rights,
warehouse and ricemill building. On January, 3,
1961 he issued a notice scheduling the sale of the
attached properties on January 31, 1961 (Exh. C;
28-30 Record on Appeal).
On January 25, 1961 the ACCFA filed a third-party
claim with the sheriff. Its provincial director informed
the sheriff that the properties levied upon had
already been sold to the ACCFA on November 5,
1960. For that reason, it contended that the same
could not again be sold at public auction. It formally
objected to the proposed auction sale (Exh. 7; 79-
81 Record on Appeal).
As scheduled, the sheriff on January 31, 1961 sold
for P5,610.50 the Facoma's lease rights, warehouse
and ricemill building to the Carried Lumber
Company, as the highest bidder. On that same
date, he issued a certificate of sale to the company
(Exh. D; 31-32 Record on Appeal).
There being no redemption within the one-year
period, the sheriff on June 29, 1962 issued a final
deed of sale in favor of the Carried Lumber
Company for the said lease rights, warehouse and
ricemill building (Exh. E).
ACCFA's mortgage lien. — As already stated, the
Facoma obtained from the ACCFA a loan of
P27,200 for the construction of its warehouse. As
security for that loan, the Facoma on November
10, 1954 mortgaged to the ACCFA its lease rights
over a parcel of land located at Barrio Maningding
Sta. Barbara, Pangasinan and the warehouse to
be constructed on the said land together with the
other improvements existing thereon (Exh. 1). The
mortgage was recorded on November 13, 1954 in
the registration book provided for in Act No. 3344
(53 Record on Appeal).
Two supplementary mortgages dated February 19
and October 19, 1955 were executed by the
Facoma in favor of the ACCFA as security for
other loans amounting to P11,600 and
P15,408.80, respectively. The other loans were
used by the Facoma for the construction of a
ricemill building and for the purchase of a ricemill
which were also mortgaged to the ACCFA (Exh. 2
and 3). The two instruments were recorded in the
chattel mortgage register on February 22 and
November 17, 1955, respectively (59, 66 Record
on Appeal).
The Facoma also defaulted in the payment of its
mortgage obligations. The ACCFA in a letter
dated September 19, 1960 requested the
Provincial Sheriff of Pangasinan to foreclose the
mortgages extrajudicially (Exh. 4). The sheriff
issued a notice of auction sale dated October 13,
1960. He scheduled the sale on November 5,
1960 (Exh. 5).
In a letter dated October 20, 1960 the Carried
Lumber Company notified the sheriff and the
Facoma that pursuant to article 2242(4) of the
Civil Code, it had a preferential lien over
the warehouse of the Facoma for having furnished
the lumber and materials used in its construction
and the cost of which had not been fully paid for.
The company specified that its unpaid claim
amounted to P5,500 and that it was evidenced by
a judgment dated September 26, 1960 (Exh. B;
26-28 Record on Appeal).
The sheriff proceeded with the foreclosure sale.
On November 5, 1960 he sold the mortgaged
properties to the ACCFA, as the highest bidder for
the sum of P68,067.35. On that date, he issued a
certificate of sale covering the Facoma's lease
rights, warehouse, ricemill, ricemill building and a
diesel engine (Exh. 6). Upon application with the
Court of First Instance, the ACCFA was placed in
possession of the mortgaged properties by virtue
of a writ of possession dated January 27, 1961
(Exh. 8, 9 and 10) or four days before the auction
sale which the sheriff conducted at the instance of
the Carried Lumber Company (Exh. D). The
certificate of sale was registered on March 23,
1961.
Proceedings in this case. — On March 1, 1961 or
after the execution of the Carried Lumber
Company's judgment against the Facoma and the
issuance of the certificate of sale in its favor, the
company sued the ACCFA for the purpose of
asserting its preferential lien over the Facoma's
warehouse and ricemill building and in order to
obtain possession thereof. One of ACCFA's
defenses was that the company waived its lien
when it filed an ordinary action to recover its claim
instead of enforcing its lien.
After trial, the lower court held that the lumber
company's materialman's lien was superior to the
ACCFA's mortgage lien because the company's
lien is sanctioned by paragraph 4 of article 2242 of
the Civil Code, whereas the ACCFA's mortgage
lien is covered by paragraph 5 of the same article.
The lower court reasoned out that the company's
lien "existed ahead" of the ACCFA's mortgage
lien. It noted that the ACCFA was aware of the
company's claim because the company sent to the
ACCFA on October 23, 1954 a telegraphic inquiry
as to the loan which the ACCFA would extend to
the Facoma for the construction of its warehouse
and the ACCFA confirmed in a telegraph answer
that the loan would be granted to the Facoma
(Exh. G).
The ACCFA contends in this appeal that the
lumber company's unregistered judgment credit
was not preferred; that while its materialman's lien
might have enjoyed preference under article 2242
of the Civil Code, that preferential status was lost
when it secured a judgment for its credit as an
ordinary claim, and that, in the alternative, the
company's credit, if preferred, and the ACCFA's
mortgage credit should be paid pro rata pursuant
to article 2249, of the Civil Code.
Ruling. — As this is a clear case of concurrence of
credits with respect to an immovable property, the
Facoma warehouse, it has to be resolved under
the following provisions of the Civil
Code:têñ.£îhqwâ£
ART. 2242. With reference to
specific immovable property and
real rights of the debtor, the
following claims, mortgages and
liens shall be preferred, and shall
constitute an encumbrance on
the immovable or real right:
xxx xxx xxx
(4) Claims of furnishers of
materials used in the
construction, reconstruction, or
repair of buildings, canals or
other works, upon said buildings,
canals or other works:
(5) Mortgage credits recorded in
the Registry of Property, upon
the real estate mortgaged;
xxx xxx xxx (1923a)
ART. 2243. The claims or credits
enumerated in the preceding
articles (2241 and 2242) shall be
considered as mortgages or
pledges of real or personal
property, or liens within the
purview of legal provisions
governing insolvency. Taxes
mentioned in No. 1, article 2241,
and No. 1 article 2242, shall first
be satisfied. (n)
ART. 2249. If there are two or
more credits with respect to the
same specific real property or
real rights, they shall be satisfied
pro rata, after the payment of the
taxes and assessments upon the
immovable properties or real
right. (1927a)
The term pro rata in article 2249 means in
proportion or ratably or a division according to
share, interest or liability of each (72 C.J.S. 967-8).
The trial court erred in holding that the lumber
company's lien over the warehouse is superior to
the ACCFA's mortgage lien. It was mistaken in
assuming that the enumeration of ten claims,
mortgages and liens in article 2242 creates an order
of preference. It is not correct to say that the
materialman's (mechanic's) lien or refectionary
credit of the lumber company, being listed as No. 4
in article 2242, is superior to the ACCFA's mortgage
credit which is listed as No. 5. The enumeration in
article 2242 is not an order of preference. That
article lists the credits which may concur with
respect to specific real properties and which would
be satisfied pro rata according to article 2249.
There is no dispute that the Facoma warehouse
was constructed by means of the materials supplied
by Carried Lumber Company and that the
construction was financed by the ACCFA which had
loaned P27,200 to the Facoma (Exh. 1). Therefore,
it is just and proper that the two creditors should
have pro rata shares in that warehouse.
The lower court's solution of awarding the
warehouse to the lumber company was an
unwarranted disregard of the ACCFA's claim. On
the other hand, the sheriff's adjudication of the
whole warehouse to the ACCFA nullifies the lumber
company's claim. Neither solution is just because it
results in unjust enrichment by one party at the
expense of the other.
The instant case is different from Luzon Lumber &
Hardware Co. vs. Quiambao, 94 Phil, 663, where
the defendant spouses mortgaged their three lots
and the two buildings to be constructed thereon to
the Rehabilitation Finance Corporation (RFC) to
secure a loan. The mortgage was registered on
September 13, 1948. The materials used in the
construction of the two buildings were bought on
credit by the defendant spouses from plaintiff
lumber company during the period from October,
1948 to March, 1949 or after the registration of the
mortgage. To cover the unpaid balance of the price
of the materials, plaintiff lumber company sued
defendant spouses. The RFC was impleaded as a
defendant after it had foreclosed the mortgage and
bought the lots and building as the highest bidder at
the auction sale.
It was held that the mortgage credit of the RFC was
superior to the refectionary credit (credito
refacionario) held by the lumber company. The RFC
loan was used to defray the cost of constructing the
two buildings. By express stipulation, the mortgage
included all the improvements which would be
constructed on the lots. The mortgage lien over the
buildings attached thereto as of the recording of the
mortgage and not as of the time of their
construction. (Under article 1923 of the old Code a
refectionary credit should be registered and, if not
recorded, it is inferior to a registered mortgage
credit).
Also inapplicable to this case is the ruling that in
order to implement the pro rata sharing among the
creditors mentioned in article 2242, as directed in
article 2249, the said creditors "must necessarily
be convened and the import of their claims
ascertained" and that, to do so, "there must be
first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated,
such as insolvency, the settlement of a decedent's
estate under Rule 87 (now 86) of the Rules of
Court, or other liquidation proceedings of similar
import" (Resolution of the motion for
reconsideration in De Barretto vs. Villanueva, 110
Phil. 896, 904, 906).
The Barretto ruling was predicated on the
assumption that such an insolvency proceeding is
necessary in order "to enable the court to
ascertain the pro rata dividend corresponding to
each" of the two creditors as well as the "other
creditors" entitled to preference under article
2242.
Where, as in this case, it appears that there are
no other creditors aside from the Carried Lumber
Company and the ACCFA, the requirement that
the pro rata dividend should be ascertained in an
insolvency or similar proceeding should not be
enforced.
Moreover, the instant case has features that easily
distinguish it from the Barretto case. Here, the
lumber company, before the registration of the
mortgage, inquired from the ACCFA whether it
would extend a loan to the Facoma. The lumber
company continued to supply lumber to the
Facoma after the ACCFA had made the
telegraphic assurance that it would extend a loan
of P27,200 to the Facoma. In effect, the ACCFA
had prior notice of the lumber company
materialman's lien.
Furthermore, in the Barretto case, the controversy
was between the supposed unpaid vendor and the
mortgage who had acted in good faith and was
unaware of the vendor's lien for the unpaid price
(No. 2 in article 2242). This Court found that the
vendor's lien was questionable and could not
stand on equal footing with the mortgage lien.
As already noted, the ACCFA has been in
possession of the warehouse since January 27,
1961 (Exh. 10). The trial court should ascertain
whether the warehouse has yielded any income
during the time that the ACCFA has been in
possession thereof. In any event, the rental value
of the warehouse should be determined. The
ACCFA is entitled to deduct from the earnings of
the warehouse or its rental value the taxes and
necessary and useful expenses which it had
incurred for the said warehouse. By reason of its
lien, the Carried Lumber Company has a pro
rata share in the net earnings or rental value of
the warehouse.
There is another aspect of this case which has
eluded the attention of the parties. The lumber
company in its original complaint asserted a lien
not only over the Facoma's warehouse but also
over its ricemill building. The trial court sustained
the lumber company's lien over the Facoma's
ricemill building. That is an error.
The evidence for the lumber company shows that
it supplied materials only for the construction of
the warehouse (Exh. F, F-1). The company in its
letter to the sheriff specified that it was asserting a
lien only over the warehouse (Exh. B). It did not
mention the ricemill building. It has no
materialman's lien on the ricemill building. On the
other hand, the ACCFA had a mortgage lien on
the ricemill building (Exh. 2). It foreclosed its
mortgage and bought the ricemill building at the
auction sale held on November 5, 1960 (Exh. 5,
6).
WHEREFORE, the trial court's judgment is
reversed. It is hereby adjudged that the Carried
Lumber Company and the ACCFA have
concurrent liens on the Sta. Barbara Facoma
warehouse in the proportion of their credits
amounting to P5,655.50 (including the sheriff's fee
of P45) and P41,370.11 (Exh. 4), respectively.
Should the parties within a period of thirty (30)
days from the finality of this judgment be unable to
agree as to how their liens over the Facoma
warehouse should be satisfied, then the
Warehouse may be sold at public auction by the
sheriff to the highest bidder, and the net proceeds
of the sale should be allocated pro rata to the
lumber company and the ACCFA.
The trial court should ascertain the net earnings or
net rental value of the warehouse from January
27, 1961, when the ACCFA was placed in
possession thereof, up to the time the carried
Lumber Company's lien is satisfied. Such net
earnings or net rental value should also be
allocated pro rata to the lumber company and the
ACCFA. No pronouncement as to costs.