2.
Involving Personal Property
a. Chattel Mortgage
i. Laws
Chattel Mortgage Law (Act No. 1506)
Revised Administrative Code
Art. 319, Revised Penal Code
Ship Mortgage Decree of 1978 (PD
1521)
ii. Subject Matter
Davao Saw Mill Co., Inc. v. Catillo, 61
Phil 709
Davao Saw Mill Co., Inc. vs. Aproniano G. Castillo &
Davao Light & Power Co., Inc., G.R. No. 40411,
August 7, 1935 (61 Phil 709)
FACTS:
The Davao Saw Mill Co., Inc. is the holder of a
lumber concession from the Government of the
Philippine Islands. However, the land upon which the
business was conducted belonged to another person.
On the land, the sawmill company erected a building
which housed the machinery used by it. Some of the
implements thus used were clearly personal property.
The conflict concerns machines which were
placed and mounted on foundations of cement. The
contract between the sawmill company and the owner of
the land explicity provides that all improvements and
buildings introduced to and erected on the land will pass
to the owner upon the expiration of the lease, except
machineries and accessories.
In another action, wherein the Davao Light &
Power Co., Inc., was the plaintiff and the Davao Saw Mill
Co., Inc., was the defendant, a judgment was rendered
in favor of the plaintiff in that action against the
defendant in that action; a writ of execution issued
thereon, and the properties now in question were levied
upon as personality by the sheriff. No third party claim
was filed for such properties at the time of the sales
thereof as is borne out by the record made by the
plaintiff herein.
Indeed the bidder, which was the plaintiff in that
action, and the defendant herein having consummated
the sale, proceeded to take possession of the machinery
and other properties described in the corresponding
certificates of sale executed in its favor by the sheriff of
Davao.
Davao Saw Mill Co., Inc., has, on a number of
occasions, treated the machinery as personal property
by executing chattel mortgages in favor of third persons.
One of such persons is the appellee by assignment from
the original mortgagees.
Davao Saw Mill Co., Inc. filed a case against
Davao Light & Power Co., Inc. to recover the properties
executed upon on the claim that such properties were
real properties that were attached to the land and are
exempt from execution.
Lower Court Decision: The lower court ruled that the
properties were personal properties and dismissed the
case.
ISSUE:
HELD:
Tsai v. CA, 366 SCRA 324
Facts:
● Ever Textile Mills, Inc. (EVERTEX) obtained a 3
million loan from Philippine Bank of
Communications (PBCom), secured by a deed
of Real and Chattel Mortgage over the lot where
its factory stands, and the chattels located
therein as enumerated in a schedule attached to
the mortgage contract.
● PBCom granted a second loan of P3,356,000.00
to EVERTEX which was secured by a Chattel
Mortgage over personal properties similar to
those listed in the first mortgage deed.
● After the date of the execution of the second
mortgage mentioned above, EVERTEX
purchased various machines and equipment.
● EVERTEX filed insolvency proceedings where
CFI Pasay City declared the corporation
insolvent. All its assets were taken into the
custody of the Insolvency Court, including the
collateral, real and personal, securing the two
mortgages.
● EVERTEX failed to meet its obligation, hence,
PBCom commenced extrajudicial foreclosure
 proceedings against EVERTEX under Act 3135
and Act 1506 or "The Chattel Mortgage Law".
● PBCom emerged as the highest bidder and
consolidated its ownership over the properties. It
then leased and subsequently sold the entire
factory premises to Tsai.
● EVERTEX filed a complaint for annulment of
sale, reconveyance, and damages with the
Regional Trial Court against PBCom, alleging
inter alia that the extrajudicial foreclosure of
subject mortgage was in violation of the
Insolvency Law. EVERTEX claimed that no
rights having been transmitted to PBCom over
the assets of insolvent EVERTEX, therefore Tsai
acquired no rights over such assets sold to her,
and should reconvey the assets. EVERTEX
averred that PBCom, without any legal or factual
basis, appropriated the contested properties,
which were not included in the Real and Chattel
Mortgage.
Issue:
Whether or not the properties acquired after the
execution of the chattel mortgage are covered by the
chattel mortgage. (NO)
Whether immovables can be treated as movables for
purpose of executing a chattel mortgage. (YES)
Ruling:
While it is true that the controverted properties appear to
be immobile, a perusal of the contract of Real and
Chattel Mortgage executed by the parties herein gives
us a contrary indication. The true intention of PBCOM
and the owner, EVERTEX, is to treat machinery and
equipment as chattels.
Assuming arguendo that the properties in question are
immovable by nature, nothing detracts the parties from
treating it as chattels to secure an obligation under the
principle of estoppel. An immovable may be considered
a personal property if there is a stipulation as when it is
used as security in the payment of an obligation where a
chattel mortgage is executed over it, as in the case at
bar.
Inasmuch as the subject mortgages were intended by
the parties to involve chattels, insofar as equipment and
machinery were concerned, the Chattel Mortgage Law
applies, which provides in Section 7 thereof that: “a
chattel mortgage shall be deemed to cover only the
property described therein and not like or substituted
property thereafter acquired by the mortgagor and
placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary
notwithstanding.” And, since the disputed machineries
were acquired in 1981 and could not have been involved
in the 1975 or 1979 chattel mortgages, it was
consequently an error on the part of the Sheriff to
include subject machineries with the properties
enumerated in said chattel mortgages. As the auction
sale of the subject properties to PBCom is void, no valid
title passed in its favor. Consequently, the sale thereof
to Tsai is also a nullity under the elementary principle of
nemo dat quod non habet, one cannot give what one
does not have.
Acme Shoe Rubber & Plastic Corp. v.
CA, 260 SCRA 714
FACTS:
● Chua Pac, the president and general manager
of ACME executed a chattel mortgage in favor of
Producers Bank of the Philippines.
● The mortgage stood by way of security for
petitioner's corporate loan of three million pesos
(P3,000,000).
● The mortgage provided that it shall stand as
security for said obligations and any and all
other obligations of the MORTGAGOR to the
MORTGAGEE of whatever kind and nature,
whether such obligations have been contracted
before, during or after the constitution of this
mortgage.
● In due time, ACME was able to pay the loan.
● Subsequently, in 1981, the company obtained
from the bank additional financial
accommodations totaling P2.7M. These
borrowings were also paid on due date.
● In January 1984, the bank yet again extended to
the corporation a loan of P1M, but this was not
paid. The bank thereupon applied for an
extrajudicial foreclosure of the chattel mortgage.
ACME was prompted to file an action for
injunction.
ISSUE:
WoN a clause in a chattel mortgage that purports to
extend its coverage to obligations yet to be contracted or
incurred is valid and effective. (NO)
HELD:
Contracts of security are either personal or real. In
contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by
the principal debtor is secured by the personal
commitment of another (the guarantor or surety).
In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by
an encumbrance of property.
In pledge, the placing of movable property in the
possession of the creditor;
in chattel mortgage, by the execution of the
corresponding deed substantially in the form
prescribed by law;
in real estate mortgage, by the execution of a
public instrument encumbering the real property
covered thereby; and
in antichresis, by a written instrument granting
to the creditor the right to receive the fruits of an
immovable property with the obligation to apply
such fruits to the payment of interest, if owing,
and thereafter to the principal of his credit.
Upon the essential condition that if the principal
obligation becomes due and the debtor defaults, then
the property encumbered can be alienated for the
payment of the obligation, but that should the obligation
be duly paid, then the contract is automatically
extinguished proceeding from the accessory character of
the agreement. As the law so puts it, once the
obligation is complied with, then the contract of
security becomes, ipso facto, null and void.
While a pledge, real estate mortgage, or
antichresis may exceptionally secure after-incurred
obligations so long as these future debts are
accurately described, a chattel mortgage, however,
can only cover obligations existing at the time the
mortgage is constituted.
Although a promise expressed in a chattel
mortgage to include debts that are yet to be
contracted can be a binding commitment that can be
compelled upon, the security itself, however, does
not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted
debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract
conformably with the form prescribed by the Chattel
Mortgage Law.
Refusal on the part of the borrower to
execute the agreement so as to cover the after-
incurred obligation can constitute an act of default
on the part of the borrower of the financing
agreement whereon the promise is written but, of
course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during
the life of the chattel mortgage sought to be
foreclosed.
One of the requisites, under Section 5 thereof, is
an affidavit of good faith. While it is not doubted that
if such an affidavit is not appended to the
agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting
in good faith), the fact, however, that the statute has
provided that the parties to the contract must
execute an oath makes it obvious that the debt
referred to in the law is a current, not an obligation
that is yet merely contemplated.
In the chattel mortgage here involved, the only
obligation specified in the chattel mortgage contract was
the P3,000,000.00 loan which petitioner corporation later
fully paid. By virtue of Section 3 of the Chattel Mortgage
Law, the payment of the obligation automatically
rendered the chattel mortgage void or terminated.
Doctrine: A chattel mortgage, as hereinbefore so
intimated, must comply substantially with the form
prescribed by the Chattel Mortgage Law itself.
Jaca v. Davao Lumber Co., 113 SCRA 107
FACTS:
● Urbano Jaca is a licensee of a logging
concession in Davao, together with Bonifacio
Jaca. They are engaged in the logging business
of producing timber and logs for export and/or
domestic purposes. Davao Lumber Company is
a business corporation with which plaintiffs had
 business dealings covering the sale and/or
exportation of their logs.
● the parties entered into an agreement whereby
the Jacas may secure, by way of advances,
either cash or materials, foodstuffs, and or
equipment from the company. The payment of
such account was to be made either in cash
and/or by the Jacas turning over all the logs that
they produce in the aforesaid concession to the
company.
● While the aforesaid business relationship
between the parties was subsisting, the
company made Urbano Jaca execute in its favor
a chattel mortgage, a copy of which instrument,
however, was never furnished to the Jacas.
● Urbano Jaca executed assignments of letters of
credit in favor of the company, in order that the
latter may be able to use, as it did use, the said
letters of credit for bank negotiations of the
former in the exportation of logs. The business
relationship of the parties continued from 1954
up to August 1963.
Jaca’s Contention: The Jacas made repeated
demands on the company for a formal accounting of
their business relationship from 1954 up to August,
1963, but the company failed and refused, and still fails
and refuses, to effect such formal accounting, asserting
that it had no time as yet to examine into all the details of
the accounting. Sometime on October 30, 1963, much to
their surprise, the Jacas received letters of demand from
the company in which they were requested to pay their
allegedly overdue accounts. The Jacas filed this case in
order to compel the company to have a formal
accounting between them.
Davao Lumber’s Contention: Davao Lumber Company
filed its Answer with Affirmative Defenses and
Counterclaim. In its counterclaim, the Davao Lumber
Company alleged that Plaintiffs Urbano Jaca and
Bonifacio Jaca are the ones indebted to the defendant in
the sum of P756,236.52 and P91,651.97, respectively.
The company also alleged that Urbano Jaca executed a
chattel mortgage in favor of the defendant to secure the
payment of any and all obligations contracted by him in
favor of the defendant covering several chattels valued
at P532,000.
Lower Court’s Decision: The lower court dismissed the
complaint and granted the counterclaim. A motion
pending appeal was granted. The Jacas are questioning
the execution
ISSUE:
Whether a chattel mortgage that secures any
and all obligations hereinbefore and hereinafter
contracted is void.
HELD: YES.
As provided in Sec. 2, Rule 39 of the New
Rules of Court, the existence of good reasons is
what confers discretionary power on a court of first
instance to issue a writ of execution pending appeal.
The reasons allowing execution must constitute
superior circumstances demanding urgency which
will outweigh the injury or damage should the losing
party secure a reversal of the judgment on appeal.
The decision in Civil Case No. 4189 requires
petitioners to pay the enormous amount of P867,887.52.
Clearly, premature execution of said decision will result
in irreparable damage to petitioners as the collection of
said amount may be enforced through the seizure of
money and/or sale of properties used in the logging
business of petitioners.
In other words, execution of the decision in Civil
Case No. 4189 may result in the termination of
petitioner's business. Thus, any damage to the
petitioners brought about by the premature execution of
the decision will be justified only upon a finding that the
appeal is being taken only for the purpose of delay and
of rendering the judgment nugatory.
The facts of record show that the petitioner's
appeal is not frivolous and not intended for delay. The
findings of the respondent judge that the petitioners are
indebted to the respondent Davao Lumber Company are
based solely on the report submitted by Estanislao R.
Lagman, the commissioner appointed by the court. This
report was assailed by the petitioners as null and void in
a motion to strike out the report from the records of the
case.
The reasons stated in the order of execution
pending appeal are not well founded. The first reason
stated in the order was the consistent refusal of
petitioner to deliver the mortgaged chattels to the
receiver. The records disclose that respondent Davao
Lumber Company is not even entitled to the appointment
of a receiver.
It is an established rule that the applicant for
receivership must have an actual and existing
interest in the property for which a receiver is
sought to be appointed. The Davao Lumber
Company's proof of interest in the property is the deed of
chattel mortgage executed by Urbano Jaca in favor of
the Davao Lumber Company on January 24, 1961. This
deed of chattel mortgage is void because it provides
that the security stated therein is for the payment of
any and all obligations herein before contracted and
which may hereafter be contracted by the Mortgagor
in favor of the Mortgagee.
In the case of Belgian Catholic Missionaries vs.
Magallanes Press this Court held that a mortgage that
contains a stipulation in regard to future advances in the
credit will take effect only from the date the same are
made and not from the date of the mortgage. Where the
statute provides that the parties to a chattel
mortgage must make oath that the debt is a just
debt, honestly due and owing from the mortgagor to
the mortgagee, it is obvious that a valid mortgage
cannot be made to secure a debt to be thereafter
contracted.
The second reason stated was the fact that
petitioner Urbano Jaca violated Article 319 of the
Revised Penal Code by selling to a certain Teodoro
Alagon some of the mortgaged properties. As
already discussed, the deed of chattel mortgage
executed by Urbano Jaca in favor of the Davao
Lumber Company is void. Hence, petitioner Urbano
Jaca could not have violated Article 319 of the Revised
Penal Code. Moreover, the respondent Davao Lumber
Company has not successfully refuted the allegation of
the petitioners that the sale of the wrecker to Teodoro
Alagon, was exclusively negotiated by the lumber
company's managing partner, Tian Se, and that the
latter caused Urbano Jaca to sign the deed of sale
because he was the owner of the wrecker.
The third reason stated is the fact that
petitioners have no properties and assets to satisfy
the judgment. The basis of respondent judge's
conclusion that petitioners do not have sufficient assets
is an unsubstantiated allegation in the motion for
execution pending appeal of respondent lumber
company.
iii. Formalities & Registration
Lilius v. Manila Railroad Co., 62 Phil
56
DOCTRINE:
· Under section 5 of Act No. 1507, as amended by Act
No. 2496, a chattel mortgage does not have to be
acknowledged before a notary public. But as against
creditors and subsequent encumbrancers, the law does
require an affidavit of good faith appended to the
mortgage and recorded with it.
· A chattel mortgage may be valid as between the
parties without an affidavit of good faith. As between the
parties and as to third persons who have no rights
against the mortgagor, no affidavit of good faith is
necessary.
FACTS:
1. In 1931, Aleko Lilius, his wife, and daughter,
were driving to Laguna when their car collided with a
locomotive of the Manila Railroad Company (MRC).
Lilius filed an action for damages
2. Lilius’ creditors; BPI, Laura Lindley Shuman,
Manila Wine Merchants, and Manila Motor Co.
intervened.
3. Manila Motor Co. Inc. (MMC) supported its claim
by presenting a Certified Copy of Judgment, along
with a Certified Copy of the Writ of Execution and
Garnishment awarded to it from Civil Case No. 41159.
4. The judgment referred to a mortgage between
MMC and Lilius appearing in the evidence in the
case as Exhibit A, without mentioning the date of the
execution of that exhibit, and The alleged public
document of mortgage evidencing its claim was not
offered in evidence.
5. The lower court ruled that Manila Railroad was
guilty of negligence and thus awarded damages, and
fixed the degree of preference in the distribution of the
award.
6. Manila Motor appealed arguing that it should
have preference over the claims of other creditors as
against Lilius.
ISSUE:
 A. WON Manila Motor Co. Inc. has preference over
other creditors in the distribution of the judgment
award.
RULING:
A. No. MMC has no preference over other
creditors.
· Granting that a mortgage existed between the Manila
Motor Co., Inc., and Aleko Lilius, this does not warrant
the conclusion that the instrument evidencing that
mortgage is a public document entitled to preference.
Under section 5 of Act No. 1507, as amended by Act No.
2496, a chattel mortgage does not have to be
acknowledged before a notary public. As against
creditors and subsequent encumbrancers, the law
does require an affidavit of good faith appended to
the mortgage and recorded with it.
· A chattel mortgage may, however, be valid as
between the parties without such an affidavit of good
faith. In 11 Corpus Juris, 482, the rule is expressly stated
that as between the parties and as to third persons
who have no rights against the mortgagor, no
affidavit of good faith is necessary. It will thus be
seen that under the law, a valid mortgage may exist
between the parties without its being evidenced by a
public document.
· If the Manila Motor Co., Inc., desired to rely upon a
public document in the form of a mortgage as
establishing its preference in this case, it should have
offered that document in evidence, so that the court
might satisfy itself as to its nature and
unquestionably fix the date of its execution. There is
nothing either in the judgment relied upon or in the
evidence to show the date of said mortgage. The burden
was upon the claimant to prove that it actually had a
public instrument within the meaning of article 1924 of
the Civil Code. It is essential that the nature and the date
of the document be established by competent evidence
before the court can allow a preference as against the
other parties to this proceeding.
Northern Motors, Inc. v. Coquia, 68
SCRA 374
Facts:
1.Northern Motors, Inc. has chattel mortgages over
several taxicabs owned by Manila Yellow Taxicab, Inc.
and foreclosed on these chattel mortgages.
2. On the other hand, Honesto Ong, is an assignee of an
unsecured judgment creditor of Manila Yellow Taxicab,
Inc. and was able to levy on the taxicabs.
3.Northern Motors is claiming to have a superior lien
over Honesto Ong.
4.The Supreme Court decided in favor of Northern
Motors; hence, motion for reconsideration.
Issues:
1. Whether or not a chattel mortgage lien is superior to
an execution levy.
2. Whether or not registration of a chattel mortgage is an
effective and binding notice to a judgment creditor.
Ruling:
1. YES. Ong had no right to levy upon the mortgaged
taxicabs and that he could have levied only upon the
mortgagor's equity of redemption. The essence of the
chattel mortgage is that the mortgaged chattels
should answer for the mortgage credit and not for
the judgment credit of the mortgagor's unsecured
creditor. The mortgagee is not obligated to file an
"independent action" for the enforcement of his credit.
To require him to do so would be a nullification of his lien
and would defeat the purpose of the chattel mortgage
which is to give him preference over the mortgaged
chattels for the satisfaction of his credit. (See art. 2087,
Civil Code).
2. YES. Honesto Ong's theory that Manila Yellow
Taxicab's breach of the chattel mortgage should not
affect him because he is not privy of such contract is
untenable. The registration of the chattel mortgage is
an effective and binding notice to him of its
existence.The mortgage creates a real right (derecho
real, jus in re or jus ad rem, XI Enciclopedia Juridica
Española 294) or a lien which, being recorded, follows
the chattel wherever it goes.
Sison v. Yap Tico & Avancena, 37
Phil 584
Facts:
1. The plaintiffs Sison borrowed a sum of money
from Eugenio Kilayko, for which the plaintiffs
executed and delivered a chattel mortgage
covering machinery, crops and a number of
carabaos.
 2. The plaintiff-mortgagors also agreed to deliver
crops to the bodega of the defendant Yap Tico
at the request of the mortgagee Kilayko.
3. Upon liquidation, there was still a debt in the
amount of PHP 650 due from the plaintiff-
mortgagors. The plaintiff-mortgagors delivered
the payment to Kilayko. The mortgage was then
cancelled.
4. Kilayko on an earlier date, however, assigned
the chattel mortgage to defendant Yap Tico.
Such assignment was duly registered, but
without notice to the plaintiff-mortgagors either
from Kilayko or from Yap Tico.
5. Yap Tico moved for the foreclosure of the
mortgage. The sheriff, despite notice from the
plaintiff-mortgagors that the mortgaged had
been paid and cancelled, attached and took
possession of the property.
Issue:
Whether or not the registration of the assignment of the
mortgage constitutes a valid notice to the mortgagor
Ruling:
NO. The law does not require such assignments to be
recorded. While such assignments may be recorded, the
law is permissible and not mandatory. The filing and
recording of an instrument in the office of the registrar,
when the law does not require such filing and recording,
does not constitute notice to the parties.
The debtor or party liable on contracts like the one in
question is not affected by the assignment until he has
notice thereof, and consequently he may set up against
the claim of the assignee any defense acquired before
notice that would avail him against the assignor had
there been no assignment, and payment by the debtor to
the assignor, or any compromise or release of the
assigned claim by the latter before notice will be valid
against the assignee and discharge the debtor.
Article 1527 of the Civil Code provides that a debtor
who, before having been informed of the assignment,
pays the creditor, shall be free from the obligation.
Thus, without being notified of such assignment, the
plaintiff-mortgagors in this case were free from the
obligation to the mortgagee or to the assignee.
Consequently, they can recover the property attached by
and in the hands of the sheriff.
Rubiso & Gelito v. Rivera, 37 Phil 72
Fausto Rubiso & Bonifacio Gelito vs. Florentino E.
Rivera, G.R. No. L-11407, October 30, 1917 (37 Phil
72)
FACTS:
Valentina, a pilot boat, belonged to Gelito & Co.,
Bonifacio Gelito being a copartner thereof to the extent
of two-thirds, and the Chinaman Sy Qui, to that of one-
third of the value of said vessel.
Bonifacio Gelito sold his share to his copartner
Sy Qui, through an instrument which was registered in
the office of the Collector of Customs. Sy Qui, in turn,
sold the boat to Florentino Rivera through a deed
executed on January 4,1915 which was registered in the
Bureau of Customs on March 17, 1915.
A case was filed against Sy Qui by his creditor,
Fausto Rubiso, to enforce payment of a certain sum of
money. Rubiso acquired the vessel at an auction sale on
January 23, 1915, and the sale was recorded on
January 27, 1915.
So, the boat was twice sold: first privately by its
owner Sy Qui to the defendant Florentino E. Rivera on
January 4, 1915, and afterwards by the sheriff at public
auction in conformity with the order contained in the
judgment rendered by the justice of the peace court, on
January 23 of the same year, against the Chinaman Sy
Qui and in behalf of the plaintiff, Fausto Rubiso.
It is undeniable that the defendant Rivera
acquired by purchase the pilot boat Valentina on behalf
of the plaintiff Rubiso; but it is no less true that the sale
of the vessel by Sy Qui to Florentino E. Rivera, on
January 4, 1915, was entered in the customs registry
only on March 17, 1915, while its sale in public auction
to Fausto Rubiso on the 23rd of January of the same
year, 1915, was recorded in the office of the Collector of
Customs on the 27th of the same month, and in the
commercial registry on the 4th of March, following; that
is, the sale on behalf of the defendant Rivera was prior
to that made at public auction to Rubiso, but the
registration of this latter sale was prior by many days to
the sale made to the defendant.
The lower court judge ordered Rivera to give the
boat to Rubiso. Rivera appealed.
ISSUE:
WoN a prior registrant has better rights than a
prior buyer over a pilot boat.
HELD: Yes. Affirmed.
Article 573 of the Code of Commerce provides
that merchant vessels constitute property which may be
acquired and transferred by any of the means
recognized by law. The acquisition of a vessel must be
included in a written instrument, which shall not produce
any effect with regard to third persons if not recorded in
the commercial registry. So, inscription in the
commercial registry was indispensable, in order that said
acquisition might affect and produce consequences with
respect to third persons.
The requisite of registration on the registry, of
the purchase of a vessel, is necessary and
indispensable in order that the purchaser's rights may be
maintained against a claim filed by a third person. Such
registration is required both by the Code of Commerce
and by Act No. 1900. The amendment solely consisted
in charging the Insular Collector of Customs, as at
present, with the fulfillment of the duties of the
commercial register concerning the registering of
vessels; so that the registration of a bill of sale of a
vessel shall be made in the office of the Insular Collector
of Customs, who, since May 18, 1909, has been
performing the duties of the commercial register in place
of this latter official.
In view of said legal provisions, it is undeniable
that the defendant Florentino E. Rivera's rights cannot
prevail over those acquired by Fausto Rubiso in the
ownership of the pilot boat Valentina, inasmuch as,
though the latter's acquisition of the vessel at public
auction, on January 23, 1915, was subsequent to its
purchase by the defendant Rivera, nevertheless said
sale at public auction was antecedently record in the
office of the Collector of Customs, on January 27, and
entered in the commercial registry. — An unnecessary
proceeding -on March 4th; while the private and
voluntary purchase made by Rivera on a prior date was
not recorded in the office of the Collector of Customs
until many days afterwards, that is, not until March 17,
1915.
The legal rule set down in the Mercantile Code
subsists, inasmuch as the amendment solely refers to
the official who shall make the entry; but, with respect to
the rights of the two purchases, whichever of them first
registered his acquisition of the vessel in the one entitled
to enjoy the protection of the law, which considers him
the absolute owner of the purchased boat, an this latter
to be free of all encumbrance and all claims by strangers
for, pursuant to article 582 of the said code, after the bill
of the judicial sale at auction has been executed and
recorded in the commercial registry, all the other
liabilities of the vessel in favor of the creditors shall be
considered canceled.
The purchaser at public auction, Fausto Rubiso,
who was careful to record his acquisition, opportunely
and on prior date, has, according to the law, a better
right than the defendant Rivera who subsequently
recorded his purchase. The latter is a third person, who
was directly affected by the registration which the
plaintiff made of the acquisition.
Ships or vessels, whether moved by steam or by
sail, partake, to a certain extent, of the nature and
conditions of real property, on account of their value and
importance in the world commerce; and for this reason
the provisions of article 573 of the Code of Commerce
are nearly identical with article 1473 of the Civil Code.
Borlough v. Fortune Enterprise, Inc.,
100 Phil 1063
Olaf N. Borlough vs. Fortune Enterprises, Inc. &
CA,
G.R. No. L-9451, March 29,
1957 (100 Phil 1063)
Facts:
United Car Exchange sold to the Fortune
Enterprises, Inc. a Chevrolet car. The same car
was sold by the Fortune Enterprises,Inc. to
oneSalvador Aguinaldoon installments.To secure
the payment of this note, Aguinaldo executed a
deed of chattel mortgage over said car. The deed
was duly registered in the office of the Register of
Deeds of Manila. When Aguinaldo failed to
pay, a demand letter was sent to him.
It appears that the said car found its way
again to United Car Exchange which sold the car in
cash to Mr. Borlough. Borlough took possession of
the vehicle from the time he purchased it.
Fortune Enterprises, Inc. brought action
against Salvador Aguinaldo to recover the balance
of the purchase price. Borlough filed a third-party
complaint, claiming the vehicle. Thereupon,
Fortune Enterprises, Inc. amended its complaint,
including Borlough as a defendant and alleging
that he was in connivance with Salvador
Aguinaldo and was unlawfully hiding and
concealing the vehicle in order to evade seizure by
judicial process.
The vehicle was seized by the sheriff of
Manila on August 4, 1952 and was later sold at
public auction.
The Court of First Instance rendered
judgment in favor of Borlough, and against plaintiff,
ordering the latter to pay Borlough the sum of
P4,000, with interest at 6 per cent perannum, from
the date of the seizure of the car on August
4,
1952, and in addition thereto, attorney's fees in
the sum of P1,000.
The CA rendered judgment ordering that
Emil B. Fajardo pay Borlough P4,000 plus
attorney's fees and that plaintiff pay to Borlough
any amount received by it in excess of its credits
and judicial expenses. The reason for the
modification of the judgment is that the mortgage
was superior, being prior in point of time, to
whatever rights may have been acquired by
Borlough by reason of his possession and by the
registration of his title in the Motor Vehicles Office.
Issue: Whether the sale of a car subsequently
registered
with the Motor Vehicles Office coupled with
actual
HELD:
Yes. Affirmed
While the question can be resolved by the general
principles found in civil code and expressly stated ij
Article 559, there is no need of resorting need to in
view of the express provision of thr revised motor
vehicles law which specifically regulate the
registration , sale,transfer and mortgaged of motor
vehicles.
A mortgaged in order to affect the third persons
should not only be registered in the chattel registry
but same should also be registered in the motor
vehicles office as required by such law . And the
failure of the respondent mortgage to report the
mortgage executed in its favor had the effect of
makinh said mortgage ineffective agaibst borlough.
iv. Foreclosure
Esguerra v. CA, 173 SCRA 1
FACTS:
GA Machineries, Inc. (GAMI) sold a ford trader
truck to Hilario-Lagmay and Bonifacio Masilungan. The
right to the same was bought by Esguerra, assuming the
unpaid purchase price of P20,454. In doing so, Esguerra
executed a promissory note and a chattel mortgage over
the said truck in favor of GAMI.
Esguerra having defaulted in his obligation and
GAMI having granted his request for extension, a new
chattel mortgage and a promissory note were executed.
Esguerra failed to comply with the obligation, the
said truck was taken by GAMI’s agents while the same
was in possession of Esguerra’s driver, Carlito Padua.
Esguerra filed a complaint to recover the truck.
The court dismissed the complaint, CA affirmed the
decision but took exception at the failure of the GAMI to
sell the truck at public auction. Due to this failure,
Esguerra was awarded damages.

ISSUE:
WON the mortgagee-vendor of personal
property sold on the installment is legally obligated to
foreclose the chattel mortgage and sell the chattel
subject thereof at public auction in case the mortgagor-
vendee defaults in the payment of the agreed
instalments.
HELD:
Yes, the vendee has the option to foreclose the
mortgage either judicially or extrajudicially and in case of
foreclosure, it was agreed between the parties that the
vendor may take the property outside the municipality or
city where the vendor may sell the same.
The vendor’s taking of the chattel did not
amount to foreclosure of the mortgage but taking it
without proceeding to the sale of the chattel at a public
auction and appropriating the same as payment is
unlawful. Such automatic appropriation is null and void
under Article 2088 of the Civil Code.
GAMI can no longer cancel the sale since it
opted to foreclose the chattel mortgage. The remedies
of the vendor in case vendee defaults in contracts of
personal property payable in installments are
alternative and not cumulative. Should the vendee
default in the payment of two or more agreed
installments, the vendor either exacts fulfillment of the
obligation, cancel the sale, or foreclose the mortgage.
The exercise of one bar the exercise of the others.
PNB v. Manila Investment & Construction, Inc., 38
SCRA 462
Facts: A civil case was decided in the Court of First
Instance of Manila with a dispositive portion being that:
IN VIEW WHEREOF, judgment is rendered
condemning defendants, jointly and severally, to pay
plaintiff:
(1) Under the first cause of action the sum of
P88,939.48 with daily interest of P12,77385 plus 1/4%
commission or P194.6689 for every 30 days or a
fraction thereof, plus 10% on the principal as
attorney's fees and the cost;
(2) On the second cause of action the sum of
P356,913.01, plus P48,464 03 and 1/4% or P629.31
for every 30 days or fraction thereof that the amount
remain outstanding and unpaid plus 10% of the
principal as attorney's fees, and the cost.
*That in case of non-payment, the decision also
provided that properties covered by the chattel
mortgage be subject to sale on a public auction.
*After decision became executory, instead of
properties sold at public auction, the parties, however
agreed to have them sold at a private sale, net
proceeds obtained was used to partially satisfy the
previous judgment
*On August 11,1964, five years but less than ten
years from the date when decision became executory,
the Philippine National Bank filed in the same Court of
Instance of Manila an action to revive it.
*Defendants filed an answer admitting some
allegations of complaint and denying others.
*After the parties had submitted their respective
memorandum, the court rendered on August 30,
196,6 the appealed decision whose dispositive portion
reads as follows:
WHEREFORE, the Court renders judgment ordering
the defendants to pay the plaintiff, jointly and
severally, the amount of THREE HUNDRED EIGHTY
TWO THOUSAND THREE HUNDRED THIRTY
EIGHT AND 47/100 (P382,338.47) PESOS, with
interest at the legal rate from August 12, 1964 until
fully paid. Costs against the defendants.
*The defendants appealed to have the decision be
reversed, claiming, firstly, that the action instituted
below is not the proper remedy; secondly, that the
private sale of the mortgaged personal properties was
null and void, and lastly, that the appellee is not
entitled to a deficiency judgment.
ISSUE: Whether or not the private sale of the
mortgaged property was null and void.
HELD: NO. Private sale is VALID as both parties agreed
on the process, it is likewise true that said personal
properties were sold at a private sale by agreement
between the parties. Besides, We see nothing illegal,
immoral or against public order in such agreement
entered into freely and voluntarily. In line with the
provisions of the substantive law giving the
contracting parties full freedom to contract provided
their agreement is not contrary to law, morals, good
customs, public order or public policy (Article 1306,
Civil Code of the Philippines), We held in Philippine
National Bank vs. De Poli thus:
Under article 1255 of the Civil Code (Art. 1306 New
Civil Code), the contracting parties may stipulate that
in case of violation of the conditions of the mortgage
contract, the creditor may sell, at private sale and
without previous advertisement or notice, the whole or
part of the good mortgaged for the purpose of
applying the proceeds thereof on the payment of the
debt. Said stipulation is not contrary to law or public
order, and therefore it is valid. (Emphasis supplied).
As the disposition of the mortgaged personalities in a
private sale was by agreement between the parties, it
is clear that appellants are now in estoppel to
question it except on the ground of fraud or duress —
pleas that they do not invoke. They do not even claim
that the private sale agreed upon had caused them
substantial prejudice.
Cabral v. Evangelista, 28 SCRA 1000
Principle: The rights of a mortgage creditor over the
mortgaged properties are superior to those of a
subsequent attaching creditor.
Facts: George L. Tunaya had executed in favor of the
CABRALS a chattel mortgage covering a "MORRISON"
English piano, made in England, Concert model, and a
Frigidaire General Motors Electric Stove with four
burners and double oven, both items bearing serial
numbers, as security for payment to the plaintiffs-
mortgagees of a promissory note in the sum of
P1,000.00 executed on the same date, with stipulation of
interests and collections fees in case of default. The
chattel mortgage deed was duly inscribed in the Chattel
Mortgage Register of Rizal province.
Meanwhile, the Evangelista spouses, obtained a final
money judgment against defendant Tunaya and they
caused the levy of the personal properties of the latter
including the piano and stove. The properties levied
were sold in a public auction.
CABRALS filed a complaint against Tunaya and
Evangelista spouses.
City court rendered judgement in favor of the CABRALS
as against Tunaya, but dismissed the case as against
the Evangelistas. The CFI reversed such decision, and it
upheld the rights of plaintiffs-appellees as mortgage
creditors to the personal properties in question, holding
that defendants-appellants, "being subsequent judgment
creditors in another case, have only the right of
redemption."
Issue(s):
1. Whether a mortgagee’s action to sell
foreclosed mortgaged chattels after 30 days from
breach of contract is barred by prescription.
2. Whether a purchaser of mortgaged chattels
in an execution sale has a superior right over the
mortgagee.
3. Whether a judgment creditor who levies on
mortgaged properties can be held solidarily liable
with the mortgagor.
Held:
On the first issue, No. Supreme Court held that Sec
14 of the Chattel Mortgage Law (ActNo.1508) will
show that the 30-day period is the minimum period
after violation of the mortgage condition for the
mortgage creditor to cause the sale at public auction
of the mortgaged chattels, with at least 10-days-
notice to the mortgagor and posting of public notice
of the time, place & purpose of such sale. It is a
period of grace for the mortgagor, who has no right
of redemption after the sale is held, to discharge the
mortgage obligation. The prescription period for
recovery of movables for foreclosure purposes is 8
years, and here the Cabrals had timely filed their
action within 8months from the mortgage debtor’s
default.
On the second issue, No. The purchasers of
mortgaged chattels at the execution sale and the
delivery of the chattels to them with a certificate of
sale did not give them a superior right to the
chattels. The rules of court precisely provide that the
sale conveys to the purchaser all the right which the
debtor had in such property on the day the
execution or attachment was levied. The right of
those who so acquire said properties should not and
cannot be superior to that of the creditor who has in
his favor an instrument of mortgage executed with
the formalities of the law, in good faith, and without
the least indication of fraud.
On the third issue, Yes. Article 559 NCC which
provides that “If the possessor of a movable lost or
of which the owner has been unlawfully deprived,
has acquired it in good faith at a public sale, the
owner cannot obtain its return without reimbursing
the price therefore” has no application in this case
because the chattels were acquired subject to the
existing mortgage lien. The record shows that the
Evangelistas disposed of the mortgaged chattels to
other persons at a discounted rate and, therefore,
appropriated the same as if the chattels were of their
absolute ownership, in complete derogation of the
Cabral’s superior mortgage lien and indisregard of
the demand to them prior to the filing of the
complaint to pay or exercise the right of redemption.
The Evangelistas, by their act of disposing the
mortgaged chattels, whose value were admittedly
more than adequate to secure the mortgage
obligation, have thus practically nullified the
mortgagee’s superior right to foreclose the
mortgage and collect the amount due them.
Considering the long period that has elapsed when
the mortgagees tried to enforce their claim and the
Evanglista’s adamant resistance thereof and unjust
refusal to recognize the clearly superior right to the
chattels, which were admittedly disposed of without
lawful right to other unknown persons obviously to
defeat the mortgagee’s right over the same, justice
and equity justify the judgment holding the
Evangelistas solidarily liable for the amount due.
v. Redemption
Tizon v. Valdez & Morales, 48 Phil 910
vi. Replevin
BA Finance Corporation vs. CA & Roberto Reyes,
G.R. No. 102998, July 5, 1996 (258 SCRA 102)
Facts: The spouses Reynaldo and Florencia Manahan
executed a promissory note binding themselves to pay
Carmasters, Inc. the amount of P83,080. To secure
payment, the Manahan spouses executed a deed of
chattel mortgage over a motor vehicle, a Ford Cortina.
When the Manahans failed to pay, demand
letters were sent which went unheeded. A complaint
for replevin was filed praying for the recovery of the
vehicle with the alternative prayer for the payment of a
sum of money. A writ of replevin was issued. The
vehicle was found in the possession of Roberto Reyes
from whom it was seized. Summons could not be served
to the Manahans, so the lower court dismissed the
action for failure to prosecute. The order was recalled,
but summons still could not be served on the
Manahans. So, the trial court dismissed the case and
ordered that the vehicle be returned to Reyes. The CA
affirmed.
Issue: Whether a mortgagee can maintain an action for
replevin against a possessor of the object of a chattel
mortgage who is not a party to the mortgage, in the
absence of the mortgagor.
Held:No. Affirmed.
Ratio: Replevin, broadly understood, is both a form of
principal remedy and of a provisional relief. It may refer
either to the action itself, i.e., to regain the possession
of personal chattels being wrongfully detained from the
plaintiff by another, or to the provisional remedy that
would allow the plaintiff to retain the thing during the
pendency of the action and hold it pendente lite. The
action is primarily possessory in nature and generally
determines nothing more than the right of possession.
Replevin is so usually described as a mixed action, being
partly in rem and partly in personam. It is in rem insofar
as the recovery of specific property is concerned, and in
personam as regards to damages involved. As an
"action in rem," the gist of the replevin action is the
right of the plaintiff to obtain possession of specific
personal property by reason of his being the owner or
of his having a special interest therein. Consequently,
the person in possession of the property sought to be
replevied is ordinarily the proper and only necessary
party defendant, and the plaintiff is not required to so
join as defendants other persons claiming a right on the
property but not in possession thereof. Rule 60 of the
Rules of Court allows an application for the immediate
possession of the property but the plaintiff must show
that he has a good legal basis, i.e., a clear title thereto,
for seeking such interim possession.
Where the right of the plaintiff to the
possession of the specific property is so conceded or
evident, the action need only be maintained against him
who so possesses the property. In rem actio est per
quam rem nostram quae ab alio possidetur petimus, et
semper adversus eum est qui rem possidet. In Northern
Motors, Inc. vs. Herrera, there can be no question that
persons having a special right of property in the goods
the recovery of which is sought; such as a chattel
mortgagee, may maintain an action for replevin
therefor. Where the mortgage authorizes the
mortgagee to take possession of the property on
default, he may maintain an action to recover
possession of the mortgaged chattels from the
mortgagor or from any person in whose hands he may
find them. In effect then, the mortgagee, upon the
mortgagor's default, is constituted an attorney-in-fact
of the mortgagor enabling such mortgagee to act for
and in behalf of the owner. Accordingly, that the
defendant is not privy to the chattel mortgage should
be inconsequential. By the fact that the object of
replevin is traced to his possession, one properly can be
a defendant in an action for replevin. It is here assumed
that the plaintiffs right to possess the thing is not or
cannot be disputed.
A chattel mortgagee, unlike a pledgee, need not
be in, nor entitled to the possession of the property
unless and until the mortgagor defaults and the
mortgagee thereupon seeks to foreclose thereon. Since
the mortgagee's right of possession is conditioned upon
the actual fact of default which itself may be
controverted, the inclusion of other parties like the
debtor or the mortgagor himself, may be required in
order to allow a full and conclusive determination of the
case. When the mortgagee seeks a replevin in order to
effect the eventual foreclosure of the mortgage, it is not
only the existence of, but also the mortgagor's default
on, the chattel mortgage that, among other things, can
properly uphold the right to replevy the property. The
burden to establish a valid justification for that action
lies with the plaintiff. An adverse possessor, who is not
the mortgagor, cannot just be deprived of his
possession, let alone be bound by the terms of the
chattel mortgage contract, simply because the
mortgagee brings up an action for replevin.
vii. Effect of Separate Action
Movido v. Rehabilitation Finance Corp., 105 Phil 886
Facts: Vet Bros. & Company, Inc. mortgaged to Jose S.
Movido its rights, title, interest and participation in a
complete sawmill with all its machineries, tools and
equipment in good running condition to secure the
payment of a loan of P15,000. The chattel mortgage
was registered in the Office of the Register of Deeds.
Movido brought an action against Vet Bros. & Company,
Inc. to recover a sum of money and the parties, assisted
by their respective counsel, entered into and submitted
to the Court a compromise agreement terminating their
dispute and renouncing their respective claims for
damages and any other claim in connection with the
subject matter of the case which was approved and
the Court rendered judgment in accordance
therewith.
By an instrument duly executed, Vet Bros. & Company,
Inc. and the spouses Toribio mortgaged the real estate
and chattels therein enumerated and described in favor
of the Rehabilitation Finance Corporation to secure the
payment of a loan of P46,000. When Vet Bros. &
Company, Inc. failed to pay, Rehabilitation Finance
Corp. moved for the sale of the properties in a public
auction. Movido filed with the Sheriff a third party claim
on the chattels advertised for sale at public auction
asserting a prior and superior right in them because of
his chattel mortgage recorded before that of the
Rehabilitation Finance Corporation and by virtue of a
judgment in his favor rendered by the lower court.
Despite such claim, the Sheriff proceeded to carry out
the sale and after the sale had been successively
postponed, sold the chattels, except those expressly
excluded from the public auction sale, to the
successful bidders.
Movido filed an action against RFC for having unlawfully,
fraudulently and maliciously disregarded his third
party claim on the chattels. The court rendered
judgment holding that the compromise agreement
entered into by and between the parties in the civil case
and the judgment rendered by the Court pursuant
thereto novated the plaintiff's credit secured by the
chattel mortgage, and that when the Vet Bros. Company,
Inc. and the spouses Simeon G. Toribio and Maximiana
Escobar de Toribio mortgaged to the RFC, the plaintiff's
lien on the chattels no longer existed. The court
dismissed the case.
Issue: Whether a prior mortgagee who obtains a
personal judgment against the mortgagor waives his
right to enforce the mortgage securing the loan.
Held: Yes. Affirmed.
Ratio: A mortgagee who sues and obtains a personal
judgment against a mortgagor upon his credit waives
thereby his right to enforce the mortgage securing it. By
instituting the civil case and by securing a judgment in
his favor upon the compromise agreement, the appellant
abandoned his mortgage lien on the chattels in question.
The rule in Tizon vs. Valdez, 48 Phil., 910 and Matienzo
vs. San Jose, G. R. No. 39510, 16 June 1934, relied
upon by the appellants, has been abandoned in
Bachrach Motor Company vs. Icarangal (68 Phil 287).
Moreover, the appellant secured a writ of execution of
the judgment rendered in the civil case on 26 June 1953
only or fifteen days after the public auction sale had
been carried out.
viii. Recovery of Deficiency
Bicol Savings & Loan Assoc. v. Guinhawa, 188
SCRA 642
Facts: Victorio Depositario together with private
respondent Jaime Guinhawa,acting as solidary comaker,
took a loan from petitioner Bicol Savings and Loan
Association (BISLA).
To secure the payment of the foregoing loan
obligation, the principal borrower Victorio Depositario put
up as security a chattel mortgage which was a Yamaha
Motorcycle. Said motorcycle was eventually foreclosed
by reason of the failure of Depositario and Guinhawa to
pay the loan.
As a result of the foreclosure,there was a
deficiency in the amount of P5,158.06 as of July
31,1981, and BISLA made a demand to pay the same.
BISLA filed a complaint for the recovery of a sum of
money constituting the deficiency after foreclosure of the
chattel mortgage.
The City Court ruled for BISLA.
The CFI reversed.
Issue: Whether a creditor can collect the deficiency
Amount after foreclosure of the chattel mortgage.
Held: Yes. Reversed.
Ratio: If in an extrajudicial foreclosure of a chattel
Mortgage a deficiency exists, an independent civil action
may be instituted for the recovery of said deficiency.
If the mortgagee has foreclosed the mortgage
judicially, he may ask for the execution of the judgment
against any other property of the mortgagor for the
payment of the balance. To deny to the mortgagee the
right to maintain an action to recover the deficiency after
foreclosure of the chattel mortgage would be to overlook
the fact that the chattel mortgage is only given as
security and not as payment for the debt in case Of
failure of payment.(Bank of the Philippine Islands v.
Supply Co.v.Tamaraw Plantation Co.,47Phil.513.)
The case of Pascual, as cited by the
Respondent court,is not applicable in this instant case
because it was a case of sale on installment,where after
foreclosure of the units the plaintiffs-guarantors who had
likewise executed a real estate mortgage of up to
P50,000,cannot be held answerable anymore for the
Deficiency.
The conclusion therefore reached by the Lower
court was erroneous because in the case at Bar,the
obligation contracted by the principal debtor
(Depositario) with a Solidary co-maker (private
respondent therein), was one Of loan secured by a
chattel mortgage,executed by the Principal debtor,and
not a sale where the price is Payable on installments
and where a chattel mortgage on the thing sold was
constituted by the buyer and, further, the obligation to
pay the installments having been guaranteed by another.

Pascual v. Universal Motors, Inc., 61

SCRA 121

b. Pledge
i. Requirements
Betita v. Ganzon, 49 Phil 87

Yuliongsui v. PNB, 22 SCRRA 585

Mision de San Vicente v. Reyes, 19

Phil 524

Bachrach Motor Co. v. Lacson

Ledesma, 64 Phil 681

Ocejo, Perez & Co. v. International

Bank, 37 Phil 631

ii. Subject Matter

Pac. Com. Co. v. PNB, 49 Phil 236
FACTS:
1. At Davao, Gulf Plantation Company, through its
president, executed to PNB a certain instrument, in
which the Plantation Company is named and styled
as the pledgor, and the PNB as the pledgee, in which
it is recited that the Gulf Plantation Company has
obtained certain credits, loans, overdrafts, etc., from the
pledgee.
2. The said pledge was in consideration over public
land, buildings, hemp, carabaos, and boats. The pledgor
agreed without demand to pledge and deliver to the
pledgee any further and additional securities required,
and to pay the taxes and keep the property insured.
That, if the pledgor shall pay to the pledgee such
sums of money as the pledgee, may advance under
the terms of the pledge, then the pledged property
may be turned to the pledgor, and "this pledge shall
be of no further, otherwise, to remain in force, and
the pledgee may dispose of the pledged property in
the manner herein provided, or in accordance with
the Chattel Mortgage Law, at the option of the
pledgee."
3. The pledgor appoints the pledgee as attorney-in-
fact of the pledgor with full power and authority after any
condition of the pledge may have been broken to enter
the premises where the pledged property is located, and
take possession of it by force, if necessary, and seize
and take actual possession of it without an order of the
court, and to sell, assign and deliver the property
pledged, or any part thereof, at the option of the
pledgee. Provision is then made for the application of the
proceeds of any sale of the property under the pledge.
The instrument was duly executed and
acknowledged before a notary public as of the date
it was signed (became a public instrument).
4. An insolvency petition was filed to have the
Gulf Plantation Company declared insolvent, and it
was declared insolvent. The court ordered the sheriff
to take possession of all the assets of the insolvent
estate. The assignee in insolvency filed a petition for
authority to sell at public auction all the properties of the
insolvent estate. The PNB also filed a petition to seek
enforcement of the pledge in its favor.
Lower court: ruled in favor of PNB
ISSUES:
1. WON a pledge is effective even though the
pledgee had no possession over the thing pledged.
2. WON immovables can be the subject of pledge.
3. WON the pledge covers the increase in quantity
of the thing pledged.
RULING: Reversed the decision of the lower court.
1. No. Upon the question of pledge, article 1863 of
the Civil Code provides:
In addition to the requisites mentioned in article
1857, it shall be necessary, in order to constitute the
contract of pledge, that the pledge, be placed in the
possession of the creditor or, of a third person appointed
by common consent.
Section 4 of Act No. 1508, entitled "an Act
providing for the mortgaging of personal property, and
for the registration of the mortgages so executed,"
provides:
A chattel mortgage shall not be valid against any
person except the mortgagor, his executors or
administrators, unless the possession of the property is
delivered to and retained by the mortgagee or unless the
mortgage is recorded in the office of the register of
deeds of the province in which the mortgagor resides at
the time of making the same, or, if he resides without the
Philippine Islands, in the province in which the property
is situated.
That is to say, a chattel mortgage is not valid
against any person except the mortgagor, his executors
or administrators, without delivery of possession of the
property, unless the mortgage is recorded in the office of
the register of deeds of the province. It will be noted that,
in the absence of such delivery of possession on the
recording of the instrument in the office of the register of
deeds, a chattel mortgages is valid only as to the
mortgagor, his executors or administrators. Hence, it
follows that, in the absence of such record and the
delivery of possession a chattel mortgage is void as
against the creditors or the assignee of an insolvent
estate, and upon that question, there is no evidence in
the record.
2. No. Again, in the every nature of things, a
pledge or chattel mortgage is confined and limited to
personal property, and it cannot be extended or made to
apply to real property.
3. No. It will also be noted that the pledge was
executed in 1918, and it is very probable that the one
thousand piculs of hemp have long since been sold. As
to the twenty-three carabaos, thirty-eight bullocks and
eighteen horses, there is no provision for the increase.
Hence, the pledge, if valid for any purpose, should be
confined and limited to the particular property described
in the pledge, and would not include any increase.
iii. Alienation by pledgor or owner
Estate of Litton v. Mendoza, 163
SCRA 246
iv. Right of Retention
Serrano v. CA, 196 SCRA 107
v. Duties and Obligations
Cruz & Serrano v. Chua A.H. Lee, 54
Phil 10
vi. Extinguishment
Tan Chun Tic v. West Coast Life Ins.
Co., 54 Phil 361
Facts: On September 16, 1925, the West Coast Life
Insurance Company filed a complaint against Go Chulian,
Julio Gonzaga, and Francisco Sanchez in the Court of First
Instance of Manila for the recovery from them of the sum
of P24,000. On the same day, the West Coast Life Insurance
Company obtained from the court a writ of preliminary
attachment by virtue of which the provincial sheriff of
Occidental Negros attached two parcels of land described
in the transfer certificates of title Nos. 3220 and 1263 in
the name of Go Chulian. The attachment was duly recorded
in the registry of deeds of Occidental Negros and
annotated on the back of the proper certificates on the
same date, September 21, 1925.
On September 15, 1925, Go Chulian executed a mortgage
on the two parcels in question in favor of Genoveva
Gamboa de Jayme, in order to secure the payment of a loan
of P4,200. According to said document, the mortgage, upon
maturity the mortgagor shall be unable to satisfy the
amount owed, he will authorize the mortgagee to take over
the aforesaid parcels of land, and to dispose of them after
the sugar-cane crop has been harvested, the ownership of
the aforesaid lots being thus transferred to the mortgagee
who shall then be the owner thereof in fee simple,
dispensing with expensive lawsuits."
On the date which the mortgage fell due, Genoveva de
Jayme assigned and transferred her rights and actions in
the mortgage contract to Tan Chun Tic. Tan Chun Tic
presented to the registrar of deeds of Occidental Negros an
affidavit wherein he stated that the period granted to the
debtor in the said mortgage had already elapsed without
payment of its value. The registrar of deeds then cancelled
the certificates of title in the name of Go Chulian, and in
lieu thereof issued others in the name of Tan Chun Tic, but
preserved the annotation of the preliminary attachment in
favor of the West Coast Life Insurance Company.
Tan Chun Tic filed a complaint seeking the annulment and
cancellation of the preliminary attachment levied by the
provincial sheriff of Occidental Negros and West Coast Life
Insurance Company upon the said properties. The trial
court rendered judgment holding that lots Nos. 64 and 662
belong in fee simple Tan Chun Tic, and by virtue thereof
ordered that their respective transfer certificates of title be
cancelled, and that the annotation of the preliminary
attachment of said lots be stricken therefrom, with costs
against the defendant.
West Coast Life Insurance Company appealed from the
judgment. It alleges that the stipulation in the mortgage,
whereby the lands mortgaged shall become the property of
the creditor-mortgagee in the event of the nonpayment of
the debt within the term fixed, is a pactum commissorium
and therefore null and void under articles 1859 and 1884
of the Civil Code."
Issue: (1) Whether or not a stipulation in the mortgage,
whereby the lands mortgaged shall become the property of
the creditor-mortgagee in the event of the nonpayment of
the debt within the term fixed, a pactum commissorium, is
null and void. (Yes)
(2) Whether or not a creditor can appropriate the
things given by way of mortgage or dispose of them. (No)
Ruling: (1) Yes. Under Article 1859 of the Civil Code the
creditor may not appropriate to himself the things given in
pledge or mortgage, or dispose of them and Art. 1884. The
non-payment of the debt within the term agreed upon
does not vest the ownership of the property in the
creditor. Any stipulation to the contrary shall be void. But
in such case the creditor may demand, in the manner
prescribed by the Law of Civil Procedure, the payment of
the debt or the sale of the realty."
(2) No. The pactum commissorium, that is, the additional
stipulation to a contract of loan, whereby the thing pledged
shall become the property of the creditor in the event of
the non-payment of the debt within the term fixed, is void.
The creditor has no right to appropriate the chattels and
effects pledged, or to make payment to himself and by
himself of his credit with the value thereof, for he is only
allowed to collect the debt out of the proceeds of the sale
of the effects and chattels pledged. And with regard to the
pledge, neither can the creditor appropriate the thing
pledged, even if it be so stipulated, because in that case,
such an agreement would be immoral, illicit, and contrary
to law.
What the law forbids is the appropriation or disposition of
the mortgaged property by the mortgagee, and that if the
debtor may legally sell to his creditor the mortgaged
property for such price and subject to such conditions as
he may deem fit, there is no reason whatsoever why he
should not be able in like manner to make a promise to
sell. That is to say, that if said parties agree in the mortgage
deed upon the sale, or mere promise to sell, of the
property mortgaged to the creditor, should the obligation
secured by it not be complied with in time, stipulating the
conditions of the alienation, the latter may be effectuated
without any juridical objection upon the mere default in
the payment, without the necessity of a prior auction sale,
or any other requisite or formality.
However, if instead of agreeing upon the alienation the
agreement merely states that upon non-fulfillment of the
obligation secured by the mortgage, the mortgagee may,
when the mortgage falls due, sell the encumbered
property, then the provisions of the law for the sale of the
thing pledged, as given in the article under consideration,
must be observed. But the doctrines which recognize the
right of owners of mortgaged property to transmit freely
the ownership thereof to the mortgagee in payment of his
credit, are not applicable to the case at bar, where the
additional stipulation in question is entirely different from
that which the judge took into consideration as the ground
of the judgment appealed from. This being so, it is held that
the court below erred in upholding the validity of the
additional stipulation in question, and in ordering the
cancellation of the annotation of the preliminary
attachment upon said lots in favor of the defendant West
Coast Life Insurance Company.
Manila Surety & Fidelity Co, inc. v.
Velayo, 21 SCRA 515
FACTS:
1. In 1953, Manila Surety & Fidelity Co., upon request
of Rodolfo Velayo, executed a bond for P2,800.00
for the dissolution of a writ of attachment obtained
by one Jovita Granados in a suit against Rodolfo
Velayo in the Court of First Instance of Manila.
2. Velayo undertook to pay the surety company an
annual premium of P112.00 to indemnify the
Company for any damage and loss of whatsoever
kind and nature that it may suffer.
3. As "collateral security and by way of pledge" Velayo
also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with
power to sell the same in case the surety paid or
become obligated to pay any amount of money in
connection with said bond, applying the proceeds
to the payment of any amounts it paid or will be
liable to pay.
4. Judgment having been rendered in favor of Jovita
Granados and against Rodolfo Velayo, and
execution having been returned unsatisfied, the
surety company was forced to pay P2,800.00
5. Upon Velayo’s failure to pay, the surety caused the
pledged jewelry to be sold, realizing therefrom a net
product of P235.00 only.
6. Thereafter and upon Velayo's failure to pay the
balance, the surety company brought suit in the
Municipal Court. However, Velayo countered with a
claim that the sale of the pledged jewelry
extinguished any further liability on his part under
Article 2115 of the New Civil Code, which states:
“The sale of the thing pledged shall
extinguish the principal obligation, whether
or not the proceeds of the sale are equal to
the amount of the principal obligation,
interest and expenses in a proper case. If
the price of the sale is more than said
amount, the debtor shall not be entitled to
the excess, unless it is otherwise agreed. If
the price of the sale is less, neither shall the
creditor be entitled to recover the deficiency,
notwithstanding any stipulation to the
contrary.”
7. The Municipal Court decided against Velayo. On
appeal, the CFI Manila affirmed the Municipal
Court’s decision, stating that the pieces of jewelry
delivered to the surety company was merely an
added protection. There was no understanding that,
should the same be sold at public auction and the
value thereof should be short of the undertaking,
 the defendant would have no further liability to the
plaintiff. The status of the pledge is nothing more
nor less than that of a mortgage given as a
collateral for the principal obligation in which the
creditor is entitled to a deficiency judgment for the
balance should the collateral not command the
price equal to the undertaking.
ISSUE: Whether or not the sale of the pledged
jewelry extinguished the liability of Velayo.
RULING: YES.
Article 2115, in its last portion, clearly
establishes that the extinction of the principal obligation
supervenes by operation of imperative law that the
parties cannot override:
“If the price of the sale is less, neither shall the creditor
be entitled to recover the deficiency notwithstanding any
stipulation to the contrary.”
The provision is clear and unmistakable, and its
effect can not be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation, the
creditor has waived any other remedy, and must abide
by the results of the sale. No deficiency is recoverable.
viii. Pledges by operation of law
III. Preference and Concurrence of Credits
A. Classification of Credits
Uy v. Zamora, 13 SCRA 508
Zosimo D. Uy vs. Jose R. Zamora, The Allied
Finance, Inc., G.R. No. L-19482, March 31, 1965 (13
SCRA 508)
FACTS:
Uy had a motor vehicle of Zamora attached in
court. The writ of attachment was levied on the vehicle
on August 11, 1960. Subsequently, the Municipal Court
rendered judgment for Uy. Zamora appealed.
While the case was thus pending appeal, the
Allied Finance, Inc. sought and was allowed to intervene.
According to the intervenor, the motor vehicle, which
was attached by the Sheriff, had previously been
mortgaged to it by defendant Zamora to secure the
payment of a loan of P3,060 and that at the time of the
filing of the complaint in intervention on December 19,
1960 there remained a balance of P2,451.93 in its favor.
Meanwhile, Uy and Zamora submitted to the
court a compromise agreement wherein Zamora
admitted being indebted to Uy. Since the motor vehicle
had already been sold on order of the Court for P2,500
to prevent depreciation, defendant Zamora agreed to
have plaintiff Uy's credit paid out of the proceeds of the
sale.
The court found Zamora liable to both Uy and
Allied Finance, Inc. Since the proceeds of the sale of the
vehicle was not enough to cover the two debts, there is
now a controversy on who has preference.
In resolving the issue, the lower court held that
intervenor's claim could not be considered specially
preferred credit under Article 2241(4) of the Civil Code
because an unregistered chattel mortgage is void.
However, the court held that the same could be
considered a credit appearing in a public instrument
under Article 2244(14) so that it could be considered
preferred over plaintiff's attachment lien because of
priority of its date. Uy appealed.
ISSUE:
Whether an unregistered chattel mortgage credit
is preferred to an attachment lien.
HELD: NO.
Considering the fact that the intervenor Allied
Finance, Inc. registered its mortgage only on August 24,
1960, or subsequent to the date of the writ of attachment
obtained by plaintiff Uy on August 11, 1960, the credit
of the intervenor cannot prevail over that of the
plaintiff.
The lower court upheld intervenor's credit on the
ground that, being embodied in a public instrument of an
earlier date (June 20, 1960), it should take precedence
over plaintiff's lien by attachment (August 11, 1960),
pursuant to Article 2244 of the Civil Code. This is
untenable, for the reason that, as already stated, the
credit of the intervenor cannot be considered as
preferred until the same has been recorded in the
Motor Vehicles Office.
Thus, in Borlough v. Fortune Enterprises, Inc.,
53 O.G. 4070, it was held that a mortgage of motor
vehicles, in order to affect third persons, should not
only be registered in the Chattel Mortgage Registry,
but the same should also be recorded in the Motor
Vehicles Office (now the Land Transportation
Commission), as required in Section 5 (e) of the then
Revised Motor Vehicles Law.
There is no doubt that with respect to defendant
Zamora and the intervenor Allied Finance, Inc., plaintiff
Uy is a third person. We, therefore, hold that plaintiff's
credit should first be paid.
B. Concurrence of Credits
Carried Lumber Co. v. ACCFA, 63 SCRA 411
Carried Lumber Company vs. Agricultural Credit &
Cooperative Financing Administration (ACCFA), G.R.
No. L-21836, April 22, 1975 (63 SCRA 411)
FACTS:
Sta Barbara Farmer’s Cooperative Marketing
Association, Inc. (Facoma) purchased on credit from
Carried Lumber Company lumber and materials which
were used in the construction of Facom’s warehouse.
The company extended credit to the Facoma after
having been informed by the ACCFA’s General Manager
in a telegram that a loan had been approved for the
construction of the Facoma’s warehouse.
Facoma made partial payments to Carried
Lumber Company, but was unable to pay the balance.
The company sued Facoma. In a decision dated
September 26, 1960, based on compromise, the lower
court ordered Facoma to make monthly installment
payments to the company and the failure to pay any
installment will render the whole unpaid balance due.
Since Facoma failed to make the installments, the
company enforced the judgment and levied upon the
Facoma’s lease rights, warehouse and ricemill building.
ACCFA filed a 3rd party claim with the sheriff on
the ground that the properties had already been sold to
ACCFA on November 6, 1960. Facoma was granted by
ACCFA a loan for the construction of a warehouse. As
security for that loan, Facoma mortgaged to ACCFA its
lease rights over the land and the warehouse to be
constructed. This mortgage was recorded. When
Facoma defaulted, ACCFA extrajudicially foreclosed on
the properties and came out as the highest bidder.
The sheriff, nevertheless, proceeded with the
auction sale and the company came out as the highest
bidder. A certificate of sale was issued. Since no
redemption was made, a final deed of sale was issued.
The company sued ACCFA for the purpose of
asserting its preferential lien. ACCFA raised the defense
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 ACCFA’s
mortgage lien.
ISSUE:
Whether preferred credits on a specific
immovable property should be satisfied pro rata and
should be considered as concurrent? (YES)
Whether an insolvency proceeding is required in order to
have a concurrence of credit? (NO)
HELD:
The lower court was mistaken in assuming that
the enumeration of 10 claims, mortgages and liens in
Art. 2242 creates an order of preference. It is not correct
to say that the materialman’s lien or refectionary credit of
the lumber company being listed as No. 4 in Art. 2242 is
superior to ACCFA’s mortgage credit which is listed as
No. 5. The enumeration is not in order of preference.
The article lists the credits which may concur with
respect to specific real properties and which would be
satisfied pro rata according to Art. 2249.
The lumber company has no lien on the ricemill
building as the lien is only on the warehouse.
There is no necessity of initiating a liquidation or
insolvency proceeding in this case in order to assert a
pro rata satisfaction of the debt. In this case, there are
no other creditors aside from the lumber company and
ACCFA.
De Barretto v. Villanueva, 1 SCRA 288
Magdalena C. De Barreto, et al. vs. Jose G.
Villanueva, et al., G.R. No. L-14938, January 28, 1961
(1 SCRA 288)

FACTS:
Rosario Cruzado, for herself and as
administratrix of the intestate estate of her deceased
husband Pedro Cruzado, obtained from Rehabilitation
Finance Corporation (RFC) an P11,000 loan which was
secured by a parcel of land owned by the spouses.
When she failed to pay installments on the loan, the
mortgage was foreclosed and the RFC acquired the
property. Upon application, the land was sold back to
Rosario conditionally for an amount payable in 7 years.
2 years later, Rosario was authorized by the
court to sell the land with the previous consent of RFC.
Pursuant to such authority and consent, Rosario sold the
land to Pura L. Villanueva with the condition that the
latter will now assume the obligation owed to RFC. Pura
made partial payments and was able to secure the land
title in her name. She then mortgaged the property to
Magdalena C. Barretto as security for a loan.
Pura failed to pay the remaining installments on
the unpaid balance for the sale of the property. A
complaint for recovery of the same was filed with a levy
in attachment upon the property in favor of the vendor
(Rosario Cruzado).
After trial, the court ruled for the vendor. Pura
also failed to pay Magdalena Baretto. An action for
foreclosure of mortgage impleading the Cruzados was
filed. A decision was promulgated against Pura. The
court ordered the issuance of a writ of execution.
The Cruzados filed their Vendor’s lien over the
property, and the court gave due course to the lien and
ordered its annotation. The court also decreed that
should the realty be sold at public auction, the Cruzados
shall be credited with their pro-rata share in the
proceeds. At the sale, the Barrettos were able to buy the
property. The Barrettos sought reconsideration of the
order of the court giving due course to the lien of the
Cruzados which the court denied. They appealed on this
issue.
ISSUE:
Whether an unregistered vendor’s lien shall be
satisfied pro-rata together with a mortgage lien.
HELD: Initially Yes, but SC reversed its decision
upon Motion for Reconsideration - NO.
Art. 2242 NCC enumerates the claims that
constitute as encumbrance on specific immovable
property and lists as No. (2) the vendor’s lien and as No.
(5) the mortgage lien. Art. 2249 provides that if there are
2 or more credits with respect to the same specific real
property or real rights, they shall be satisfied pro-rata.
The law 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. Section 70 of the Land
Registration Act itself respects without reserve or
qualification the paramount rights of lien holders on real
property.
As to the point made that the articles of the Civil
Code on concurrence and preference of credits are
applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we
are to interpret this portion of the Code as intended only
for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits
would be left without any rules to govern them, and it
would render purposeless the special laws on
insolvency.
Ratio of MFR: Under the system of the Civil Code, only
taxes enjoy an absolute preference. All the remaining
classes of preferred creditors under Art. 2242 enjoy no
priority among themselves, but must be paid pro rata,
i.e. in proportion to the amount of the respective credits.
But in order to make this prorating fully effective, the
preferred creditors must necessarily be convened, and
the import of their claims ascertained. It is thus apparent
that the full application of Art. 2249 and 2242 demands
that there must be first some proceeding where the
claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of
decedent’s estate, or other liquidation proceedings of
similar import. This explains the rule of Art. 2243 NCC
that the claims or credits enumerated shall be
considered as mortgages or pledges of real or personal
property or liens within the purview of legal provisions
governing insolvency.
Thus, it becomes evident that one preferred
creditor’s 3 rd party claim to the proceeds of a
foreclosure sale is not the proceeding contemplated by
law for the enforcement of preferences under Art. 2242,
unless the claimant was enforcing a credit for taxes that
enjoys absolute priority. If none of the claims is for taxes,
a dispute between 2 creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise
enjoying preference under Article 2242 cannot be
ascertained.
In the absence of insolvency proceedings,
the conflict between the parties now before us must
be decided pursuant to the well established principle
concerning registered lands; that a purchaser in
good faith and for value takes registered property
free from liens and encumbrances other than
statutory liens and those recorded in the certificate
of title.
There being no insolvency or liquidation, the
claim of the unpaid vendor did not acquire the character
and rank of a statutory lien co-equal to the mortgagee’s
recorded encumbrance, and must remain subordinate to
the latter. The court is understandably loathed to adopt a
rule that would undermine the faith and credit to be
accorded to registered Torrens titles and nullify the
beneficent objectives sought to be obtained by the Land
Registration Act.
No argument is needed to stress that if a
person dealing with registered land were to be held
to take in every instance subject to all 14 preferred
claims enumerated in Art. 2242 NCC, even if the
existence and import thereof cannot be ascertained
from the records, all confidence in Torrens titles
would be destroyed.
Upon the other hand, it does not appear
excessively burdensome to require the privileged
creditors to cause their claims to be recorded in the
books of the Register of Deeds should they desire to
protect their rights even outside of insolvency or
liquidation proceedings.
The Cruzados also cannot be considered as
unpaid vendors since they lost their rights as owners of
the property when they failed to pay RFC the purchase
price. What they sold to Pura was their rights, title,
interest and dominion to the property. They merely
assigned whatever rights or claims they might still have
thereto.
The ownerhip of the property rested with RFC
which was the one that sold the property to Pura. The
sale from Cruzado to Villanueva, therefore, was not so
much a sale of the land as it was a quitclaim deed in
favor of Villanueva.
J.L. Bernardo Construction v. CA, 324 SCRA
24
J.L. Bernardo Construction, represented by
attorneys- in-fact Santiago R. Sugay, Edwin A.
Sugay & Fernando S.A. Erana, Santiago R. Sugay,
Edwin A. Sugan & Fernando S.A. Erana vs CA &
Mayor Jose L. Salonga, G.R. No. 105827, January 31,
2000 (324 SCRA 24)
FACTS:
The municipal government of San Antonio,
Nueva Ecija approved the construction of San Antonio
Public Market to be funded by the Economic Support
Fund Secretariat (ESFS), a government agency working
with the USAID. The petitioners entered into a business
venture for the purpose of participating in the bidding for
the public market. The contract was awarded to them.
Under the Construction Agreement, the municipality
agreed to assume the expenses for the demolition, and
clearing and site filling and to provide cash equity.
Although the whole amount of the cash equity
became due, the municipality refused to pay despite
repeated demand and notwithstanding that the public
market was 98% complete. Furthermore, the petitioners
advanced the expenses for the demolition, clearing and
site filling, and they have not yet been reimbursed. The
petitioners filed a case.
Lower Court Decision: The court granted a preliminary
attachment. Although the usual way of enforcing a lien is
by a decree of sale of the property and the application of
the proceeds to the payment of the debt secured by it,
the court found it more practical and reasonable to
permit the petitioners to operate the public market and to
apply to their claims the income derived therefrom, in the
form of rentals and goodwill from the prospective
stallholders of the market.

Court of Appeals Decision: The CA reversed the order
of the lower court.
ISSUE:
Whether a contractor’s lien can be enforced
without an insolvency proceeding.
HELD: No.
Art. 2241 and 2242 of the Civil Code
enumerates certain credits which enjoy preference
with respect to specific personal or real property of
the debtor. Specifically, the contractor’s lien is
granted under the third paragraph of Art. 2242.
However, Art. 2242 only finds application
when there is a concurrence of credits, i.e. when the
same specific property of the debtor is subjected to
the claims of several creditors and the value of such
property of the debtor is insufficient to pay in full all
the creditors.
In such a situation, the question of preference
will arise, that is, there will be a need to determine which
of the creditors will be paid ahead of the others.
Fundamental tenets of due process will dictate that this
statutory lien should then only be enforced in the context
of some kind of a proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such
as insolvency proceedings.
The action filed by the petitioners in the trial
court does not partake of the nature of an insolvency
proceeding. It is basically for specific performance and
damages.
Thus, even if it is finally adjudicated that
petitioners actually stand in the position of unpaid
contractors and are entitle to invoke the contractor’s lien,
such lien cannot be enforced in the present action for
there is no way of determining whether or not there exist
other preferred creditors with respect to such property.
The fact that no 3rd party claims have been filed
in the trial court will not bar other creditors from
subsequently bringing actions and claiming that they
also have preferred liens against the property involved.
Petitioners may only obtain possession and
use of the public market by means of a preliminary
attachment upon such property, in the event that
they obtain a favorable judgment in the trial court.
Clearly, the trial court’s order granting possession
and use of the public market to the petitioners does
not adhere to the procedure for attachment laid out
in the Rules of Court.
DBP v. CA, 363 SCRA 307
Development Bank of the Philippines vs. CA &
Remington Industrial Sales Corporation, G.R. No.
126200, August 16, 2001 (363 SCRA 307)
FACTS:
Marinduque Mining Industrial Corporation
obtained from the PNB various loan accommodations.
To secure the loans, the mining company executed real
estate mortgage and chattel mortgage in favor of PNB.
The mortgage covered all of the mining company’s real
properties located at Surigao del Norte, Sipalay, Negros
Occidental, and Antipolo, including improvements.
The Mining Company executed in favor of PNB
and DBP a second Mortgage Trust Agreement over all
its real properties, including improvements. The
mortgage also covered all chattels, as well as assets of
whatever kind, nature and description which the mining
company may subsequently acquire in substitution or
replenishment or in addition to th properties covered by
the previous Deed of Real and Chattel Mortgage.
An amendment to the Mortgage Trust
Agreement was made in favor of PNB and DBP over all
other real and personal properties and other real rights
subsequently acquired. The mining company failed to
settle its loan obligations, thus PNB and DBP instituted
extrajudicial foreclosure proceedings.
In the meantime, the mining company
purchased and caused to be delivered construction
materials and other merchandise from Remington
Industrial Sales Corporation. The purchases remained
unpaid when Remington filed a complaint for sum of
money and damages. The complaint was amended to
include PNB and DBP in view of the foreclosure by the
latter of the real and chattel mortgages on real and
personal properties, chattels, mining claims, machinery,
equipment and other assets of the mining company.
Several other amendments to the complaint were made
to implead other parties.
Lower Court Decision: In favor of Remington.
Court of Appeals Decision: Affirmed lower court
decision.
ISSUE:
Whether an unpaid seller’s lien on movables
shall be given preference in the absence of a liquidation
proceeding.
HELD: NO.
DBP and PNB are mandated by law to foreclose
when an account has reached certain arrearages, thus
they were only fulfilling a duty when they foreclosed on
the properties.
In the absence of liquidation proceedings, the
claim of Remington cannot be enforced against DBP.
The ruling in the Barretto case applies to this case.
Although Barretto involved specific immovable
property, the ruling therein should apply equally in this
case where specific movable property is involved. As
the extrajudicial foreclosure instituted by PNB and DBP
is not the liquidation proceeding contemplated by the
Civil Code, Remington cannot claim its pro rata share
from DBP.
C. Order of Preference of Credits
Republic v. Peralta, 150 SCRA 37
RP, represented by the Bureau of Customs & BIR vs.
Honorable E.L. Peralta, Presiding Judge of the CFI of
Manila, Branch XVII, Quality Tobacco Corp.,
Francisco Candeleria, Federacion Obrero de la
Industria Tabaquera Y Otros Trabajadores de
Filipinas (FOITAF), USTC Employees Association
Workers Union-PTGWO, G.R. No. L-56568, May 20,
1987 (150 SCRA 37)
FACTS:
In the voluntary insolvency proceedings
commenced by Quality Tobacco Corp, the following
claims of creditors were filed: separation pay of workers;
BIR tobacco inspection fees; and BOC customs duties
and importation taxes which appear to be secured by
surety bonds.
Lower Court Decision: The trial court ruled that the
separation pay of workers were to be preferred over the
claims of BOC and BIR as provided by Art. 110 of the
Labor Code.
Sol.Gen’s Contention: reversal of this judgment on the
ground that Art. 110 does not apply since it speaks of
wages which does not include separation pay.
ISSUE:
Whether separation pay claims of laborers is
preferred over BIR and BOC claims.
HELD: YES.
Art. 110 of the Labor Code cannot be viewed in
isolation. Rather, Art. 110 must be read in relation to the
provisions of the Civil Code concerning the classification,
concurrence and preference of credits, which provisions
find particular application in insolvency proceedings,
where the claims of all creditors, preferred or non-
preferred, may be adjudicated in a binding manner.
Art. 2241 and 2242 NCC are special preferred
credits. These credits constitute liens or encumbrances
on specific movable or immovable property to which they
relate. These credits, except for taxes, are not preferred
one over another inter se. Non-tax liens or special
preferred credits which subsist in respect of specific
movable or immovable property are to be treated on an
equal basis and to be satisfied concurrently and
proportionately.
Put succinctly, Art. 2241 & 2242 jointly with
Arts. 2246 to 2249 establish a 2- tier order of
preference.
The first tier includes only taxes, duties and
fees due on specific movable or immovable
property.
All other special preferred credits stand on
the same 2nd tier to be satisfied, pari passu and pro
rata, out of any residual value of the specific
property to which such other credits relate.
 If the value of the specific property involved
is greater than the sum total of the tax liens and
other specially preferred credits, the residual value
will form part of the free property of the insolvent.
In contrast, Art. 2244 creates no liens on
determinate property which follow such property.
What Art. 2244 creates is simply rights in favor of
certain creditors to have the cash and other assets
of the insolvent applied in a certain sequence or
order of priority.
In this sequence, certain taxes and
assessments also figure but these do not have the
same kind of overriding preference that Art. 2241 No.
1 and 2242 No. 1 create for taxes which constitutes
liens on the taxpayer’s property.
The claim of the BOC for unpaid customs duties
and taxes enjoys the status of specially preferred credit
under Art. 2241 No. 1, only in respect of the articles of
importation which are still in the custody or subject to the
control of the BOC. Unsatisfied claims of the BOC which
is No. 9 in the order of Art. 2244 will have to be paid out
of the insolvent’s free property.
The claim of BIR for Tobacco Inspection Fees
are imposed both as a regulatory measure and as a
revenue-raising measure. It follows that the claim of the
BIR is a tax lien upon all the properties and assets,
movable and immovable, of the insolvent as taxpayer
under Art. 2241 No.1 and 2242 No. 2.
Art. 110 LC does not purport to create a lien
in favor of workers or employees for unpaid wages.
Claims for unpaid wages do not therefore fall at all
within the category of specially preferred claims,
except to the extent that such claims of unpaid
wages are already covered by Art. 2241 No. 6 and
2242 No. 3. Under, Art. 2241 No. 6, the claim for
separation pay constitutes as liens attaching to the
processed leaf tobacco, cigars and cigarettes, and
other products produced or manufactured by the
insolvent, but not to other assets. The claims of the
unions may be given effect only after the BIR’s
claim.
Art. 110 LC did not sweep away the
overriding preference accorded to tax claims of the
government or any subdivision thereof. It cannot be
assumed simpliciter that the legislative authority, by
using the words “first preference” and “any provision of
law to the contrary notwithstanding” intended to disrupt
the elaborate and symmetrical structure set up in the
Civil Code. Neither can it be assumed casually that
Art. 110 intended to subsume the sovereign itself
within the term “other creditors” in stating that
“unpaid wages shall be paid in full before other
creditors may establish any claim to a share in the
assets of employer.” Insistent considerations of public
policy prevent us from giving to “other creditors” a
linguistically unlimited scope that would embrace the
universe of creditors save only unpaid employees.
Art. 110, however, has an impact on the
provisions of the Civil Code. Bearing in mind the
overriding precedence given to taxes, duties and fees
and the fact that the Labor Code does not impress any
lien on the property of an employer, the use of the
phrase “first preference” in Art. 110 indicates that what
Art. 110 intended to modify is the order of preference
found in Art. 2244 which order relates, as we have seen,
to properties of the insolvent that are not burdened with
liens or encumbrances created or recognized by Art.
2241 and 2242. Art. 110 modified Art. 2244 in 2
respects:
(a) by removing the 1-year limitation found in
Art. 2244, No. 2.; and
(b) by moving up claims for unpaid wages of
laborers or workers of the insolvent from 2nd
priority to 1st priority.
The BIR will have preference in the processed
or manufactured tobacco products. The remaining value
will be subject to a lien in favor of unions by virtue of Art.
2241 No. 6. In case there are no more inventory, the
claim of the unions will have to be satisfied out of the
free property under Art. 2244 as modified by Art. 110 LC.
The BOC will have preference in importations
still in its custody. If there are no such importations or if
such importations are insufficient, it will only have 9th
priority by virtue of Art. 2244 No. 9. In respect of the free
property, the unions will enjoy first priority and will be
paid ahead of the claims of the BOC. The claims of the
Union do not include the 10% claim for attorney’s fees
which do not stand on the same footing as separation
pay.
Cruz, dissenting: If the law had intended an exception,
it would have – and could easily have – provided for it.
The Labor Code was promulgated by President Marcos
who was aware of the usual preference of tax claims. So
informed, he would have reserved that primacy in the
above article if that was what he really wanted.
The fact that he did not is to me certain
indication of his intention, viz., that under the said article
the claims of laborers for unpaid wages shall have
priority above all else.
It is axiomatic that the words of a statute are to
be given their normal and ordinary connotation.
Moreover, the Labor Code was promulgated later than
the Civil Code, the Insolvency Law, and the Internal
Revenue Code.
The Labor Code prevails over these earlier
statutes as it represents the later expression of
legislative will.
Banco Filipino v. NLRC, 188 SCRA 700
Banco Filipino Savings & Mortgage Bank
(Represented by its liquidator, Ms. Carlota P.
Valenzuela) vs. NLRC, Labor Arbiter Evangeline
Lubaton, & Fortunato Dizon, Jr., G.R. No. 82135,
August 20, 1990 (188 SCRA 700)
FACTS:
Banco Filipino Savings & Mortgage Bank was
placed under receivership and later ordered liquidated
by the Monetary Board of the Central Bank.
Mr. Fortunato Dizon, the EVP and COO of the
bank, filed with the liquidator a request for the payment
to him of the cash equivalent of his vacation and sick
leave credits and unexpended/unused reimbursable
allowance. His claims were not paid by the liquidator.
Dizon then filed with the labor arbiter a
complaint against the bank for recovery of unpaid salary,
the cash equivalent of his accumulated vacation and sick
leaves, termination pay, damages and attorney’s fees.
The liquidator moved for dismissal on grounds of
jurisdiction.
The Labor Arbiter upheld her jurisdiction and
ruled for Dizon.
The NLRC affirmed.
ISSUE:
Whether labor claims against a bank under
liquidation are still under the jurisdiction of the NLRC.
(YES)
Whether Art. 110 LC upgraded the laborer’s
claim to an absolutely preferred credit. (NO)
HELD:
There is nothing in Section 29 of the Central
Bank Act that suggests that the jurisdiction of the
liquidation court to adjudicate claims against the
insolvent bank is exclusive.
On the other hand, Art. 217 LC explicitly
provides that labor arbiters have original and
exclusive jurisdiction over money claims of an
employee against his employer. The Court does not
think that this jurisdiction would be lost simply
because a former employer has been placed under
liquidation.
Under normal circumstances, the decision of
the NLRC is immediately executory. The Court ruled
that Art. 110 LC did not upgrade the worker’s claim
as absolutely preferred credit. The significance of
Art. 110 in the scheme of concurrence and
preference of credit is to raise the worker’s claim
into first priority under Art. 2244 NCC.
Not being an absolutely preferred credit, as
taxes under Art. 2241 (1) and 2242 (1), Dizon’s claims
cannot be paid ahead of other credits and outside of the
liquidation proceeding because the free property has not
yet been determined. Thus, Dizon’s adjudicated claims
should be submitted to the liquidators for processing.
If it is later adjudicated that the liquidation is
improper, then the NLRC’s decision may be
executed under normal procedure. If the contrary is
proven, then the bank’s liquidation shall proceed
and Dizon’s established claims should be treated as
an ordinary preferred credit enjoying first Code and its implementing rule cannot be invoked in this
preference. case absent a formal declaration of bankruptcy or a
liquidation order. Following the rule in Republic vs.
Peralta, to hold that Art. 110 is also applicable in
DBP v. Santos, 171 SCRA 138
extrajudicial proceedings would be putting the worker in
DBP vs. Hon. Labor Arbiter Ariel C. Santos, Phil.
Association of Free Labor Unions (PAFLU-RMC a better position than the State which could not assert its
Chapter) and its members, Michael Penalosa, et al., own preference in case of a judicial proceeding.
Samahang Diwang Manggagawa sa RMC-FFW Therefore, Art. 110 must not be viewed in isolation and
Chapter, and its members, Jaime Arada, et al., G.R. must always be reckoned with the provisions of the Civil
Nos. 78261-62, March 8, 1989 (171 SCRA 138) Code.

FACTS: The claims of all creditors, whether preferred or

Phil. Association of Free Labor Unions (PAFLU- non-preferred, the identification of the preferred ones
RMC Chapter) and its members filed a labor case and the totality of the employer’s asset should be
against Riverside Mills Corporation. The labor arbiter brought into the picture.
ruled for the complainants. Other laborers also filed
cases against the corporation which was also decided in There can then be an authoritative, fair, and
their favor. A notice of levy on execution of certain real binding adjudication instead of the piecemeal settlement
properties was annotated. which would result from the questioned decision in this
case.
Meanwhile, DBP obtained a writ of possession
from the RTC on all the properties of RMC after having
extrajudicially foreclosed the same at public auction
earlier in 1983. DBP subsequently leased the properties
to Egret Trading and Manufacturing Corporation,
Rasario Textile Mills, and General Textile Mills.

The writ of possession prevented the scheduled

auction sale of RMC properties to execute the award for
the laborers. The laborers filed an incidental petition with
the NLRC to declare their preference over the levied
properties.

Labor Arbiter Decision: issued an order recognizing

and declaring the laborer’s first preference.

NLRC Decision: set aside the decision and remanded

the case for further proceedings. The Labor Arbiter again
affirmed the preference of the laborers’ claims.

ISSUE:
Whether a declaration of bankruptcy or a judicial
liquidation is required before the worker’s preference
may be enforced.

HELD: YES.
A declaration of bankruptcy or a judicial
liquidation must be present before the worker’s
preference may be enforced. Thus, Art. 110 of the Labor