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Credit Transactions – Atty.

Ilagan 1

Real Estate Mortgage as shown by the terminology used in the covenant, as well as "by their
conduct, words, actions and deeds prior to, during and immediately
1-Lao v. CA after executing the agreement."
[275 SCRA 237]
Facts: This conclusion is fully supported by the decision in Cuyugan vs. Santos,
 Priv. Respondent Better Homes Realty and Housing Corp. filed with MTC where this court held that a conveyance in the form of a contract of sale
QC a complaint of unlawful detainer, on the ground that it is the owner with pacto de retro will be treated as a mere mortgage, if really
of a Unit in QC as evidenced by a TCT executed as security for a debt.
 that Manuel Lao occupied the property without rent, but on
respondent’s pure liberality with the understanding that he would The law enumerates when a contract may be presumed to be an
vacate the property upon demand, but despite demand to vacate equitable mortgage:
made by letter petitioner refused to vacate the premises. a. when the price of a sale with right to repurchase is unusually
 Lao contends that he bought the same from N. Domingo Realty and inadequate;
Development Corp but the agreement was actually a loan secured by b. When the vendor remains in possession as lessee or otherwise;
mortgage; and that plaintiff's cause of action is for accion publiciana c. When upon or after the expiration of the right to repurchase,
outside the jurisdiction of an inferior court another instrument extending the period of redemption or
 MTC decided in favor of respondent granting a new period is executed;
 RTC reversed the decision d. When the purchaser retains for himself a part of the purchase
 CA reversed the decision price;
e. when the vendor binds himself to pay the taxes on the thing
Issues: sold;
1. Whether or not the lower court can decide on the issue of ownership in f. In any other case where it may be fairly inferred that the real
the present ejectment case. intention of the parties is that the transaction shall secure the
2. Whether or not private respondent had acquired ownership over the payment of a debt or the performance of any other obligation.
property in question.
3. Whether or not petitioner should be ejected from the premises in The foregoing presumption applies also to a 'contract purporting to be
question an absolute sale.

Held:  We find the agreement between the private respondent and N.

1. It held that as a general rule, the issue in an ejectment suit is possession Domingo Realty & Housing Corporation, as represented by petitioner,
de facto, not possession de jure, and that in the event the issue of manifestly one of equitable mortgage.
ownership is raised as a defense, the issue is taken up for the limited  First, possession of the property in the controversy, remained with
purpose of determining who between the contending parties has the Petitioner Manuel Lao who was the beneficial owner of the property,
better right to possession. before, during and after the alleged sale. It is settled that a "pacto de
retro sale should be treated as a mortgage where the (property) sold
XPN: However, where neither of the parties objects to the allegation of never left the possession of the vendors."
the question of ownership in an ejectment suit and, indeed, both present  Second, the option given to Manuel Lao to purchase the property in
evidence thereon, argue the question in their various submissions and controversy had been extended twice through documents executed
participate in all aspects of the trial without objecting to the MTC's by Mr. Tan Bun Uy, President and Chairman of the Board of Better
jurisdiction to decide the question of ownership, the Regional Trial Court, Homes Realty & Housing Corporation. The wording of the first extension
in the exercise of its original jurisdiction under Sec. 11, Rule 40 of the Rules is a refreshing revelation that indeed the parties really intended to be
of Court, may rule on the issue, including the corollary question of bound by a loan with mortgage, not by a pacto de retro.
whether the subject deed is one of sale or of equitable mortgage.  It reads, "On June 10, this option is extended for another sixty days to
expired (sic) on Aug. 11, 1988. The purchase price is increased to
2. In determining the nature of a contract, the Court looks at the intent of P137,000.00. Since Mr. Lao borrow (sic) P20,000.00 from me." These
the parties and not at the nomenclature used to describe it. Pivotal to extensions clearly represent the extension of time to pay the loan given
deciding this issue is the true aim and purpose of the contracting parties to Manuel Lao upon his failure to pay said loan on its maturity. Mr. Lao


Credit Transactions – Atty. Ilagan 2

was even granted an additional loan of P20,000.00 as evidenced of In its Answer, SOLID, by way of alternative defense, alleged that the
the above quoted document. obligations under the Contract to Sell has become so difficult . . . the herein
 Third, unquestionably, Manuel Lao and his brother were in such "dire respondents be partially released from said obligation by substituting
need of money" that they mortgaged their townhouse units registered subject lot with another suitable residential lot from another subdivision
under the name of N. Domingo Realty Corporation, the family which respondents own/operates." Upon the other hand, STATE, to which
corporation put up by their parents, to Private Respondent Better the subject lot was mortgaged, averred that unless SOLID pays the
Homes Realty & Housing Corporation. In retrospect, it is easy to blame redemption price of P125,1955.00, (sic) it has "a right to hold on and not
Petitioner Manuel Lao for not demanding a reformation of the contract release the foreclosed properties."
to reflect the true intent of the parties. But this seeming inaction is  Office of Appeals, Adjudication and Legal Affairs (OAALA) rendered a
sufficiently explained by the Lao brother's desperate need for money, decision in favor of the Spouses, ordering the delivery to the latter of the
compelling them to sign the document purporting to be a sale after Certificate of Title and for SOLID to pay STATE for the price thereof
they were told that the same was just for "formality.  Both the STATE and SOLID appealed to the Board of Commissioners, HLURB,
 Moreover, since the borrower's urgent need for money places the which dismissed the appeal. They then appealed to the Office of the
latter at a disadvantage vis-a-vis the lender who can thus dictate the President which dismissed the same. CA also dismissed the appeal.
terms of their contract, the Court, in case of ambiguity, deems the
contract to be one which involves the lesser transmission of rights and Issues:
interest over the property in controversy. 1. WON CA erred in ruling that that private respondent spouses Oreta's
3. No. Based on the previous discussion, there was no sale of the disputed unregistered rights over the subject property are superior to the registered
property. Hence, it still belongs to petitioner's family corporation, N. mortgage rights of petitioner State Investment House, Inc. (STATE); and
Domingo Realty & Development Corporation. Private respondent, 2. WON CA erred in not applying the settled rule that persons dealing with
being a mere mortgagee, has no right to eject petitioner. Private property covered by Torrens certificate of title are not required to go
respondent, as a creditor and mortgagee," . . . cannot appropriate the beyond what appears on the face of the title.
things give and void.
2-State Investment House v. CA 1. STATE's registered mortgage right over the property is inferior to that of
254 SCRA 368 respondents-spouses' unregistered right. The unrecorded sale between
Facts: respondents-spouses and SOLID is preferred for the reason that if the
 On October 15, 1969, Contract to Sell was executed by the Spouses original owner (SOLID, in this case) had parted with his ownership of the
Canuto and Ma. Aranzazu Oreta, and the Solid Homes, Inc. (SOLID), thing sold then he no longer had ownership and free disposal of that thing
involving a parcel of land in Capitol Park Homes Subdivision, Quezon City, so as to be able to mortgage it again. Registration of the mortgage is of
for a consideration of P39,347.00. no moment since it is understood to be without prejudice to the better right
 Upon signing of the contract, the spouses Oreta made payment of third parties.
amounting to P7,869.40, with the agreement that the balance shall be 2. As a general rule, where there is nothing in the certificate of title to indicate
payable in monthly installments of P451.70, at 12% interest per annum. any cloud or vice in the ownership of the property, or any encumbrance
 On November 4, 1976, SOLID executed several real estate mortgage thereon, the purchaser is not required to explore further than what the
contracts in favor of State Investment Homes Inc. (STATE) over its Torrens Title upon its face indicates in quest for any hidden defect or
subdivided parcels of land, one of which is the land sold to Sps. Oreta inchoate right that may subsequently defeat his right thereto.
 For Failure of SOLID to comply with its mortgage obligations contract, STATE This rule however, admits of an exception as where the purchaser or
extrajudicially foreclosed the mortgaged properties including the subject mortgagee, has knowledge of a defect or lack of title in his vendor, or that
lot on April 6, 1983, with the corresponding certificate of sale issued therefor he was aware of sufficient facts to induce a reasonably prudent man to
to STATE annotated at the back of the titles covering the said properties inquire into the status of the title of the property in litigation.
on October 13, 1983.
 On August 15, 1988, the spouses filed a complaint before the Housing and In this case, petitioner was well aware that it was dealing with SOLID, a
Land Use Regulatory Board, HLURB, against the developer SOLID and STATE business entity engaged in the business of selling subdivision lots. In fact,
for failure on the part of SOLID "to execute the necessary absolute deed of the OAALA found that "at the time the lot was mortgaged, respondent
sale as well as to deliver title to said property . . . in violation of the contract State Investment House, Inc., [now petitioner] had been aware of the lot's
to sell . . .," despite full payment of the purchase price as of January 7, 1981. location and that said lot formed part of Capital Park/Homes Subdivision."


Credit Transactions – Atty. Ilagan 3

authorized plaintiffs to transport all their personal belongings to their house

In Sunshine Finance and Investment Corp. v. Intermediate Appellate at the aforesaid lot
Court, the Court ruled, “Nevertheless, we have to deviate from the general  on December 24, 1992, plaintiffs received a copy of the execution
rule because of the failure of the petitioner in this case to take the foreclosing mortgage issued by the RTC ordering defendant Sheriff Sula to
necessary precautions to ascertain if there was any flaw in the title of the sell at public auction several lots formerly owned by defendant
Nolascos and to examine the condition of the property they sought to corporation including subject lot of plaintiffs; that the alleged mortgage of
mortgage. The petitioner is an investment and financing corporation. We subject lot is null and void as it is not authorized by plaintiffs pursuant to Art.
presume it is experienced in its business. Ascertainment of the status and 2085 of the Civil Code which requires that the mortgagor must be the
condition of properties offered to it as security for the loans it extends must absolute owner of the mortgaged property; that as a consequence of the
be a standard and indispensable part of its operations. Surely, it cannot nullity of said mortgage, the execution foreclosing [the] mortgage is
simply rely on an examination of a Torrens certificate to determine what likewise null and void; that plaintiffs advised defendants to exclude subject
the subject property looks like as its condition is not apparent in the lot from the auction sale but the latter refused. Plaintiffs likewise prayed for
document. The land might be in a depressed area. There might be damages in the sum of P50,000.00.
squatters on it. It might be easily inundated. It might be an interior lot,  Defendant William Ong Genato filed a motion to dismiss the complaint
without convenient access. These and other similar factors determine the which was opposed by the plaintiffs and denied by the Court
value of the property and so should be of practical concern to the  Defendant Genato, then filed his answer averring that on May 19, 1989 co-
petitioner. defendant Oakland Development Resources Corporation mortgaged to
Genato two (2) parcels of land as security and guaranty for the payment
"Our conclusion might have been different if the mortgagee were an of a loan in the sum of P2,000,000.00; that it appears in the complaint that
ordinary individual or company without the expertise of the petitioner in the subject parcel of land is an unsubdivided portion of the land; that said
the mortgage and sale of registered land or if the land mortgaged were real estate mortgage has been duly annotated at the back of TCT and
some distance from the mortgagee and could not be conveniently that for non-payment of the loan of P2,000,000.00 defendant Genato filed
inspected.” an action for foreclosure of real estate mortgage against corporation
 In the foreclosure action, RTC decided against defendant corporation. CA
The above-enunciated rule should apply in this case as petitioner admits affirmed the decision, and its decision became final and executory. RTC
of being a financing institution. We take judicial notice of the uniform caused the sale of the lot.
practice of financing institutions to investigate, examine and assess the  that plaintiffs have no cause of action against defendant Genato; that the
real property offered as security for any loan application especially where, alleged plaintiffs' Contract to Sell does not appear to have been
as in this case, the subject property is a subdivision lot located at Quezon registered with the Register of Deeds, and that the title was clean at the
City, M.M. It is a settled rule that a purchaser or mortgagee cannot close time of the mortgage and that they were not bound to look beyond the
its eyes to facts which should put a reasonable man upon his guard, and title for flaws.
then claim that he acted in good faith under the belief that there was no
defect in the title of the vendor or mortgagor. Petitioner's constructive RTC: ordered corporation to pay back the monthly amortizations plus interests
knowledge of the defect in the title of the subject property, or lack of such etc. to Flancia.
knowledge due to its negligence, takes the place of registration of the MR: reversed and ordered that the foreclosure sale was null and void
rights of respondents-spouses.
CA: reversed and reinstated the first judgement
Respondent court thus correctly ruled that petitioner was not a purchaser
or mortgagee in good faith; hence petitioner can not solely rely on what Issues:
merely appears on the face of the Torrens Title. 1. whether or not the registered mortgage constituted over the property was
3-Flancia v. CA 2. whether or not the registered mortgage was superior to the contract to
457 SCRA 224 sell; and
Facts: 3. whether or not the mortgagee was in good faith.
 Plaintiffs Sps. Flancia allege that they purchased from defendant
corporation Oakland Development Resources Corp., a parcel of land in Held:
Quezon City; that by virtue of the contract of sale, defendant corporation All the requisites of a Real Mortgage are present in this case.


Credit Transactions – Atty. Ilagan 4

title to the property passes to the ownership is, by agreement, Just as an innocent purchaser for value may rightfully rely on what appears in
vendee upon the delivery of the reserved by the vendor and is not to the certificate of title, a mortgagee has the right to rely on what appears in the
thing sold; pass to the vendee until full payment title presented to him. In the absence of anything to arouse suspicion, he is under
of the purchase price. no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of the said certificate.
In the contract between petitioners and Oakland, aside from the fact that it was
denominated as a contract to sell, the intention of Oakland not to transfer 4-Premiere Development Bank v. CA
ownership to petitioners until full payment of the purchase price was very clear. 453 SCRA 630
Acts of ownership over the property were expressly withheld by Oakland from Facts:
petitioner. All that was granted to them by the "occupancy permit" was the right  A little background: the lot in question, Lot 23, is located in Caloocan.
to possess it. Basically, the creation of QC found the lot within its borders and the
records of the lot were transferred to QC, and the generation of the new
It was stated in the contract that: (1) the title of the property is not yet passed to CTs to reflect territorial changes.
the buyer, and (2) buyers cannot transfer, alienate, assign or dispose of the  2 different persons with exactly the same name, Vicente T. Garaygay,
same. Clearly, Oakland retained absolute ownership over the property. each claimed exclusive ownership of Lot 23 by virtue of an owner's
duplicate certificate each had possession of during the period material
Inherent in ownership is the right to enjoy and dispose of the thing, jus utendi, jus covering said lot.
abutendi, jus dispodendi which is the power of the owner to alienate,  One held TCT No. 9780 (old/ Caloocan), supra, and the other, TCT No. 9780
encumber, transform and even destroy the thing owned. And Because Oakland (693) (QC copy), supra. The technical description of the land appearing in
retained all the foregoing rights as owner of the property, it was entitled one copy corresponds exactly with that in the other. The date "June 14,
absolutely to mortgage it to Genato. Hence, the mortgage was valid. 1944" appears on the face of both copies as a common date of entry.
One, however, contained certain features, markings, and/or entries not
2. DIFFERENCE BETWEEN STATE INVESTMENT HOUSE v. CA and FLANCIA v. CA found in the other and vice versa.
Petitioner cited State Investment House v. CA, it is completely inapplicable to
the case at bar. A contract of sale and a contract to sell are worlds apart. Note: this table contains the same facts. You may read the table, or the text
subsequent to it. The table is created to help the reader understand the
STATE INVESTMENT HOUSE v. CA FLANCIA v. CA unfolding of the events. Should you choose to read the table, the subsequent
pertained to a contract of sale This case involves a contract to sell events start again with the “ALLEGATIONS.”
In State Investment House, ownership Oakland retained absolute Garaygay of Cebu Garaygay of Rizal
had passed completely to the buyers ownership over the property under  Executed a deed of sale over  Sold to Yambao and
and therefore, the former owner no the contract to sell and therefore the lot (OCT duplicate from Rodriguez
longer had any legal right to had every right to mortgage it. QC) in favor of Joselito  Yambao and Rodriguez sold a
mortgage the property, Garaygay, but the title portion thereof to Morales
notwithstanding the fact that the remained in Vicente’s
new owner-buyers had not possession
registered the sale.  A fire gutted the QC hall and destroyed the original copy of the TCT
with the Registry of Deeds QC
In sum, we rule that Genato's registered mortgage was superior to petitioner's  Engr. Hobre filed an
contract to sell, subject to any liabilities Oakland may have incurred in favor of application, signed by
petitioners by irresponsibly mortgaging the property to Genato despite its Garaygay of Cebu, for the
commitments to petitioners under their contract to sell. reconstitution of the burned
original on the basis of the
3. The issue of WON the mortgage is in good faith is a factual issue and therefore, latter's owner's duplicate
the SC, not being a trier of facts, adopted the decision of the CA and upheld certificate
the good faith of the mortgagee Genato.  LRA issued the reconstitution


Credit Transactions – Atty. Ilagan 5

 on May 26, 1989, the deed of  June 11, 1988 a fire that gutted a portion of the Quezon City hall and
sale executed by Garaygay destroyed in the process the original copy of TCT No. 9780 (693) on file with
of Cebu in favor of his the Registry of Deeds of Quezon City.
nephew Joselito was  Barely a month later, a certain Engr. Hobre filed an application, signed by
registered, paving the Garaygay of Cebu, for the reconstitution of the burned original on the
issuance in the latter's name basis of the latter's owner's duplicate certificate. One Engr. Felino Cortez
of TCT No. 12183 of the Land Registration Authority (LRA) did the follow-up on the
 the Lot was subdivided into application. After due proceedings, the LRA issued an order of
Lot 23-A, Lot-23B, Lot-23C reconstitution, by virtue of which Garaygay of Cebu acquired
 Lot23-A was sold to Lilian reconstituted TCT No. RT-1764 (9780) (693)
Toundjis who, pursuant to a  Meanwhile, or on May 26, 1989, the deed of sale executed by Garaygay
Contract to Sell executed on of Cebu in favor of his nephew Joselito was registered, paving the issuance
March 23, 1990, undertook to in the latter's name of TCT No. 12183.
pay Joselito the P.5 Million  Thereafter, thru the efforts of same Engr. Cortez, Lot 23 was subdivided into
balance of the P2.5 Million three (3) lots, namely: Lot 23-A, Lot 23-B and Lot 23-C for which separate
purchase price once she is TCTs were issued.
placed in possession of a  Joselito posthaste sold Lot 23-A t o Lilian Toundjis who, pursuant to a
fenced-off property Contract to Sell executed on March 23, 1990, undertook to pay Joselito
 Joselito assigned on February the P.5 Million balance of the P2.5 Million purchase price once she is
26, 1991, the other two (2) lots, placed in possession of a fenced-off property.
to Century Realty and  And, for shares of stock, Joselito assigned on February 26, 1991, the other
Development Corporation two lots to Century Realty and Development Corporation which, after
which, after securing TCTs securing TCTs therefor, mortgaged the same to Premiere Development
therefor, mortgaged the Bank, Inc. to secure a P2.5 Million loan.
same to Premiere  Clashing claims of ownership first came to a head when, sometime in May
Development Bank, Inc. to 1990, Liberato G. Yambao and his agents forcibly prevented Joselito's
secure a P2.5 Million loan. hired hands from concrete-fencing the subject property. The police and
 sometime in May 1990, Liberato G. Yambao and his agents forcibly eventually the National Bureau of Investigation (NBI) entered into the
prevented Joselito's hired hands from concrete-fencing the picture.
subject property.  Yambao, Rodriguez and Morales as pro indiviso buyers of Lot No. 23,
 Yambao, Rodriguez and Morales as pro indiviso buyers of Lot No. caused the annotation on December 17, 1990, January 16, 1991 and
23, caused the annotation on December 17, 1990, January 16, February 15, 1991 of their respective adverse claims on Joselito's TCT
1991 and February 15, 1991 of their respective adverse claims on  They then filed with the RTC a suit against Joselito, Century Realty and
Joselito's TCT Premiere Bank for quieting of title and annulment of said defendants' fake
 They then filed with the RTC a suit against Joselito, Century Realty titles with prayer for damages
and Premiere Bank for quieting of title and annulment of said
defendants' fake titles with prayer for damages ALLEGATIONS:
 Yambao et. al. alleges that Joselito took advantage of the fire that
 The 1st Vicente Garaygay, Cebu City resident, executed a deed of sale ravaged the QC Hall, and the reconstituted title was secured by means of
over the lot with the OCT Duplicate from QC, in favor of his nephew Joselito fraud, deceit, or other machinations is void ab initio under Section 11 of
Garaygay. The sale notwithstanding, the owner's duplicate certificate Republic Act (R.A.) 6732
remained for some time in the seller's possession.  That they (Yambao, Rodriguez and Morales) filed their separate adverse
 The 2nd Vicente T. Garaygay, a resident of Rizal sold to Liberto G. Yambao claims and caused the same to be annotated at the back of Joselito's TCT
and Jesus B. Rodriguez the same property described in TCT 9780. "YCM Nos. 14414, 14415 and 14416; that while the adverse claim of Rodriguez
Compound, Angono, Rizal" is set out in the February 11, 1986 conveying was still valid, Joselito executed on February 26, 1991 a Deed of
deed as the seller's residence. Buyers Yambao and Rodriguez would later Assignment in favor of Century Realty, which thus made the latter a
sell a portion of their undivided interests on the land to Jesus D. Morales. "transferee in bad faith"; that on March 26, 1991, Century Realty executed


Credit Transactions – Atty. Ilagan 6

a mortgage contract in favor of Premiere Bank, "a mortgagee in bad Held: No.
faith";  The categorical conclusion of the Court of Appeals — confirmatory of that
 During trial, plaintiffs Yambao, Rodriguez and Morales offered in evidence of the trial court — is that Exhibit "B" is genuine, and that Garaygay of Rizal
several documents. Foremost of these was the owner's duplicate copy of is a real person. On the other hand, Exhibit "1" was adjudged spurious.
TCT No. 9780 of the Registry of Manila (Exhibit B) once in the possession of These factual determinations as a matter of long and sound appellate
Garaygay of Rizal. practice must be accorded great weight, and, as rule, should not be
 Principal defendants presented no less than 38 pieces of marked and sub- disturbed on appeal, save for the most compelling and cogent reasons,
marked documentary evidence, among which was the duplicate copy of like when such factual findings were drawn from a vacuum, or, in fine,
TCT No. 9780 (693) (Exhibit 1) that pertained to Garaygay of Cebu and reached arbitrarily.
used in the reconstitution of the burned original thereof.  Facts and reasonable inferences drawn therefrom point to Exhibit "1" as
 Yambao testified that having noticed, when Garaygay of Rizal offered to being spurious, necessarily leaving Exhibit "B" as the authentic duplicate
sell Lot 23, that the corners and the portion of Exhibit "B" containing the copy. For starters, there is the appearance and physical condition of the
owner's personal circumstances were torn and related the owner's owner's copies in question which, if properly evaluated in the light of
explanation as to how these oddities came about. Yambao related that attendant circumstances, would help in determining which is genuine and
owing to the physical appearance of Exhibit "B", the recording of the which is sham.
Garaygay of Rizal — Yambao/Rodriguez deed of sale (Exh. "A") was  For, the condition and physical appearance of a document would, to
refused since the more crucial document, i.e., the torn owner's copy was borrow from Junquera, reveal, albeit silently, "the naked truth, hiding
itself not registrable unless it is first reconstituted. nothing, forgetting nothing and exaggerating nothing."
 He also testified that, to assure himself of the genuineness of the seller's  As aptly observed by the appellate court, rationalizing its conclusion
owner's duplicate certificate, he and Garaygay of Rizal repaired to the adverted to above, Exhibit "B" has no defect, except for its partly being
Quezon City Registry to compare his (Garaygay of Rizal's) copy with the torn. Respondents' explanation for the defective state of Exhibit "B", as
original copy on le with the registry, and discovered that the only related to them by Garaygay of Rizal, i.e., it was due to exposure of the
difference was that the owner's duplicate bears the title number "9780", document to the elements, like rain, following his evacuation from Manila
while the original had "9780 (693)" typewritten on a straight line. As told by to a small nipa hut in Angono, Rizal during the Japanese occupation,
Yambao, Garaygay of Rizal's explanation for the figure difference is that merited approval from the trial court and the Court of Appeals. Both
"693" was not a fixed on his (Garaygay of Rizal's) title because he never, in courts, being in a better position to pass upon the credibility of petitioners'
first place, presented the same to the Quezon City Registry for correction witness and appreciate his testimony respecting the less than usual
or affixture. appearance of Exhibit "B", their findings command the respect of this
 That Garaygay of Rizal presented IDs to verify his identity and visited the lot Court.
where he was assured by the residents/caretakers that Garaygay was the  Lest it be overlooked, what might be considered as defects in Garaygay
owner of the lot. of Cebu's copy are, at bottom, the combined effects thereon of the
 defendants presented Garaygay of Cebu who alleged, among other passage of time and the elements. Standing alone, these defects do not,
things, having acquired Lot 23 from one Macaria Lim vda. Arambulo in our view, undermine the integrity of the document. However, unlike
sometime in 1944, having paid taxes thereon for the period 1949-1990 and Exhibit "B", Exhibit "1" contained entries and other uncommon markings or
mortgaging in 1949 the titled property with Meralco Employees Savings & features which could not have existed without human intervention.
Loan Association, with the mortgage deed and later the discharge of Although any one of them may perhaps not be appreciable in isolation,
mortgage being annotated on his title. Joselito also took the witness stand these features and/or markings, taken together, indeed put the integrity
in defense of his ownership of Lot 23 and the transactions he entered into of Exhibit "1" under heavy cloud and indeed cast doubt on its genuineness.
involving the lot.  There were irregularities in Garaygay of Cebu’s CT, such as the Victory
RTC: ruled in favor of Yambao and Rodriguez, and Joselito and all subsequent Stamps issued after liberation when such stamps were inexistent when the
titles null and void. title was entered in the RoD June 14, 1944. Petitioner’s contention that the
CA: affirmed in toto. MR: denied discharge of mortgage he constituted over Lot 23 in favor of Meralco
Employees Savings and Loan Association proves the authenticity of the
Issue: latter's owner duplicate is valid to a point. But, to suggest that such
Whether or not the Court of Appeals erred in holding Garaygay of Rizal, instead inscription could not have been possible were his title spurious is altogether
of Garaygay of Cebu, as the real owner of Lot 23. a different matter.


Credit Transactions – Atty. Ilagan 7

 the payment of land taxes on Lot 23 does not also necessary detract from  Premiere cannot be accorded as innocent mortgagee. When Premiere
the spurious nature of his title, Exhibit "1". After all, any one can pay real inspected the property . . ., it was aware of the existence of Rodriguez'
estate taxes on a given property without being quizzed by the local adverse claim. This is admitted by Premiere's witness.
treasury whether or not the payor owns the real property in question. He  If the land mortgaged is in the possession of a person other than the
also did not appear before the current stand-off to have exercised mortgagor, the mortgagee is required to go beyond the certificate of title
dominion over Lot 23. Neither Garaygay of Cebu nor his nephew Joselito and make inquiries as to the rights of the actual possessors. Failure to do
ever instituted any action to eject or recover possession from the so would make him a mortgagee in bad faith
occupants of Lot 23. This passivity bespeaks strongly against their claim of  It cannot be overemphasized, that Premiere Bank, being in the business of
ownership extending loans secured by real estate mortgage, is familiar with rules on
AS TO TOUNDIJIS’ and PREMIERE BANK’s RIGHTS land registration. As such, it was, as here, expected to exercise more care
 The first asserts the rights of a purchaser and the other, that of a and prudence than private individuals in their dealing with registered
mortgagee, in good faith and for value of Lot 23, a status respectively lands. Accordingly, given inter alia the suspicion-provoking presence of
denied them by the appellate court. occupants other than the owner on the land to be mortgaged, it
 The rule that a subsequent declaration of a title as null and void is not a behooved Premiere Bank to conduct a more exhaustive investigation on
ground for nullifying the contractual right of a purchaser, mortgagee or the history of the mortgagor's title. That Premiere Bank accepted in
other transferees in good faith, with the exceptions thereto, is well-settled. mortgage the property in question notwithstanding the existence of
Where the certificate of title is in the name of the seller or mortgagor, the structures on the property and which were in actual, visible and public
innocent purchaser or mortgagee for value has the right to rely on what possession of a person other than the mortgagor, constitutes gross
appears on the certificate without inquiring further. In the absence of negligence amounting to bad faith. Premier Bank is thus not entitled to
anything to excite or arouse suspicion, or except when the party have its lien annotated on the genuine title.
concerned had actual knowledge of facts or circumstances that should  Ordered to reimburse Toundjis of the purchase price plus interest.
impel a reasonably cautious person to make such further inquiry, said
purchaser or mortgagee is without obligation to look beyond the 5-DELA MERCED vs. GSIS
certificate and investigate the title of the seller or mortgagor. Thus, where G.R. No. 140398 September 11, 2001
innocent third persons, relying on the correctness of the certificate, Petitioners: COL. FRANCISCO DELA MERCED, substituted by his heirs, namely,
acquire rights over the property as buyer or mortgagee, the subsequent BLANQUITA E. DELA MERCED, LUIS CESAR DELA MERCED, BLANQUITA E. DELA
declaration of nullity of title is not a ground for nullifying the right of such MERCED (nee MACATANGAY) and MARIA OLIVIA M. PAREDES
 Tested by the above norm, may Toundjis be considered, as she has VICTOR and MILAGROS MANLONGAT
claimed, an innocent purchaser for value, meaning one who buys or
acquires, for valuable consideration, a piece of land of another without Facts:
notice that some other person has a right to, or interest in, such property  Petitioners sought to set aside the decision of the CA, which reversed
at the time of purchase, or before he has notice of the claim or interest of the decision of the RTC. The RTC, in its Decision, declared the
some other persons in the property. petitioners as the true and lawful owner of Lots Nos. 6, 7, 8, and 10 of
 CA rejected this claim of Toundjis and rightly so. Block 2 and Lot 8 of Block 8 of the property originally covered by TCT
o It was shown that Toundjis contracted to buy from Joselito carried an 26105 and that the foreclosure sale of said lots and the Certificate of
annotation that it was administratively reconstituted. Titles issued to respondents GSIS and the Manlongat spouses were null
o It is also shown that she knew at the time of the sale that Joselito did and void.
not have possession of the lot inasmuch as she agreed to pay the  Petitioners alleged that the Zulueta spouses were no longer the owner
balance a soon as she fences off the property. of the subject lots when they were mortgaged to respondent GSIS on
o These should have put her on guard respecting Joselito’s title, and October 15, 1957 since the said properties were already sold to
her claim must fail. petitioner Francisco dela Merced on September 3, 1957. Hence, the
 citing Republic vs. Court of Appeals, 44 that a purchaser of a property mortgage was void from its inception and respondent GSIS, as
cannot be in good faith where the title thereof shows that it was mortgagee, acquired no better right notwithstanding the registration
reconstituted. of the mortgage. Petitioner also claimed that respondent GSIS knew
that they had been in continuous and open possession of the subject


Credit Transactions – Atty. Ilagan 8

lots since 1955 up to the present. Petitioners also claimed that Jose C. Zulueta and Soledad B. Ramos owned the Antonio Subdivision when
respondent GSIS was a mortgagee in bad faith. they mortgaged the same with GSIS.
 Respondent GSIS maintained that the subject lots were included in the
real estate mortgage executed by the Zuluetas in their favor. There is nothing in the records of this case to indicate that an ocular inspection
Respondent GSIS further asserted that as mortgagee of land registered report was conducted by GSIS, or whether it investigated, examined and
under the Torrens System, it was not required to do more than rely upon assessed the subdivision lots when they were offered as security for the loans by
the certificate of title. the original owners. The only inventory made by GSIS based on its documentary
 On the other hand, respondent spouses Manlongat claimed that their evidence was prepared by its officers employed with the Acquired Assets
daughter Department, but that was after the foreclosure sale was already conducted
 Elizabeth Manlongat, as purchaser of Lot 6, Block 2 at the auction sale and not before the mortgage was constituted over the property. The
conducted by respondent GSIS, has a better right than petitioners constructive knowledge of GSIS of the defect in the title of the subject property,
since the contract to sell and deed of absolute sale executed or lack of such knowledge due to its negligence, takes the place of registration
between the Zuluetas and petitioner dela Merced were unregistered. of the rights of petitioners.

Issue: (2) NO. Likewise, the Court ruled that respondent Manlongat had no better right
1. Whether or not the petitioners’ rights of ownership over the properties than petitioners. The title of Manlongat was derived through sale from GSIS,
in dispute albeit unregistered was superior over the registered whose acquisition over the property proceeded from a foreclosure sale that was
mortgage rights of GSIS null and void. No one can transfer a greater right to another than he himself has.
2. Whether or not Manlongat (purchaser at auction sale) had better right Accordingly, the Court declared void the certificates of title subsequently issued
than petitioners to respondents GSIS and Manlongat. In other words, the subsequent certificates
of title of GSIS and of Manlongat over the property are both void, because of the
Held: legal truism that the spring cannot rise higher than the source.
(1) YES. The Supreme Court held that the registered right of GSIS as mortgagee
of the property is inferior to the unregistered right of petitioners. The unrecorded Further, Manlongat cannot claim that she was a purchaser in good faith. The
sale between petitioner dela Merced as the vendee of the property and the records categorically reflect that neither Manlongat nor her predecessor-in-
Zuluetas, the original owners, is preferred for the reason that if the original owner interest, GSIS, possessed the property prior to or after the former bought the
had parted with his ownership of the thing sold then he no longer had ownership same at an auction sale. In fact, at the time the lots were sold to Manlongat,
and free disposal of that thing so as to be able to mortgage it again. Registration petitioners were not only in actual possession thereof, but their father, Francisco
of the mortgage is of no moment since it is understood to be without prejudice dela Merced, had already built a house thereon. Again, a cautious and prudent
to the better right of third parties. purchaser would usually make an ocular inspection of the premises, this being
standard practice in the real estate industry. Should such prospective buyer find
Moreover, the Court held that the general rule that a purchaser or mortgagee out that the land she intends to buy is being occupied by anybody other than
of land is not required to look further that what appears on the face of the title the seller, who, in this case, was not in actual possession, it would then be
does not apply when the purchaser or mortgagee is a financing institution, such incumbent upon her to verify the extent of the occupant's possessory rights. The
as respondent GSIS. Because even if as a general rule, where there is nothing on failure of a prospective buyer to take such precautionary steps would mean
the certificate of title to indicate any cloud or vice in the ownership of the negligence on her part and would thereby preclude her from claiming or
property, or any encumbrance thereon, the purchaser is not required to explore invoking the rights of a purchaser in good faith.
further than what the Torrens Title upon its face indicates in quest for any hidden
defect or inchoate right that may subsequently defeat his right thereto; such 6-NAVARRO vs. SECOND LAGUNA DEVELOPMENT BANK
rule however admits of an exception as where the purchaser or mortgagee has G.R. No. 129428 February 27, 2003
knowledge of a defect or lack of title in the vendor, or that he was aware of Petitioners: BENJAMIN NAVARRO and ROSITA FORTEA
sufficient facts to induce a reasonably prudent man to inquire into the status of Respondents: SECOND LAGUNA DEVELOPMENT BANK, and SPOUSES ISAAC
the property in litigation. GUZMAN and VILMA ESPORLAS

In the case at bar, GSIS is admittedly a financing institution. In its answer to the Facts:
complaint filed with the trial court, GSIS admitted knowledge that the spouses


Credit Transactions – Atty. Ilagan 9

 Petitioners spouses Benjamin and Rosita Navarro, together with Leticia, good faith. Thus, in Cruz vs. Bancom Finance Corporation, this Court stressed that
Esther, Luciana and Leoniza, all surnamed Navarro, were co-owners of a mortgagee-bank is expected to exercise greater care and prudence before
a parcel of land covered by TCT No. 244200. entering into a mortgage contract, even those involving registered lands. The
 On March 18, 1978, spouses Donalito Velasco and Esther Navarro, ascertainment of the status or condition of a property offered to it as security for
conspiring with the latter's sister Luciana Navarro, executed a falsified a loan must be a standard and indispensable part of its operations.
Deed of Absolute Sale wherein they made it appear that the entire lot
was sold to said spouses Velasco. TCT No. 114526 in the names of In entering into the mortgage contract with spouses Velasco, there was no
spouses Velasco covering the property was accordingly issued. indication that respondent bank acted in bad faith. Spouses Velasco presented
 Subsequently, spouses Velasco mortgaged the property to respondent to the bank their TCT No. 114256 showing they were then the absolute owners
Bank to secure payment of a loan. On June 30, 1987, the respondent thereof. Indeed, there were no circumstances or indications that aroused
Bank, foreclosed the mortgage when spouses Velasco failed to pay respondent bank's suspicion that the title was defective.
their loan.
 On August 8, 1988 and January 5, 1990, petitioners, introducing Article 1431 of the Civil Code states that "through estoppel an admission or
themselves as attorneys-in-fact of Esther Navarro-Velasco, wrote the representation is rendered conclusive upon the person making it and cannot be
respondent Bank, offering to redeem the property. However, they denied or disproved as against the person relying thereon."
failed to do so. Hence, ownership thereof was consolidated in the
name of respondent Bank and a new TCT was thereafter issued in its "A person, who by his deed or conduct has induced another to act in a
favor. particular manner, is barred from adopting an inconsistent position, attitude or
 On March 26, 1990, petitioners filed with the RTC a complaint for the course of conduct that thereby causes loss or injury to another." Petitioners, in
annulment of the mortgage and the consolidation of ownership with their two letters to respondent Bank, did not state that spouses Velasco falsified
damages. They alleged that the sale of the lot with respect to their 1/6 their signatures appearing in the Deed of Absolute Sale. Nor did they question
share was void ab initio considering that their signatures appearing in the validity of the mortgage and its foreclosure. Indeed, those letters could have
the Deed of Absolute Sale were falsified. led the respondent Bank to believe that petitioners recognized the validity of the
 While the case was pending, the respondent Bank sold the property to Deed of Absolute Sale and the mortgage as well as its subsequent foreclosure.
respondent Isaac Guzman and Vilma Esporlas.
 Petitioners, therefore, impleaded spouses Guzman as additional 7-URSAL vs. COURT OF APPEALS
defendants in the case alleging that the said spouses were purchasers G.R. No. 142411 October 14, 2005
in bad faith. Petitioner: WINIFREDA URSAL
 The RTC ruled against the petitioners. On appeal, the CA affirmed the Respondents: COURT OF APPEALS, THE RURAL BANK OF LARENA (SIQUIJOR), INC.
decision of the trial court with modification as to award of damages. and SPOUSES JESUS MONESET and CRISTITA MONESET
 Hence, this petition for review on certiorari.
Issue:  Spouses Moneset are registered owners of a parcel of land and they
Whether or not petitioners were estopped from questioning the validity of the executed on it a Contract to Sell in favor of petitioner Ursal.
mortgage and its foreclosure; hence, the sale of property between respondent  Petitioner paid the down payment and took possession of the
bank and spouses Guzman was valid property. She immediately built a concrete perimeter fence and an
artesian well and planted fruit bearing trees and flowering plants
Held: thereon which all amounted to P50k. After paying 6 monthly
YES. In dismissing the petition, the Supreme Court held that the petitioners were installments, petitioner stopped paying due to the Monesets' failure to
estopped from assailing the validity of the sale of the property to respondent deliver to her the transfer certificate of title of the property as per their
spouses Guzman. agreement; and because of the failure of the Monesets to turn over
said title, petitioner failed to have the contract of sale annotated
In Rural Bank of Compostela vs. CA, this Court held that the rule that persons  Unknown to petitioner, the land was subject of an absolute deed of
dealing with registered lands can rely solely on the certificate of title does not sale in favor of Dr. Canora, Jr. and was sold again by the Monesets with
apply to banks because their business is one affected with public interest, pacto de retro with Resituto Bundalo
keeping in trust money belonging to their depositors, which they should guard  Bundalo, as attorney-in-fact of the Monesets, executed a real estate
against loss by not committing any act of negligence which amounts to lack of mortgage over said property with Rural Bank of Larena for P100k. The


Credit Transactions – Atty. Ilagan 10

SPA made by the Monesets in favor of Bundalo as well as the REM was
then annotated on the title. 8-RIZAL COMMERCIAL BANKING CORPORATION vs. CA
 For the failure of the Monesets to pay the loan, the Bank served a G.R. No. 128833 April 20, 1998
notice of extrajudicial foreclosure on Bundalo. Petitioner: RCBC, UY CHUN BING AND ELI D. LAO
 Petitioner moved for the declaration of the non-effectivity of the Respondents: COURT OF APPEALS AND GOYU & SONS, INC.
mortgage and the payment of damages alleging that there was fraud ---------------------
or bad faith in the part of the spouses and with the bank for granting G.R. No. 128834
the REM in spite knowing that the property was in possession of Petitioners: RIZAL COMMERCIAL BANKING CORPORATION
petitioner –– Petitioner claims that: the Bank was duly informed through Respondents: CA, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP,
its appraiser that the house and lot to be mortgaged by Monesets SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY GO
were in the possession of a lessee; the Bank should have taken this as ---------------------
a cue to investigate further the Monesets' right over the same [G.R. No. 128866. April 20, 1998.]
 The Monesets answered that it was Ursal who stopped paying the Petitioners: MALAYAN INSURANCE INC.
agreed monthly installments in breach of their agreement. The Bank, Respondents: GOYU & SONS, INC.
on the other hand, averred that the title of the property was in the
name of "Cristita Radaza Moneset married to Jesus Moneset" and did Synopsis: (G na happenings kahit thru this lang)
not show any legal infirmity. When GOYU & Sons, Inc. (GOYU) obtained a credit facility from Rizal
 RTC ruled in favor of petitioner but maintained that the property be Commercial Banking Corporation (RCBC) it executed a mortgage contract in
foreclosed. CA affirmed in toto. favor of the bank wherein it was expressly stipulated that GOYU will insure all the
subject properties with an insurance company approved by the bank and to
Issue: endorse and deliver the policies to the bank. GOYU, through Alchester
Whether or not respondent bank acted in bad faith by failing to look beyond Insurance, Agency, Inc., took insurance policies from Malayan Insurance
the TCT of the property before a loan may be extended upon it. Company, Inc. (MICO), sister company of RCBC, and endorsed them in favor of
RCBC. Copies of the endorsements were sent and received by GOYU, RCBC
Held: and MICO. GOYU continued to enjoy the benefits of the credit facilities
YES. Banks cannot merely rely on certificates of title in ascertaining the status of extended to it by the bank. When GOYU's factory buildings were gutted by fire,
mortgaged properties; as their business is impressed with public interest, they GOYU and RCBC filed separate claims with MICO but were both denied
are expected to exercise more care and prudence in their dealings than private because the policies were either attached or claimed by other creditors. GOYU
individuals. Indeed, the rule that persons dealing with registered lands can rely then filed a complaint for specific performance and damages disowning the
solely on the certificate of title does not apply to banks. endorsements or lack of authority of Alchester to prepare and issue said
endorsements in favor of RCBC. The trial court rendered judgment ordering,
As enunciated in Cruz vs. Bancom: among others, MICO to pay fire loss claim of GOYU while ordering MICO and
“Respondent… is not an ordinary mortgagee; it is a mortgagee-bank. As such, RCBC to pay damages. GOYU was ordered to pay its loan obligations with RCBC
unlike private individuals, it is expected to exercise greater care and prudence with interests. On appeal, the Court of Appeals sustained the findings of the trial
in its dealings, including those involving registered lands. A banking institution is court with respect to MICO and RCBC's liabilities.
expected to exercise due diligence before entering into a mortgage contract.
The ascertainment of the status or condition of a property offered to it as security Hence, this recourse.
for a loan must be a standard and indispensable part of its operations.”
The Supreme Court held that a mortgagor and a mortgagee have separate
The ruling in the case however is still unfavorable to petitioner. The court held: and distinct insurable interests in the mortgaged property and may insure the
“Our agreement with petitioner on this point of law, notwithstanding, we are same for his own sole benefit; that GOYU is estopped from assailing the validity
constrained to refrain from granting the prayers of her petition. The reason is that, of the endorsements in favor of RCBC after it had voluntarily and purposely took
the contract between petitioner and the Monesets being one of “Contract TO the insurance policies from a sister company of RCBC and failed to seasonably
Sell Lot and House,” petitioner, under the circumstances, never acquired repudiate the authority of the persons who prepared the endorsements; that to
ownership over the property and her rights were limited to demand for specific permit GOYU to capitalize on its non-confirmation of the endorsements is to
performance from the Monesets, which at this juncture however is no longer countenance grave contravention of public policy, fair dealing, good faith and
feasible as the property had already been sold to other persons.” justice; that generally, the proceeds of an insurance shall exclusively apply to


Credit Transactions – Atty. Ilagan 11

the interest of the person in whose name or for whose benefit it is made except YES.
when otherwise intended by the parties; and that insurance policies transferred It is settled that a mortgagor and a mortgagee have separate and distinct
by way of endorsement to a mortgagee can no longer be attached by other insurable interests in the same mortgaged property, such that each one of them
creditors. may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the
Facts: present case, although it appears that GOYU obtained the subject insurance
 RCBC Binondo Branch initially granted a credit facility of P30M to Goyu policies naming itself as the sole payee, the intentions of the parties as shown by
& Sons, Inc. GOYU’s applied again and through Binondo Branch key their contemporaneous acts, must be given due consideration in order to better
officer's Uy’s and Lao’s recommendation, RCBC’s executive serve the interest of justice and equity.
committee increased its credit facility to P50M to P90M and finally to
P117M. It is to be noted that nine endorsement documents were prepared by Alchester
 As security, GOYU executed 2 real estate mortgages and 2 chattel in favor of RCBC. The Court is in a quandary how Alchester could arrive at the
mortgages in favor of RCBC. idea of endorsing any specific insurance policy in favor of any particular
 GOYU obtained in its name 10 insurance policies on the mortgaged beneficiary or payee other than the insured had not such named payee or
properties from Malayan Insurance Company, Inc. (MICO). In February beneficiary been specifically disclosed by the insured itself. It is also significant
1992, he was issued 8 insurance policies in favor of RCBC. that GOYU voluntarily and purposely took the insurance policies from MICO, a
 On April 27, 1992, One of GOYU’s factory buildings was burned so he sister company of RCBC, and not just from any other insurance company.
claimed against MICO for the loss who denied contending that the Alchester would not have found out that the subject pieces of property were
insurance policies were either attached pursuant to writs of mortgaged to RCBC had not such information been voluntarily disclosed by
attachments or garnishments or that creditors are claiming to have a GOYU itself. Had it not been for GOYU, Alchester would not have known of
better right GOYU's intention of obtaining insurance coverage in compliance with its
 GOYU filed a complaint for specific performance and damages undertaking in the mortgage contracts with RCBC, and verily, Alchester would
 RCBC, one of GOYU’s creditors, also filed with MICO its formal claim not have endorsed the policies to RCBC had it not been so directed by GOYU.
over the proceeds of the insurance policies, but said claims were also On equitable principles, particularly on the ground of estoppel, the Court is
denied for the same reasons that MICO denied GOYU’s claims constrained to rule in favor of mortgagor RCBC. RCBC, in good faith, relied upon
 RTC confirmed that GOYU’s other creditors (Urban Bank, Alfredo the endorsement documents sent to it as this was only pursuant to the stipulation
Sebastian, and Philippine Trust Company) obtain their writs of in the mortgage contracts. We find such reliance to be justified under the
attachment covering an aggregate amount of P14,938,080.23 and circumstances of the case. GOYU failed to seasonably repudiate the authority
ordered that 10 insurance policies be deposited with the court minus of the person or persons who prepared such endorsements. Over and above
the said amount so MICO deposited P50,505,594.60. this, GOYU continued, in the meantime, to enjoy the benefits of the credit
 Then, another Garnishment of P8,696,838.75 was handed down facilities extended to it by RCBC. After the occurrence of the loss insured against,
 RTC favored GOYU against MICO for the claim, RCBC for damages it was too late for GOYU to disown the endorsements for any imagined or
and to pay RCBC its loan; while CA modified by increasing the contrived lack of authority of Alchester to prepare and issue said endorsements.
damages in favor of GOYU If there had not been actually an implied ratification of said endorsements by
 In another case, RCBC seeks the right to intervene in the action virtue of GOYU's inaction in this case, GOYU is at the very least estopped from
between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), assailing their operative effects. To permit GOYU to capitalize on its non-
where the subject insurance policies were attached in favor of confirmation of these endorsements while it continued to enjoy the benefits of
Sebastian the credit facilities of RCBC which believed in good faith that there was due
 The lower and appellate courts ruled that endorsements do not bear endorsement pursuant to their mortgage contracts, is to countenance grave
the signature of any officer of GOYU concluded that the endorsements contravention of public policy, fair dealing, good faith, and justice. Such an
favoring RCBC as defective. unjust situation, the Court cannot sanction. Under the peculiar circumstances
obtaining in this case, the Court is bound to recognize RCBC's right to the
Issue: proceeds of the insurance policies if not for the actual endorsement of the
Whether or not RCBC as mortgagee, has any right over the insurance policies policies, at least on the basis of the equitable principle of estoppel.
taken by GOYU, the mortgagor, in case of the occurrence of loss
The basis and purpose of the doctrine was explained in PNB vs. CA, to wit: The
Held: doctrine of estoppel is based upon the grounds of public policy, fair dealing,


Credit Transactions – Atty. Ilagan 12

good faith and justice, and its purpose is to forbid one to speak against his own  Thereafter, petitioners requested PNB to release the mortgages over
act, representations, or commitments to the injury of one to whom they were the agricultural lands, as a prerequisite to the purchase of Landbank.
directed and who reasonably relied thereon. The doctrine of estoppel springs  On MAY 22, 1972, PNB entered into an Amendment of REM whereby it
from equitable principles and the equities in the case. It is designed to aid the consolidated the two loans so that it be secured by only the Manila
law in the administration of justice where without its aid injustice might result. It property. In effect, the mortgage on the Nueva Ecija lands were paid
has been applied by this Court wherever and whenever special circumstances off and the second was increased.
of a case so demand.  On January 5, 1976, petitioners assigned their rights to LandBank
 On June 1, 1977, PNB issued Regulation No. 40-188-77, outlining
9-RAMIREZ V. CA guidelines for the handling of Land Bank bonds, to wit:
G.R. No. 83792, February 14, 1991
FACTS: a) Bonds offered, as payment for loans not secured by land subject
 PNB extended loan to petitioners Emiliano & Rosario Ramirez and Carlo to agrarian reform shall be accepted at a discount, based on the
Rustia the amounts, to wit: bank's prevailing discount rates.
1. September 3, 1963 – Php 80,000, secured by a REM over b) Bonds issued to PNB in payment of outstanding loans secured
parcels of agricultural lands in Nueva Ecija solely by properties subjected to agrarian reform under PD 27 are
2. January 11, 1968 – Php 53,000, secured by a REM over acceptable on a one-to- one basis as provided in Special Circular
Bulacan properties No. 58-A-1974.
 On January 29, 1968, the mortgage was amended that without c) Bonds issued in payment of loan accounts secured by multiple
increasing the loan, additional securities were posted consisting of collaterals, a portion of which is subjected to agrarian reform, shall
other parcels of agricultural lands in Nueva Ecija. be accepted as follows:
 On September 10, 1968, petitioner Rustia requested that the mortgage i. At 100%, but only to the extent of the proportionate loan
over the Bulacan properties be released, on the ground that the value of the collateral subjected to land reform in relation
mortgage loan in total of Php 133,000 had already been reduced to to the total loan value of all the collaterals;
Php 80,000, and therefore, securities left was sufficient to secure the ii. The balance of the Land Bank bonds may be accepted
payment of the same. Request was GRANTED. It should be mentioned either as payment on a discounted basis, or substitute
that the original load of Php 80,000 was evidenced by a document collaterals in lieu of the collateral to be released.
entitled “Real Estate Mortgage,” which was changed to Amendment
of REM with Additional Securities,” when the additional loan (#2) was  On June 21, 1977, PNB demanded payment from the petitioners of the
granted. overdue balance of their loan (Php 63,607.28). Petitioners replied,
 PNB granted another loan to the petitioners: seeking forbearance on the ground that petitioners were still in the
3. October 1968, Php 70,000, secured by a real estate in process of seeking opinion with respect to the value of Land Bonds, but
Azcarraga St. Manila nevertheless, remitted the amount of Php 6,902.28, representing the
 On August 1970, petitioners wrote PNB of the approaching maturity interest.
dates of loans #1 and #3, which were on September and October  Petitioners paid the LandBank bonds to release the load. The bonds
1970, respectively. They also admitted that #3 loan is a new loan and were accepted but only upon a discount rate of 40% of the face value.
not and addition to #1 and #2, and, in addition, they requested:  This prompted the petitioners to recover the amount paid.
(i) To renew/extend for another year to pay the balance of their
indebtedness after paying Php 25,000; ISSUE:
(ii) To consolidate the 2 promissory notes to mature on October Whether or not the PNB has the right to discount the value of land bank bonds
2, 1971; and
(iii) To release the mortgage over the Nueva Ecija lands and HELD:
retain only the Manila property as security for both. NO.
 PNB only approved request (ii) on January 1971.
 On October 1971, the petitioners offered to sell their Nueva Ecija lands Sec. 80 of the Code of Agrarian Reform of the Philippines, (Republic Act 3844 as
to Landbank Philippines, to which the latter replied that the mode of amended), as amended by Presidential Decree No. 251, provides:
payment under Agricultural Land Reform Code should be followed.
In the event there is existing lien or encumbrance on the land in favor of any


Credit Transactions – Atty. Ilagan 13

government lending institution at the time of acquisition by the bank (meaning option of the Land Bank at or before maturity, which in no case shall exceed
Land Bank), the landowner shall be paid the net value of the land (i.e., the value twenty five (25) years.
of the land determined under Proclamation No. 27 minus the outstanding
balance/s of the obligation/s secured by the lien/s or encumbrance/s), and the The PNB, a government lending institution has choses to accept Land Bank
outstanding balance/s of the obligations to the lending institution/s shall be paid bonds without any discount only when the property acquired by the Land Bank
by the Land Bank in Land Bank bonds or other securities; existing charters of is at the time of acquisition encumbered in favor of the government lending
those institutions to the contrary notwithstanding. A similar settlement may be institution. We find, however, the imposition of a discounted value of forty
negotiated by the Land Bank in the case of obligations secured by liens or percent (40%) of Land Bank bonds — as happened in this case — tantamount
encumbrances in favor of private parties or institutions." to effecting a watered-down bond instrument, thus defeating the intent of the
law in constituting the bonds as effective payments to discharge the obligation
There is no question that the properties involved in the cited cases were all with government lending institutions of landowners who sell their agricultural
encumbered agricultural lands at the time of their acquisition by the Land Bank. lands to the Land Bank to hasten land reform, let alone the fact that such
Such lands with existing mortgages in favor of a government lending institution discounting impairs the intrinsic value of such bonds which are guaranteed by
were acquired under the land reform program; the landowners were paid no less than the Philippine Government.
directly, in Land Bank bonds, the net value of their lands as determined under
P.D. No. 27 minus the outstanding balance of their obligations to the The Land Bank bonds, besides being fully guaranteed by the government, are
government lending institution. The latter was required to accept Land by express provision of Section 80 of the Code of Agrarian Reform of the
Philippines, as amended by PD No. 251, six percent (6%) interest bearing. If the
Bank bonds at face value in settlement of the landowners' obligations. Thus, P.D. law has deemed this interest rate sufficient to compensate landowners for the
27 effects emancipation of the tenant-farmer from his bondage to the soil while change in the mode of payment of their agricultural lands from cash to bonds,
Sec. 80 of the Code of Agrarian Reform, as amended by PD 251, provides the this interest rate should also be a sufficient yield on the bonds when they are
mode of financing such emancipation. paid, instead of cash, to government lending institutions against the outstanding
balances of landowners who sell their agricultural lands to the Land Bank in their
It cannot be overlooked that, in the present case, the entire mortgage loan was desire to hasten the land reform program and speed up the emancipation of
originally secured partly by agricultural lands in Nueva Ecija that were potentially the tenant-farmer from his bondage to the soil.
subject to land reform. While it is true that at the time of payment of the
petitioners' loan balance with the PNB, the mortgage on such agricultural lands If landowners are called to sacrifice in the interest of land reform, by their
had already been released, yet the fact remains that the release was secured acceptance of Land Bank bonds in payment of their agricultural lands,
by the petitioners purposely because of the requirement of the Land Bank that government lending institutions should share in the sacrifice by accepting the
the lands should first be cleared of all liens and encumbrances before payment same Land Bank bonds at their face value, as tendered by landowners in
could be effected. In truth, there no longer existed any mortgage on the payment of their loans with such government lending institutions, as long as such
agricultural lands when they were sold to the Land Bank. But, the intention of the Land Bank bonds are derived by landowners from the sale of their agricultural
petitioners was all along to pay their mortgage account with the PNB from the lands to the Land Bank.
proceeds of the sale to the Land Bank of their agricultural lands, and these
proceeds were in the form of Land Bank bonds. Accordingly, we hold that the circumstances of the present case dictate that it
would be more in keeping with justice and equity if the Land Bank bonds in
To afford relief to landowners and in order to give them liquidity so as to enable question were accepted by the PNB on their face value or on a one-on-one
them to undertake other ventures which would contribute to national basis (as distinguished from a forty percent (40%) discounted value).
development, then President Marcos promulgated PD 251 enjoining the Land
Bank on behalf of a landowner-debtor to satisfy or settle his outstanding 10-PRUDENTIAL BANK V. SPS. ALVIAR
obligation in favor of government lending institutions by payment in Land Bank G.R. No. 150197, July 28, 2005
bonds or other securities. FACTS:

Land Bank bonds are certificates of indebtedness approved by the Monetary  Spouses Don A. Alviar and Georgia B. Alviar, are the owners of a parcel
Board of the Central Bank, fully tax exempt both as to principal and interest, and of land in San Juan covered by Transfer Certificate of Title (TCT) No.
bear interest at the rate of six percent (6%) per annum, redeemable at the 438157


Credit Transactions – Atty. Ilagan 14

 They executed a deed of real estate mortgage in favor of Prudential attorney’s fees. It ruled that while a continuing loan or credit
Bank to secure the payment of a loan worth P250, 000.00 and accommodation based on only one security or mortgage is a
executed a promissory note (1st), PN BD#75/C-252, covering the said common practice in financial and commercial institutions, such
loan and includes a dragnet clause. agreement must be clear and unequivocal.
 Don Alviar subsequently executed another promissory note (2nd), PN  In the instant case, the parties executed different promissory notes
BD#76/C-345 for P2, 640,000.00, secured by a hold-out on the agreeing to a particular security for each loan. Thus, the appellate
mortgagor’s foreign currency savings account with the bank. court ruled that the extrajudicial foreclosure sale of the property for the
 Spouses Alviar then executed for Donalco Trading, Inc., another three loans is improper.
promissory note (3rd) PN BD#76/C-430 covering P545, 000.000. The loan  The Court of Appeals, however, found that respondents have not yet
is secured by Clean-Phase out, which means that the temporary paid the P250, 000.00 covered by PN BD#75/C-252 (1st) since the
overdraft incurred by Donalco Trading, Inc. with Prudential Bank is to payment of P2, 000,000.00 adverted to by respondents was issued for
be converted into an ordinary loan in compliance with a Central Bank the obligations of G.B. Alviar Realty and Development, Inc.
 Prudential Bank then wrote Donalco Trading, Inc., informing the latter ISSUE/S: W/N the blanket mortgage clause or the dragnet clause is valid
of its approval of a straight loan of P545, 000.00, the proceeds of which
shall be used to liquidate the outstanding loan of P545, 000.00
temporary overdraft.
 Spouses Alviar then paid Prudential Bank P2, 000,000.00, to be applied
to the obligations of G.B. Alviar Realty and Development, Inc. and for YES (but not applicable to full extent in this case)
the release of the real estate mortgage. (Separate loan)
 Prudential Bank moved for the extrajudicial foreclosure of the A blanket mortgage clause, also known as a dragnet clause, is one, which is
mortgage on the property covered by TCT No. 438157 (1st PN). Per the specifically phrased to subsume all debts of past or future origins. Such clauses
bank's computation, respondents had the total obligation of P1, are carefully scrutinized and strictly construed.
608,256.68, covering the three (3) promissory notes, to wit: PN BD#75/C-
252 for P250, 000.00, PN BD#76/C-345 for P382, 680.83, and PN The parties intended the real estate mortgage to secure not only the P250,
BD#76/C-340 for P545, 000.00, plus assessed past due interests and 000.00 loan from the petitioner, but also future credit facilities and
penalty charges. advancements that may be obtained by the respondents. The terms of the
 Spouses Alviar filed a complaint for damages with a prayer for the above provision being clear and unambiguous, there is neither need nor excuse
issuance of a writ of preliminary injunction with RTC Pasig, claiming that to construe it otherwise.
they have paid their principal loan secured by the mortgaged
property, and thus the mortgage should not be foreclosed. The subsequent loans obtained by the spouses Alviar were secured by other
 Prudential Bank averred that the payment of P2, 000,000.00 was not a securities.
payment made by the spouses Alviar, but by G.B. Alviar Realty and
Development Inc., which has a separate loan with the bank secured
Under American jurisprudence, two schools of thought have emerged on this
by a separate mortgage.
question. One school advocates that a dragnet clause so worded as to be
 RTC: Dismissed the complaint and ordered the Sheriff to proceed with
broad enough to cover all other debts in addition to the one specifically
the extra-judicial foreclosure but upon reconsideration, issued an order
secured will be construed to cover a different debt, although such other debt is
setting aside its earlier decision and awarded attorneys fees to
secured by another mortgage.
respondents. RTC found that only the P250, 000.00 loans is secured by
the mortgage on the land covered by TCT No. 438157. On the other
hand, the P382, 680.83 loan is secured by the foreign currency deposit The contrary thinking maintains that a mortgage with such a clause will not
account of Don A. Alviar, while the P545, 000.00 obligation was an secure a note that expresses on its face that it is otherwise secured as to its
unsecured loan, being a mere conversion of the temporary overdraft. entirety, at least to anything other than a deficiency after exhausting the
The blanket mortgage clause relied upon by the bank applies only to security specified therein, such deficiency being an indebtedness within the
future loans obtained by the mortgagors, and not by parties other than meaning of the mortgage, in the absence of a special contract excluding it
the said mortgagors, such as Donalco Trading, Inc. from the arrangement.
 CA: Affirmed the Order of the trial court but deleted the award of


Credit Transactions – Atty. Ilagan 15

The latter school represents the better position. The parties having conformed to Even the promissory notes in issue were made on standard forms prepared by
the blanket mortgage clause or dragnet clause, it is reasonable to conclude the, and as such are likewise contracts of adhesion. Being of such nature, the
that they also agreed to an implied understanding that subsequent loans need same should be interpreted strictly against the bank.
not be secured by other securities, as the subsequent loans will be secured by
the first mortgage. In other words, the sufficiency of the first security is a corollary The bank however, is not without recourse. Both the Court of Appeals and the
component of the dragnet clause. trial court found that respondents have not yet paid the P250, 000.00, and gave
no credence to their claim that they paid the said amount when they paid
But of course, there is no prohibition, as in the mortgage contract in issue, against petitioner P2, 000,000.00. Thus, the mortgaged property could still be properly
contractually requiring other securities for the subsequent loans. Thus, when the subjected to foreclosure proceedings for the unpaid P250, 000.00 loan, and for
mortgagor takes another loan for which another security was given it could not any deficiency after subsequent securities has been exhausted, subject of
be inferred that such loan was made in reliance solely on the original security course to defenses which are available to the spouses.
with the dragnet clause, but rather, on the new security given. This is the reliance
on the security test. 11- UNION BANK V. CA, D’ROSSA, INC.
G.R. No. 164910, September 30, 2005
Hence, based on the reliance on the security test, an inquiry whether the second FACTS:
loan was made in reliance on the original security containing a dragnet clause  In a memorandum of agreement dated May 27, 1992, D’Rossa, Inc.
must be made. (DRI) agreed to mortgage its parcels of land covered by TCT S-24740
and S-24747 in favor of Union Bank as security for the credit facility of
It has been held that in the absence of clear, supportive evidence of a contrary Josephine Marine Trading Corp. (JMTC), which availed Php 3million
intention, a mortgage containing a dragnet clause will not be extended to from the credit line.
cover future advances unless the document evidencing the subsequent  Subsequently, Union Bank increased the credit to Php 27 million, from
advance refers to the mortgage as providing security therefor. which JMTC availed USD700,503.64 (or Php 18,318,170.18. Upon JMTC’s
failure, Union instituted foreclosure proceedings on DRI’s properties.
It was therefore improper for petitioner in this case to seek foreclosure of the  DRI’s properties were auctioned where Union Bank was the highest
mortgaged property because of non-payment of all the three promissory notes. bidder.
While the existence and validity of the dragnet clause cannot be denied, there  On February 26, 1997, DRI filed a supplemental complaint seeking to
is a need to respect the existence of the other security given. declare the sale as null, claiming that its liability is only up to 3 million,
which was its first agreement. Union Bank, however, alleged that DRI
was liable to JMTC’s total outstanding obligations, regardless when it
The foreclosure of the mortgaged property should only be for the P250, 000.00
was incurred.
loan covered by PN BD#75/C-252, and for any amount not covered by the
 RTC’s denied DRI’s complain for lack of merit.
security for the subsequent promissory note. While the dragnet clause subsists,
 CA reversed the decision. While it upheld that Union Bank has the right
the security specifically executed for subsequent loans must first be exhausted
to foreclose, it found that DRI’s liability is pegged at Php 3 million, which
before the mortgaged property can be resorted to.
was later amended to Php 8.61 million. It could not be held liable for
more that that even if JMTC availed more of the amount. It likewise
One other crucial point is that the mortgage contract, as well as the promissory declared the sale null because the sale was carried out on the day
notes subject of this case, is a contract of adhesion. different from that published.
 Union Bank appealed to the SC.
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by the bank, and which, according to jurisprudence must be ISSUE/S:
strictly construed against the party responsible for its preparation. 1. W/N CA erred in the setting of DRI’s liability
2. W/N CA erred in finding the foreclosure sale of DRI’s as null for lack of
If the parties intended that the blanket mortgage clause shall cover subsequent republication
advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. HELD:
1. YES
The pertinent provisions of the Real Estate Mortgage provide:


Credit Transactions – Atty. Ilagan 16


Section 1. Secured Obligations. — The obligations secured by this Mortgage (the G.R. No. 109472, May 18, 1999
"Secured Obligations") are the following: FACTS:
a) All the obligations of the Borrower and/or the Mortgagor under: (I) the Notes,  Spouses Egmidio Maglaque and Sabina Payawal were owners of a
the Agreement and this Mortgage; (ii) any and all instruments or documents house and lot in San Miguel, Bulacan, with an area of more or less 464
issued upon the renewal, extension, amendment or novation of the Notes, the sq. covered by TCT. 28303
Agreement and this Mortgage, irrespective of whether such obligations as  On March 19, 1974, they obtained a load of Php 2,000 from Bulacan
renewed, extended, amended or novated are in the nature of new, separate Development Bank, evidenced by a promissory note payable in one
or additional obligations; and (iii) any and all instruments or documents issued year, in two installments, with 12% interest per annum. They instituted a
pursuant to the Notes, the Agreement and this Mortgage; REM over the abovementioned property.
b) All other obligations of the Borrower and/or the Mortgagor in favor of the  On September 15, 1976, Sabina died, On December 22, 1977,
Mortgagee, whether presently owing or hereinafter incurred and whether or not Maglaque paid the amount of Php 2,000, which the bank accepted.
arising from or connected with the Agreement, the Notes and/or this Mortgage;  On April 9, 1979, Maglaque likewise died.
and  For non-payment in full of the load, the bank extra-judicially foreclosed
c) Any and all expenses which may be incurred in collecting any and all of the the REM. An auction was held to which the bank was the highest
above and in enforcing any and all rights, powers and remedies of the bidder. After the lapse of the redemption period, the bank
Mortgagee under this Mortgage. consolidated its title to the property.
 On September 4, 1980, David Maglaque, an heir, filed with CFI-Bulacan
The provisions clearly show the parties’ intent to constitute DRI’s real estate an annulment of the sale conducted, reconveyance and damages.
properties as continuing securities, liable for the current as well as the future  On September 24, the bank sold the property to Spouses Angel and
obligations of JMTC. Generally, a mortgage liability is usually limited to the Erlinda Beltran for Php 30,000.
amount mentioned in the contract, but where, the intent of the contracting  The RTC dismissed for lack of merit, and the CA affirmed.
parties is manifest, which the mortgage property shall also answer for future
loans, the same is valid. In this case, DRI expressly agreed to secure all ISSUE:
obligations, it is not limited to PHP 8.61 million only. W/N the foreclosure was proper

Even if DRI were considered as an accommodation mortgagor only, its liability HELD:
would still exceed Php 8.61 million. Through its president Rose Teodoro, DRI YES. In this appeal, petitioners imputes the following errors to the Court of
agreed to secure all obligations and actively participated in facilitating the Appeals, namely:
credit increases.
 The Honorable Court of Appeals erred in not finding that the Bank
It also appears that DRI has sent a letter to JMTC, evidencing that DRI was should have filed its claim in the settlement of estate of the deceased
actively involved in the business. Thus, by agreeing to secure JMTC's future loans mortgagors. 

or advancements with its real properties, DRI is estopped from questioning the  The Honorable Court of Appeals erred in not finding that there was no
foreclosure proceedings conducted upon the failure of JMTC to pay its compliance as to the mandatory requirements of extra-judicial
obligations to Union Bank. foreclosure. 

 The Honorable Court of Appeals erred in not holding that the price of
2. YES
P4, 202.70 realized from the auction sale was palpably iniquitous and

Foreclosure proceedings have in their favor the presumption of regularity and
 The Honorable Court of Appeals erred in not finding that the appellee
the burden of evidence to rebut the same is on the party that seeks to challenge
Bank is guilty of estoppel. 

the proceedings.
 The Honorable Court of Appeals erred in not holding that the Bank is
guilty of usury. 

DRI did not present proof that there was no republication. Union Bank, on the
other hand, presented a Certificate of Posting executed by the Sheriff and  The Honorable Court of Appeals erred in not holding that Sps. Angel
Affidavit of Publication by General Manager of Pilipino Newsline showing that it Beltran and Erlinda Beltran are buyers in bad faith.cdl 

was properly published for 2 months.


Credit Transactions – Atty. Ilagan 17

Except for the first assigned error, the rest of the issues raised are factual, hence,  On the other hand, Northern Motors, Inc. in its motion for
not subject to review by this Court. the partial reconsideration of the same August 29 resolution, prayed
for the reversal of the lower court's orders cancelling the bond filed by
As to the first assigned error, the rule is that a secured creditor holding a real Filwriters Guaranty Assurance Corporation. Northern Motors, Inc.
estate mortgage has three (3) options in case of death of the debtor. These are: further prayed that the sheriff should be required to deliver to it the
proceeds of the execution sale of the mortgaged taxicabs without
deducting the expenses of execution.
1) To waive the mortgage and claim the entire debt from the estate of
 Ong - invokes his supposed "legal and equity status" vis-a-vis the
the mortgagor as an ordinary claim;
mortgaged taxicabs. He contends that his only recourse was to levy
2) To foreclose the mortgage judicially and prove any deficiency as an
upon the taxicabs which were in the possession of the judgment
ordinary claim; and
debtor, Manila Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc.,
3) To rely on the mortgage exclusively, foreclosing the same at any time
as unpaid seller and mortgagee, "has still an independent legal
before it is barred by prescription, without right to file a claim for any
remedy" against the mortgagor for the recovery of the unpaid
balance of the price.

Obviously, respondent bank availed itself of the third option. It is held to be ISSUE: WON Ong the assignee of unsecured judgment creditor of the chattel
proper. mortgagor has superior right over the chattel mortgagee Northern Motors

Chattel Mortgage HELD:

 No.
 That contention is not a justification for setting aside the holding that
13- Northern Motors Inc. Coquia Ong had no right to levy upon the mortgaged taxicabs and that he
G.R. No. L-40018, December 15, 1975 could have levied only upon the mortgagor's equity of redemption.
Doctrine: The essence of the chattel mortgage is that the mortgaged chattels 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 should answer for the mortgage credit and not for the judgment credit
mortgagor's unsecured creditor. The mortgagee is not obligated to file an of the mortgagor's unsecured creditor. The mortgagee is not obligated
"independent action" for the enforcement of his credit. To require him to do so to file an "independent action" for the enforcement of his credit. To
would be a nullification of his lien and would defeat the purpose of the chattel require him to do so would be a nullification of his lien and would
mortgage which is to give him preference over the mortgaged chattels for the defeat the purpose of the chattel mortgage which is to give him
satisfaction of his credit. preference over the mortgaged chattels for the satisfaction of his
Petitioner: Northern Motors Inc  The registration of the chattel mortgage is an effective and binding
Respondents: Hon. Jorge Coquia, et. al., Filinvest Credit Corporation (intervenor) notice to Ong of its existence. The mortgage creates a real right or a
lien which, being recorded, follows the chattel wherever it goes.
NOTE:  Northern Motors, Inc., as mortgagee, was entitled to the possession of
 Northern Motors – chattel mortgagee the eight taxicabs. Those cabs should not have been levied upon and
 Manila Yellow Taxicab Co., Inc. – chattel mortgagor sold at public auction to satisfy the judgment credit which was inferior
 Honesto Ong - assignee of unsecured judgment creditor of the chattel to the chattel mortgage. Since the cabs could no longer be recovered
mortgagor because apparently they had been transferred to persons whose
addresses are unknown the proceeds of the execution sale may be
FACTS: regarded as a partial substitute for the unrecoverable cabs.
 Respondent Honesto Ong and City Sheriff of Manila filed a motion for
the reconsideration of this Court's resolution of August 29, 1975. In that 14-PNB v. RBL Enterprises
resolution, it was held that the lien of Northern Motors, Inc., as chattel G.R. No. 149569, May 28, 2004
mortgagee, over certain taxicabs is superior to the levy made on the Doctrine: When there is partial failure of consideration, the mortgage becomes
said cabs by Honesto Ong, the assignee of the unsecured judgment unenforceable to the extent of such failure. Where the indebtedness actually
creditor of the chattel mortgagor, Manila Yellow Taxicab Co., Inc. owing to the holder of the mortgage is less than the sum named in the


Credit Transactions – Atty. Ilagan 18

mortgage, the mortgage cannot be enforced for more than the actual sum  No. Respondents had complied with all the requirements set forth in the
due. recommendation and approval sheet forwarded by petitioner's main office
to the Bacolod branch for implementation; and the Credit Agreement had
Petitioner: Philippine National Bank been executed thereafter. Naturally, respondents were led to believe and
Respondents: RBL Enterprises, Inc., Ramon B. Lacson Sr., Spouses Edwardo and to expect the full release of their approved loan accommodation.
Herminia Ledesma  If the parties truly intended to suspend the release of the P1,000,000
balance of the loan until the lessor's conformity to the Mortgage Contract
FACTS: would have been obtained, such condition should have been plainly
 Respondents opened a prawn hatchery in San Enrique, Negros Occidental, stipulated either in that Contract or in the Credit Agreement. The tenor of
and for this purpose, leased from Nelly Bedrejo a parcel of land where the the language used in paragraph. 9.07, as well as its position relative to the
operations were conducted. They applied for and was approved a loan of whole Contract, negated the supposed intention to make the release of
P2,000,000.00, by PNB. To secure its payment, respondents executed in the loan subject to the fulfillment of the clause.
favor of PNB, a real estate mortgage over 2 parcels of land, located at  The records show that all the real estate and chattel mortgages were
Bago City, Negros Occidental and another real estate and chattel registered with the Register of Deeds of Bago City, Negros Occidental, and
mortgage over the buildings, culture tanks and other hatchery facilities annotated at the back of the mortgaged titles. Thus, petitioner had ample
located in the leased property of Nelly Bedrejo. security to protect its interest. The lessor's nonconformity to the Mortgage
 PNB partially released on several dates, the total sum of P1,000,000.00 less Contract would not cause petitioner any undue prejudice or
the advance interests. disadvantage, because the registration and the annotation were
 During the mid-part of the construction of the improvements, PNB refused considered sufficient notice to third parties that the property was subject to
to release the balance of P1,000,000.00 allegedly because respondents an encumbrance. A registered mortgage lien is considered inseparable
failed to comply with the bank's requirement that Nelly Bedrejo should from the property inasmuch as it is a right in rem. The mortgage creates a
execute an undertaking or a 'lessors' conformity' provided in Real Estate real right or a lien which, after being recorded, follows the chattel wherever
and Chattel Mortgage contract it goes.
o It is a condition of this mortgage that while the obligations
remained unpaid, the acquisition by the lessor of the permanent 15- PAMECA Wood Treatment Plant v. CA
improvements covered by this Real Estate Mortgage as provided G.R. No. 106435, July 14, 1999
for in the covering Lease Contract, shall be subject to this Doctrine: Since the Chattel Mortgage Law bars the creditor-mortgagee from
mortgage. For this purpose, the mortgagor hereby undertakes to retaining the excess of the sale proceeds there is a corollary obligation on the
secure the lessor's conformity hereto. part of the debtor-mortgagee to pay the deficiency in case of a reduction in
 PNB foreclosed the mortgaged properties, to the detriment of respondents, the price at public auction.
who were forced to close their business after incurring huge amount of loss.
 PNB - lessors' conformity was not an additional requirement but was already Petitioners: PAMECA Wood Treatment Plant, Inc., Herminio Teves, Victoria Teves,
part of the terms and conditions contained in the Real Estate and Chattel Hiram Diday Pulido
Mortgage and that the release of the balance of the loan was conditioned Respondents: Court of Appeals, Development Bank of the Philippines
on the compliance and submission by the respondents of the required
lessors' conformity. FACTS:
 RTC and CA - PNB had breached its obligation under the Contract of Loan  PAMECA obtained a loan of US$267,881.67, or the equivalent of
and should therefore be held liable for the consequential damages P2,000,000.00 from DBP. By virtue of this loan, petitioner PAMECA, through its
suffered by respondents. PNB's refusal to release the balance of the loan President, petitioner Herminio C. Teves, executed a promissory note for the
was unjustified - the interests of PNB were amply protected, as the loan had said amount, promising to pay the loan by installment. As security for the
overly been secured by collaterals with a total appraised value of said loan, a chattel mortgage was also executed over PAMECA's properties
P3,088,000. in Dumaguete City, consisting of inventories, furniture and equipment, to
cover the whole value of the loan.
ISSUE: WON the non-release of the balance of the loan by PNB is justified  Upon PAMECA's failure to pay, DBP extrajudicially foreclosed the chattel
mortgage, and, as sole bidder in the public auction, purchased the
HELD: foreclosed properties for a sum of P322,350.00. Thereafter, DBP filed a
complaint for the collection of the balance of P4,366,332.46 with RTC Makati


Credit Transactions – Atty. Ilagan 19

against petitioner PAMECA and private petitioners herein, as solidary of chattel mortgage, being contrary to the provisions of Article 2115, Article
debtors with PAMECA under the promissory note. 2115 in relation to Article 2141, may not be applied to the case.
 RTC – ordered PAMECA and its officers to pay jointly and severally DBP the
sum of P4,366,332.46 representing the deficiency claim of the latter, plus Antichresis
21% interest per annum and other charges.
 Petitioners – Contend that the amount of P322,350.00 at which respondent 16- Dizon v. Gaborro
bank bid for and purchased the mortgaged properties was G.R. No. L-36821, June 22, 1978
unconscionable and inequitable considering that, at the time of the public Doctrine: Where the true intention of the parties as found by the trial and
sale, the mortgaged properties had a total value of more than appellate courts was for the transferee to assume the mortgage debts of the
P2,000,000.00. They also submit that Articles 1484 and 2115 of the Civil Code mortgagor and in consideration thereof the transferee was given possession,
be applied in analogy to the instant case to preclude the recovery of a enjoyment and use of the lands until the mortgagor can reimburse fully the
deficiency claim. transferee the amounts paid by the latter to the mortgagee, to accomplish the
following ends: (a) payment of the bank obligations; (b) make the lands
ISSUE: WON DBP is entitled to recover the deficiency productive for the benefits of the possessor; (c) assure the return of the land to
the original owner, thus rendering equity and fairness to all parties, the Supreme
HELD: Court held that he agreement between the mortgagor and transferee is one of
 Yes. those innominate contracts under Article 1307 of the new Civil Code whereby
 Sec. 14, Chattel Mortgage Law (CML) – xxx the proceeds of such sale shall the mortgagor and transferee agreed "to give and to do" certain rights and
be applied to the payment, first, of the costs and expenses of keeping and obligations respecting the lands and the mortgage debts of mortgagor which
sale, and then to the payment of the demand or obligation secured by would be acceptable to the mortgagee, but partaking of the nature of
such mortgage, and the residue shall be paid to persons holding antichresis insofar as the principal parties, mortgagor and transferee are
subsequent mortgages in their order, and the balance, after paying the concerned.
mortgage, shall be paid to the mortgagor or persons holding under him on
demand. Petitioner: Jose P. Dizon
 It is clear from the above provision that the effects of foreclosure under Respondents: Alfredo G. Gaborro (substituted by Pacita De Guzman Gaborro
the CML run inconsistent with those of pledge under Article 2115. It as Judicial Administratrix of his estate) Development Bank of the Philippines
expressly entitles the mortgagor to the balance of the proceeds, upon
satisfaction of the principal obligation and costs. (Guys sorry mejo nakakalito talaga huhu, pero eto yung Synopsis hehehe)
 Since the CML bars the creditor-mortgagee from retaining the excess of the After his properties were extrajudicially foreclosed but before the expiration of
sale proceeds there is a corollary obligation on the part of the debtor- the redemption period, petitioner executed a "Deed of Sale with Assumption of
mortgagee to pay the deficiency in case of a reduction in the price at Mortgage" in favor of private respondent, who in turn executed on the same
public auction. day an "Option to Purchase Real Estate" in favor of petitioner. Thereafter, private
 Rationale: The value of the chattels changes greatly from time to time, and respondent made several payments to the mortgagee, took possession of,
sometimes very rapidly. If, for example, the chattels should greatly increase cultivated, and paid taxes, on the land.
in value and a sale under that condition should result in largely overpaying
the indebtedness, and if the creditor is not permitted to retain the excess, Two years later, petitioner offered to reimburse what private respondent had
then the same token would require the debtor to pay the deficiency in case paid to the mortgagee, and demanded an accounting. When private
of a reduction in the price of the chattels between the date of the contract respondent dishonored the request, petitioner sued the former for accounting,
and a breach of the condition. alleging that the two deeds did not express their true intent, the transaction
 Also, private petitioners are not made to answer for the corporate act of being one of an equitable mortgage and not an absolute sale. The trial court
petitioner PAMECA, but are made liable because they made themselves ordered the instruments reformed in the sense that the true agreement is one
co-makers with PAMECA under the promissory note. whereby private respondent, in consideration of the use of petitioner's
 Ablaza v. Ignacio - Article 2141 of the Civil Code, which provides that the properties, would assume the latter's debts. The Court of Appeals affirmed the
provisions of the Civil Code on pledge shall also apply to chattel decision, with the modification that petitioner "has the right to reimburse"
mortgages, insofar as they are not in conflict with the Chattel Mortgage respondent at 8% per annum, which right shall be exercised within one year from
Law. The Court reversed the ruling of the lower court and held that the the finality of decision.
provisions of the Chattel Mortgage Law regarding the effects of foreclosure


Credit Transactions – Atty. Ilagan 20

The Supreme Court affirmed the decision of the Court of Appeals, holding that or conveyance by way of security for the reimbursement or refund by Dizon
after foreclosure, the only right that the mortgagee may transfer is that of to Gaborro of any and all sums which the latter may have paid on account
redemption; that the disputed agreement is one of innominate contracts, under of the mortgage debts in favor of the DBP and the PNB.
Article 1307 of the Civil Code, partaking of antichresis; and that the agreement
may be reformed pursuant to Articles 1359 and 1361 of the Civil Code, because ISSUES:
a mutual mistake of the parties caused the failure of the instrument to disclose  WON the "Deed of Sale with Assumption of Mortgage" and the "Option to
their true agreement. Purchase Real Estate executed by and between Dizon and Gaborro
constitute an absolute sale of the parcels of land therein described (No)
FACTS:  WON the respondent should account for all the fruits produced and
 Petitioner Jose P. Dizon was the owner of the 3 parcels of land, subject income received by them from the lands mentioned (No)
matter of this litigation, situated in Mabalacat, Pampanga. He constituted
a first mortgage lien in favor of the Development Bank of the Philippines HELD:
(DBP) in order to secure a loan in the sum of P38,000.00 and a second  After the extrajudicial foreclosure and sale of his properties, petitioner Dizon
mortgage lien in favor of the Philippine National Bank (PNB) to secure his retained the right to redeem the lands, the possession, use and enjoyment
debt amounting to P93,831.91. of the same during the period of redemption. And these are the only rights
 Having defaulted in the payment of his debt, the DBP foreclosed the that Dizon could legally transfer, cede and convey unto respondent
mortgage extrajudicially and the corresponding "Certificate of Sale," was Gaborro under the instrument captioned Deed of Sale with Assumption of
executed in favor of the said bank. On November 12, 1959, Dizon himself Mortgage, likewise the same rights that said respondent could acquire in
executed the deed of sale over the properties in favor of the DBP which consideration of the latter's promise to pay and assume the loan of
deed was recorded in the Office of the Register of Deeds on October 6, petitioner Dizon with DBP and PNB.
1960.  Such an instrument cannot be legally considered a real and unconditional
 Prior to that, Alfredo G. Gaborro and Jose P. Dizon met. Gaborro became sale of the parcels of land, firstly, because there was absolutely no money
interested in the lands of Dizon. Dizon originally intended to lease to consideration therefor. The only legal effect of this Option Deed is the grant
Gaborro the property which had been lying idle for some time. But as the to petitioner the right to recover the properties upon reimbursing
mortgage was already foreclosed by the DBP and the bank in fact respondent Gaborro of the total sums of money that the latter may have
purchased the lands at the foreclosure sale on May 26, 1959, they paid to DBP and PNB on account of the mortgage debts, the said right to
abandoned the projected lease. They then entered into a contract be exercised within the stipulated 5 years period.
denominated as “Deed of Sale with Assumption of Mortgage.” The second  The Court agree with the findings of the trial and appellate courts that the
contract executed the same day, October 6, 1959 is called “Option to true intention of the parties is that respondent Gaborro would assume and
Purchase Real Estate” pay the indebtedness of petitioner Dizon to DBP and PNB, and in
 Gaborro took possession of the lots. On July 11, 1960, DBP and Gaborro consideration therefor, respondent Gaborro was given the possession, the
executed a conditional sale of the properties in consideration of the sum of enjoyment and use of the lands until petitioner can reimburse fully the
P36,090.95. respondent the amounts paid by the latter to DBP and PNB, to accomplish
 On January 7, 1960, it was noted that Dizon assigned his right of redemption the following ends: (a) payment of the bank obligations; (b) make the lands
to Gaborro in an instrument entitled: “Assignment of Right of Redemption productive for the benefit of the possessor, respondent Gaborro; (c) assure
and Assumption of Obligation.” the return of the land to the original owner, petitioner Dizon, thus rendering
 On July 5, 1961, Dizon through his lawyer, Atty. Leonardo Abola, wrote a equity and fairness to all parties concerned.
letter to Gaborro informing him that he is formally offering to reimburse  In view of all these considerations, the law and jurisprudence, and the facts
Gaborro of what he paid to the banks but without, however, tendering any established, the Court finds that the agreement between Dizon and
cash, and demanding an accounting of the income and of the property, Gaborro is one of those innominate contracts under Art. 1307 NCC whereby
contending that the transaction they entered into was one of antichresis. petitioner and respondent agreed "to give and to do" certain rights and
Gaborro did not accede to the demands of the petitioner. obligations respecting the lands and the mortgage debts of petitioner
 Dizon instituted a complaint in the CFI of Pampanga, against Gaborro, which would be acceptable to the bank, but partaking of the nature of the
alleging that the documents Deed of Sale With Assumption of Mortgage antichresis insofar as the principal parties, Dizon and Gaborro, are
and the Option to Purchase Real Estate did not express the true intention concerned.
and agreement between the parties; their real agreement was not an  The instruments must, therefore be reformed in accordance with the
absolute sale of the said parcels of land but merely an equitable mortgage intention and legal rights and obligations of the parties — the petitioner, the


Credit Transactions – Atty. Ilagan 21

respondent and the Banks. Dizon has the right to reacquire the three ● After hearing, the court below ordered the "line" annotated on the
parcels of land within the 1 year period by refunding or reimbursing to. back of Certificate of Title No. 32526, with the proviso that in case of
Gaborro or the Judicial Administratrix of his Estate whatever amount the sale under the foreclosure decree the vendor's lien and the mortgage
latter has actually paid on account of the principal only, of the loans of
credit of appellant Barreto should be paid pro rata from the proceeds.
Dizon with the DBP and PNB, excluding the interests and land taxes that
may have been paid or may have accrued, on duly certified financial ● Appellants insists that: (1) The vendor's lien, under Articles 2242 and
statements issued by the said banks. 2243 of the new Civil Code of the Philippines, can only become
 Since the Court have ruled out the obligation of petitioner Dizon to effective in the event of insolvency of the vendee, which has not been
reimburse respondent Gaborro of any interests and land taxes that have proved to exist in the instant case; and (2) That the appellee Cruzando
accrued or been paid by the latter on the loans of Dizon with DBP and PNB, is not a true vendor of the foreclosed property.
Dizon, in turn, is not entitled to an accounting of the fruits, harvests and other
income received by respondent Gaborro from the lands, for certainly, Issue: WON mortgagees Barreto remain superior to the unrecorded claim of
petitioner cannot have both benefits and the two may be said to offset each herein appellee Villanueva (or WON the previous decision of SC should be
other. reversed)

Concurrence and Preference of Credit Held: YES

● Pursuant to the former Code, confIicts among creditors entitled to
17- Barreto v. Villanueva preference as to specific real property under Article 1923 were to be
resolved according to an order of priorities established by Article 1927,
● Appellants, spouses Barretto, have filed a motion vigorously urging,
whereby one class of creditors could exclude the creditors of lower
that the SC’s decision of January 1961 be reconsidered and set aside,
order until the claims of the former were fully satisfied out of the
and a new one entered declaring that their right as mortgagees
proceeds of the sale of the real property subject of the preference,
remain superior to the unrecorded claim of herein appellee for the
and could even exhaust such proceeds if necessary.
balance of the purchase price of her rights, title, and interest in the
mortgaged property.
● Under the system of the Civil Code of the Philippines, however, only
● with Court authority, Rosario Cruzado sold all her right, title, and interest
taxes enjoy a similar absolute preference. All the remaining thirteen
and that of her children in the house and lot herein involved to Pura L.
classes of preferred creditors under Article 2242 enjoy no priority
Villanueva for P19,000.00. The purchaser paid P1,500 in advance, and
among themselves, but must be paid pro rata(in proportion to the
executed a promissory note for the balance of P17,500.00.
amount of the respective credits.)
● However, the Villanueva could only pay P5,500 on account of the
○ Thus, Article 2249 provides: "if there are two or more credits
note, for which reason the Cruzado obtained judgment for the unpaid
with respect to specific real property or real rights, they shall
be satisfied pro rata, after the payment of the taxes and
● In the meantime, the buyer Villanueva was able to secure a clean
assessments upon the immovable property or real right.”
certificate of title (No. 32526), and mortgaged the property to
● But in order to make the prorating fully effective, the preferred creditors
appellant Magdalena C. Baretto to secure a loan of P30,000.03, said
enumerated in Nos. 2 to 14 of Article 2242 must necessarily be
mortgage having been duly recorded.
convened, and the import of their claims ascertained. It is thus
● Pura Villanueva defaulted on the mortgage loan in favor of Barreto.
apparent that the full application of Articles 2249 and 2242 demands
Baretto foreclosed the mortgage in her favor, obtained judgment, and
that there must be first some proceeding (such as insolvency, the
upon its becoming final asked for execution on 31 July 1958.
settlement of a decedent's estate under Rule fi7 of the Rules of Court,
● On 14 August 1958, Cruzado filed a motion for recognition for her
or other liquidation proceedings of similar import) where the claims of
"vendor's lien" in the amount of P12,000.00 plus legal interest, invoking
all the preferred creditors may be bindingly adjudicated
Articles 2242, 2243, and 2249 of the new Civil Code.
● Thus, it becomes evident that one preferred creditor's third-party claim
to the proceeds of a foreclosure sale (as in the case now before us) is


Credit Transactions – Atty. Ilagan 22

not the proceeding contemplated by law for the enforcement of ● The spouses failed to pay their monthly amortizations. As a result
preferences under Article 2242, unless he claimant were enforcing a thereof, the petitioner bank foreclosed the mortgages, and at the
credit for taxes that enjoy absolute priority. public auction was the highest bidder. Registered it in its favor and
○ If none of the claims is for taxes, a dispute between two consolidated its ownership. A Transfer Certificate of Title No. 101864
creditors will not enable the court to ascertain the pro rata was issued in its name
dividend corresponding to each, because the rights of the ● Upon the other hand, the private respondent Ramos filed an action
other creditors likewise enjoying preference under Article against the spouses to collect the unpaid cost of the construction of
2242 can not be ascertained. the duplex-apartment before the CFI of Manila
● In the absence of insolvency proceedings (or other equivalent general ○ During its pendency, the private respondent succeeded in
liquidation of the debtor's estate), the confIict between the parties obtaining the issuance of a writ of preliminary attachment,
now before us must be decided pursuant to the well established and pursuant thereto, had the property in question attached.
principle concerning registered lands; that a purchaser in good faith Consequently, a notice of adverse claim was annotated at
and for value (as the appellant concededly is) takes registered the back of Transfer Certificate of Title No. 86195.
property free from liens and encumbrances other than statutory liens ● a decision was rendered in Civil Case No. 69228 in favor of the private
and those recorded in the certificate of title. respondent and against the spouses. A writ of execution was
● There being no insolvency or liquidation, the claim of the appellee, as accordingly issued but was returned unsatisfied.
unpaid vendor, did not acquire the character and rank of a statutory ● As the spouses did not have any properties to satisfy the judgment in
lien co-equal to the mortgagee's recorded encumbrance, and must Civil Case No. 69228, the private respondent Ramos addressed a letter
remain subordinate to the latter. to the petitioner bank for the delivery to him (private respondent) of his
pro-rata share in the value of the duplex-apartment in accordance
18- PSB v. Lantin with Article 2242 of the Civil Code.
Facts: ● The petitioner refused to pay the pro-rata value prompting the private
● Involved in this case is a duplex-apartment house on a lot covered by respondent to file the instant action. A decision was rendered in favor
TCT No. 86195 situated at San Diego Street, Sampaloc, Manila, and of the private respondent.
owned by the spouses Filomeno and Socorro Tabligan. ● Hence, this appeal
● The duplex-apartment house was built for the spouses Tabligan by
private respondent Candido Ramos, a duly licensed architect and Issue: whether or not the private respondent is entitled to claim a pro-rata share
building contractor, at a total cost of P32,927.00. The spouses paid in the value of the property in question
private respondent the sum of P7,139.00 only. Hence, Ramos used his
own money, P25,788.50 in all, to finish the construction of the duplex- Applicable prov/law/jurisprudence:
● "ART. 2242. With reference to specific immovable property and real
rights of the debtor, the following claims, mortgages and liens shall be
● Meanwhile, the spouses Tabligan obtained from petitioner Philippine
preferred, and shall constitute an encumbrance on the immovable or
Savings Bank three (3) loans in the total amount of P35,000.00, the
real right: "(1) Taxes due upon the land or building; "(2) For the unpaid
purpose of which was to complete the construction of the duplex-
price of real property sold, upon the immovable sold; "(3) Claims of
apartment. To secure payment of the loans, the spouses executed in
laborers, masons, mechanics and other workmen, as well as of
favor of the petitioner three (3) promissory notes and three (3) deeds
architects, engineers and contractors, engaged in the construction,
of real estate mortgages over the property subject matter of this
reconstruction or repair of buildings, canals or other works, upon said
buildings, canals or other works; "(4) Claims of furnishers of materials
● Petitioner bank registered the deeds of real estate w/ Register of Deeds
used in the construction reconstruction, or repair of buildings, canals or
of Manila. At the time of the registration of these mortgages, Transfer
other works upon said buildings, canals or other works; "(5) Mortgage
Certificate of Title No. 86195 was free from all liens and encumbrances.
credits recorded in the Registry of Property, upon the real estate


Credit Transactions – Atty. Ilagan 23

mortgaged; "(6) Expenses for the preservation or improvement of real construction of the duplex apartment. It is far from being a general
property when the law authorizes reimbursement, upon the liquidation of the estate of the Tabligan spouses
immovable preserved or improved;"(7) Credits annotated in the ● Insolvency proceedings and settlement of a decedent's estate are
Registry of Property, in virtue of a judicial order, by attachments or both proceedings in rem which are binding against the whole world.
executions, upon the property affected, and only as to later credits; All persons having interest in the subject matter involved, whether they
"(8) Claims of co-heirs for warranty in the partition of an immovable were notified or not, are equally bound. Consequently, a liquidation of
among them, upon the real property thus divided; "(9) Claims of donors similar import or "other equivalent general liquidation' must also
of real property for pecuniary charges or other conditions imposed necessarily be a proceeding in rem so that all interested persons
upon the donee, upon the immovable donated; "(10) Credits of whether known to the parties or not may be bound by such
insurers upon the property insured, for the insurance premium for two proceeding.
years." ● In the case at bar, although the lower court found that "there were no
● De Barreto v. Villanueva known creditors other than the plaintiff and the defendant herein", this
can not be conclusive. It will not bar other creditors in the event they
Held: NO show up and present their claims against the petitioner bank, claiming
● Concurrence of credits occurs when the same specific property of the that they also have preferred liens against the property involved.
debtor or all of his property is subjected to the claims of several Consequently, Transfer Certificate of Title No. 101864 issued in favor of
creditors. the bank which is supposed to be indefeasible would remain
○ The concurrence of credits raises no questions of constantly unstable and questionable. Such could not have been the
consequence where the value of the property or the value intention of Article 2243 of the Civil Code although it considers claims
of all assets of the debtor is sufficient to pay in full all the and credits under Article 2242 as statutory liens. Neither does the De
creditors. Barretto case sanction such instability. I
○ However, it becomes material when said assets are ● Respondent Ramos admitted in the partial stipulation of facts
insufficient for then some creditors of necessity will not be submitted by both parties that at the time of the loans to the spouses,
paid or some creditors will not obtain the full satisfaction of the petitioner's bank had no actual or constructive knowledge of any
their claims. lien against the property in question. The duplex apartment house was
● Under the system established by Article 2249 of the Civil Code of the built for P32,927.00. The spouses Tabligan borrowed P35,000.00 for the
Philippines, only taxes and assessments upon immovable property construction of the apartment house. The bank could not have known
enjoy absolute preference. All the remaining specified classes of of any contractor's lien because, as far as it was concerned, it
preferred creditors under Article 2242 enjoy no priority among financed the entire construction even if the stated purpose of the loans
themselves. Their credits shall be satisfied pro-rata, i.e., in proportion to was only to "complete" the construction
the amount of the respective credits. ● Since the action filed by the private respondent is not one which can
● Under the De Barreto decision, the full application of Articles 2242 and be considered as "equivalent general liquidation" having the same
2249 demands that there must first be some proceeding where the import as an insolvency or settlement of the decedent's estate
claims of all the preferred creditors may be bindingly adjudicated, proceeding, the well established principle must be applied that a
such as insolvency, the settlement of a decedent's estate under Rule purchaser in good faith and for value takes registered land free from
87 of the Rules of Court, or other liquidation proceedings of similar liens and encumbrances other than statutory liens and those recorded
import. in the Certificate of Title.
● The proceedings in the court below do not partake of the nature of ○ It is an admitted fact that at the time the deeds of real estate
the insolvency proceedings or settlement of a decedent's estate. The mortgage in favor of the petitioner bank were constituted,
action filed by Ramos was only to collect the unpaid cost of the the transfer certificate of title of the spouses Tabligan was free
from any recorded lien and encumbrances, so that the only


Credit Transactions – Atty. Ilagan 24

registered liens in the title were deeds in favor of the ● By reason of said foreclosure, the Writ of Execution issued in favor of the
petitioner. complainants remained unsatisfied.
● Prescinding from the foregoing, the private respondent's claim must ● A Notice of Levy on Execution on the properties of LIRAG was then
remain subordinate to the petitioner bank's title over the property entered.
evidenced by TCT No. 101864 ● LAND filed a "Motion for Writ of Execution and Garnishment" of the
proceeds of the foreclosure sale.
19- DBP v. NLRC ● upon motion of LAND, Labor Arbiter Apolinar L. Sevilla ordered the DBP
Facts: impleaded "in the interest of justice and due process," and required it
● This Petition for Certiorari addresses itself to the 12 February 1986 Order to intervene.
of the National Labor Relations Commission directing petitioner ● over the opposition of DBP, Labor Arbiter Sevilla granted the Writ of
Development Bank of the Philippines (DBP) to remit the sum of Garnishment and directed DBP to remit to the NLRC the sum of
P6,292,380.00 "out of proceeds of the foreclosed properties of Lirag P6,292,380.00 out of the proceeds of the foreclosed properties of LIRAG
Textile Mills, Inc., sold at public auction in order to satisfy the judgment" sold at public auction in order to satisfy the judgment previously
in NLRC Cases Nos. NCR-3-2581-82 and 2-2090-82. rendered.
● The complainants in the two cases filed below were former employees ● DBP sought reconsideration of the above Order on the grounds of
of Lirag Textile Mills, Inc. (LIRAG). NLRC's lack of jurisdiction over it since it was not a party to the case,
● LIRAG was a mortgage debtor of DBP. and that it was deprived of its property without due process of law.
● Private respondent Labor Alliance for National Development (LAND) Public respondent, Labor Arbiter Isabel P. Ortiguerra, denied
was the bargaining representative of the more or less 800 former rank reconsideration on 25 May 1987. DBP appealed that denial to the
and file employees of LIRAG. NLRC.
● Around September 1981, LIRAG started terminating the services of its ● In the meantime, on 3 February 1987, by virtue of Proclamation Nos. 50
employees on the ground of retrenchment. By December of the said and 50-A, the Asset Privatization Trust (APT) became the transferee of
year there were already 180 regular employees separated from the the DBP foreclosed assets of LIRAG. by virtue of that transfer, we
service. LIRAG has since ceased operations presumably due to deemed APT impleaded as a partypetitioner and gave it time within
financial reverses which to file its pleading.
● Joselito Albay, one of the employees dismissed, filed a complaint ● ATP submitted a Memorandum.It appears that a partial Compromise
before the (NLRC) against LIRAG for illegal dismissal Agreement was entered into between APT and LAND whereby APT
● LAND, on behalf of 180 dismissed members, also filed a Complaint paid the complainants-employees, ex gratia, the sum of P750,000.00
against LIRAG seeking separation pay, 13th month pay, gratuity pay, "in full settlement of their claims, past and present, with respect to all
sick leave and vacation leave pay and emergency allowance assets of LITEX transferred by DBP to APT." That amount was received by
● These two cases were consolidated and jointly heard by the NLRC. LAND's local President. Apparently, however, on 25 January 1988,
Labor Arbiter Apolinar L. Sevilla ordered LIRAG to pay the individual LAND, through its national President, filed its opposition to the
complainants. The NLRC (Third Division) affirmed the same on 28 March Compromise Agreement for being contrary to law, morals and public
1982. That judgment became final and executory policy.
● a Writ of Execution was issued. On the same day, DBP extrajudicially ● On 25 March 1988, the NLRC (First Division) affirmed the appealed
foreclosed the mortgaged properties for failure of LIRAG to pay its Order and dismissed the DBP appeal.
mortgage obligation. As the only bidder at the foreclosure sale, DBP ● DBP is now before us seeking a review and reversal.
acquired said mortgaged properties. Since DBP was the sole
mortgagee, no actual payment was made, the amount of the bid Issue: whether or not the NLRC gravely abused its discretion in affirming the
having been merely credited in partial satisfaction of LIRAG's Order of the Labor Arbiter granting the Writ of Garnishment out of the proceeds
indebtedness. of LIRAG's properties foreclosed by DBP to satisfy the judgment in these cases.


Credit Transactions – Atty. Ilagan 25

Held: YES ● DBP anchors its claims on a mortgage credit. A mortgage directly and
● Section 10, Rule III, Book III of the Omnibus Rules Implementing the immediately subjects the property upon which it is imposed, whoever
Labor Code has also been amended by Section 1 of the Rules and the possessor may be, to the fulfillment of the obligation for whose
Regulations Implementing RA 6715 as approved by the then Secretary security it was constituted (Article 2176, Civil Code). It creates a real
of Labor and Employment on 24 May 1989, and now provides: right which is enforceable against the whole world. It is a lien on an
○ "Section 10. Payment of wages and other monetary claims in identified immovable property, which a preference is not. A recorded
case of bankruptcy. — In case of bankruptcy or liquidation of mortgage credit is a special preferred credit under Article 2242 (5) of
the employer's business, the unpaid wages and other the Civil Code on classification of credits.
monetary claims of the employees shall be given first ○ The preference given by Article 110, when not falling within
preference and shall be paid in full before the claims of Article 2241 (6) and Article 2242 (3) of the Civil Code and not
government and other creditors may be paid. attached to any specific property, is an ordinary preferred
● Because of its impact on the entire system of credit, Article 110 of the credit although its impact is to move it from second priority to
Labor Code cannot be viewed in isolation but must be read in relation Crst priority in the order of preference established by Article
to the Civil Code scheme on classification and preference of credits. 2244 of the Civil Code
○ "Article 110 of the Labor Code, in determining the reach of its ● Even if Article 110 and its Implementing Rule, as amended, should be
terms, cannot be viewed in isolation. Rather, Article 110 must interpreted to mean "absolute preference," the same should be given
be read in relation to the provisions of the Civil Code only prospective effect in line with the cardinal rule that laws shall have
concerning the classification, concurrence and preference no retroactive effect, unless the contrary is provided (Article 4, Civil
of credits, which provisions find particular application in Code). Thereby, any infringement on the constitutional guarantee on
insolvency proceedings where the claims of all creditors, nonimpairment of the obligation of contracts (Section 10, Article III,
preferred or non-preferred, may be adjudicated in a binding 1987 Constitution) is also avoided.
manner. . . ." (Republic vs. Peralta (G.R. No. L-56568, May 20, ○ In point of fact, DBP's mortgage credit antedated by several
1987, 150 SCRA 37). years the amendatory law, RA No. 6715. To give Article 110
● In the event of insolvency, a principal objective should be to effect an retroactive effect would be to wipe out the mortgage in
equitable distribution of the insolvent's property among his creditors. DBP's favor and expose it to a risk which it sought to protect
● To accomplish this there must first be some proceeding where notice itself against by requiring a collateral in the form of real
to all of the insolvents's creditors may be given and where the claims property.
of preferred creditors may be bindingly adjudicated ● The Development Bank of the Philippines, the Asset Privatization Trust,
● A distinction should be made between a preference of credit and a the Labor Alliance for National Development (LAND), and other
lien. A preference applies only to claims which do not attach to creditors who may be so minded, are hereby directed, within sixty (60)
specific properties. A lien creates a charge on a particular property. days from notice, to institute involuntary insolvency proceedings
○ The right of first preference as regards unpaid wages before the proper Court where all the assets of Lirag Textile Mills, Inc.,
recognized by Article 110 does not constitute a lien on the may be inventoried, the preferences of all its creditors determined,
property of the insolvent debtor in favor of workers. It is but a and their claims discharged in a binding and conclusive manner
preference of credit in their favor, a preference in
application. 20- AC Ransom Labor Union v. NLRC
○ It is a method adopted to determine and specify the order in Facts:
which credits should be paid in the final distribution of the  In a joint Decision in two earlier cases rendered by the then Court of
proceeds of the insolvent's assets. It is a right to a first Industrial Relations (CIR) on August 19, 1972, it declared in the
preference in the discharge of the funds of the judgment dispositive portion thereof: "IN VIEW OF ALL THE FOREGOING, . . . the
debtor. A.C. Ransom Philippine Corporation is guilty of unfair labor practice of


Credit Transactions – Atty. Ilagan 26

interference and discrimination herein above held and specified; considering their success in hiding or shielding the assets of
ordering said corporation, its officers and agents to cease and desist said company.
from committing the same; finding the strike legal and justified; and to ○ RANSOM countered that the CIR Decision, dated August 19,
reinstate immediately . . ., to their respective positions with backwages 1972, could no longer be enforced by mere Motion because
from July 25, 1969 until actually reinstated, without loss of seniority rights more than five (5) years had already lapsed.
and other privileges appurtenant to their employment." ● Acting on the Motion, Labor Arbiter Tito F. Genilo issued, on March 11,
 This Court [SC] affirmed that Decision when it denied the Petition for 1980, an Order, the pertinent part of which reads: “made 7 of the
Review filed by RANSOM on February 26, 1973 in G.R. Nos. L-36226-68. RANSOM officers and agents liable and Consequently, let a writ of
● The backwages due the 22 employees having been computed at execution be issued for P164,984.00 against respondent corporation
P199,276.00 by the (CIR) Examiner, successive Motions for Execution and its officers/agents enumerated above.
were filed by the UNION on January 27, 1973 and March 1, 1973, all of ● The NLRC, on appeal, modified the Decision by relieving the officers
which RANSOM opposed stressing its "precarious financial position if and agents of liability. Reconsideration sought by the UNION from the
immediate execution of the backwages would be ordered." NLRC was denied, hence this special civil action of Certiorari
● Upon the UNION's Motion of April 22, 1973 asking the CIR that RANSOM ● SC: On June 10, 1986, this Court promulgated its Decision, the
be ordered to deposit with the Court the backwages due them. dispositive portion of which decrees: "WHEREFORE, the questioned
RANSOM manifested that it did not have the necessary funds to Decision of the National Labor Relations Commission is SET ASIDE, and
deposit and asked that the employees' earnings elsewhere during this the Order of the Labor Arbiter Tito F. Genilo of March 11, 1980 is
suspension be deducted. reinstated with the modification that personal liability for the
○ After several hearings, a recomputation was made and the backwages due the 22 strikers shall be limited to Ruben Hernandez,
award of P199,276.00 was reduced to P164,984.00. who was President of RANSOM in 1974, jointly and severally with other
● The records show that, upon application filed by RANSOM on April 2, Presidents of the same corporation who had been elected as such
1973, it was granted clearance by the Secretary of Labor on June 7, after 1972 or up to the time the corporate life was terminated."
1973 to cease operation and terminate employment effective May 1, ● Both parties have moved for reconsideration. [THIS IS THE CURRENT
1973, without prejudice to the right of subject employees to seek PETITION]
redress of grievances under existing laws and decrees.
○ The reasons given by RANSOM for the clearance application Issue: WON RANSOM’s bankruptcy is a valid justification for non-payment of
were financial difficulties on account of obligations incurred backwages to their employees
prior to 1966
Held: NO.
● On January 21, 1974, the UNION filed another Motion for Execution ● The alleged bankruptcy of RANSOM furnishes no justification for non-
alleging that although RANSOM had assumed a posture of suffering payment of backwages to the employees concerned taking into
from business reverse, its officers and principal stockholders had consideration Article 110 of the Labor Code, which provides:
organized a new corporation, the Rosario Industrial Corporation ○ "ART. 110. Worker preference in case of bankruptcy. — In the
(thereinafter called ROSARIO), using the same equipment, personnel, event of bankruptcy or liquidation of an employer's business,
business stocks and the same place of business. his workers shall enjoy first preference as regards wages due
● Writs of execution were issued successively against RANSOM on June them for services rendered during the period prior to the
23, 1976, and February 17, 1977, to no avail. bankruptcy or liquidation, any provision of law to the contrary
○ On December 18, 1978, the UNION again filed an ex-parte notwithstanding. Unpaid wages shall be paid in full before
Motion for Writ of Execution and Garnishment praying that other creditors may establish any claim to a share in the
the Writ issue against the Officers/Agents of RANSOM assets of the employer."
personally and or their estates, as the case may be, ● The term "wages" refers to all remunerations, earnings and other
benefits in terms of money accruing to the employees or workers for


Credit Transactions – Atty. Ilagan 27

services rendered. They are to be paid in full before other creditors may provision of the New Labor Code would be rendered
establish any claim to a share in the assets of the employer meaningless."
○ "Section 10. Payment of wages in case of bankruptcy. —
Unpaid wages earned by the employees before the 21-PNB vs. TERESITA CRUZ
declaration of bankruptcy or judicial liquidation of the GR No. 80593; December 18, 1989
employer's business shall be given first preference and shall
be paid in full before other creditors may establish any claim Petitioner: Philippine National Bank
Respondent: Teresita Cruz
to a share in the assets of the employer."
● The decision of the CIR was rendered on August 19, 1972. Clearance FACTS:
to RANSOM to cease operations and terminate employment granted
by the Secretary of Labor was made effective on May 1, 1973.  Sometime in 1980 Aggregate Mining Exponents (AMEX) laid-off about
○ The right of the employees concerned to backwages 70% of its employees because it was experiencing business
awarded them, therefore, had already vested at the time reverses. The retained employees constituting 30% of the work force
however, were not paid their wages.
and even before clearance was granted.
○ Note should also be taken of the fact that the clearance was  This non-payment of salaries went on until July 1982 when AMEX
completely ceased operations and instead entered into an operating
without prejudice to the right of subject employees to seek
agreement with T.M. San Andres Development Corporation whereby
redress of grievances under existing laws and decrees. the latter would be leasing the equipment and machineries of AMEX.
○ The worker preference applies even if the employer's
 The unpaid employees sought redress from the Labor Arbiter who
properties are encumbered by means of a mortgage rendered a decision finding their claim valid and meritorious and
contract, as in this case. ordered AMEX to pay in total amount of P219,452.03. To properly
○ So that, when machinery and equipment of RANSOM were effectuate the payment of the same, the necessary arrangement
sold to Revelations Manufacturing Corporation for P2M in should be made between respondents Amex and T.M. San Andres
1975, the right of the 22 laborers to be paid from the proceeds Development Corp. and PNB on their respective role and participation
herein. For should the principal respondent be unable to satisfy these
should have been recognized, even though it is claimed that
Awards, the same can be satisfied from the proceeds or fruits of its
those proceeds were turned over to the Commercial Bank machineries and equipment operated by respondent T. M. San Andres
and Trust Company (Comtrust) in payment of RANSOM Dev. Corp. either by operating agreement with respondent Amex_or
obligations, since the workers' preference is over and above thru lease of the same from PNB.
the claim of other creditors.  AMEX and its President did not appeal from this decision. But PNB, in
● The contention, therefore, of the heirs of the late Maximo C. its capacity as mortgagee-creditor of AMEX interposed an appeal with
Hernandez, Sr. that since they paid from their own personal funds the the respondent Commission, not being satisfied with the outcome of
balance of the amount owing by RANSOM to Comtrust they are the the case alleging that the workers' lien covers unpaid wages only and
not the termination or severance pay which the workers likewise
"preferential creditors" of RANSOM, is clearly without merit.
claimed they were entitled to.
○ Workers are to be paid in full before other creditors may
establish any claim to a share in the assets of the employer.
 NLRC affirmed the decision appealed from.
○ ". . . even if the employer's properties are encumbered by ISSUES:
means of a mortgage contract, still the workers' wages which
enjoy first preference in case of bankruptcy or liquidation are 1. WON Art. 110 should apply and workers’ lien should take precedence
over any other claim? YES
duly protected by an automatic first lien over and above all
other earlier encumbrances on the said properties. "Art. 110. Worker preference in case of bankruptcy.
Otherwise, workers' wages may be imperilled by foreclosure
of mortgages, and as a consequence, the aforecited


Credit Transactions – Atty. Ilagan 28

In the event of bankruptcy or liquidation of an employer's business,- his workers operations must be proved." This policy was adopted to obviate the possibility
shall enjoy first preference as regards their unpaid wages and other monetary of an employer fabricating business reverses in order to ease out employees for
claims, any provision of law to the contrary notwithstanding. Such unpaid no apparent reason.
wages and monetary claims, shall be paid in full before claims of the
Government and other creditors may be paid." The term "wages" includes not only remunerations or earnings payable by an
employer for services rendered or to be rendered, but also covers all benefits of
the employees under a Collective Bargaining Agreement like severance pay,
This Court must uphold the preference accorded to the private respondents in educational allowance, accrued vacation leave earned but not enjoyed, as
view of the provisions of Article 110 of the Labor Code which are clear and which well as workmen's compensation awards and unpaid salaries for services
admit of no other interpretation. The phrase "any provision of law to the contrary rendered. All of these benefits fall under the term "wages" which enjoy first
notwithstanding" indicates that such preference shall prevail despite the order preference over all other claims against the employer.
set forth in Articles 2241 to 2245 of the Civil Code. No exceptions were provided
under the said article, henceforth, none shall be considered. Furthermore, the For purposes of the application of Article 110, "termination pay is reasonably
Labor Code was signed into Law decades after the Civil Code took effect. regarded as forming part of the remuneration or other money benefits accruing
to employees or workers by reason of their having previously rendered services
Whenever two statutes of different dates and of contrary tenor are of equal xxx Hence, separation pay must be considered as part of remuneration for
theoretical application to a particular case, the statute of later date must services rendered or to be rendered. Indeed Article 110 of the Labor Code, as
prevail being a later expression of legislative will. Applying the aforecited case amended, aforecited, now provides that the workers' preference covers not
in the instant petition, the Civil Code provisions cited by the petitioner must yield only unpaid wages but also all other monetary claims.
to Article 110 of the Labor Code.
The termination pay which they so rightfully claim is an additional remuneration
The worker preference applies even if the employer's properties are for having rendered services to their employer for a certain period of time.
encumbered by means of a mortgage contract xxx. Under these circumstances then, this Court holds that the termination or
severance pay awarded by the respondent Commission to the private
In the implementation and interpretation of the provisions of the Labor Code respondents is proper and should be sustained.
and its implementing regulations, the workingman's welfare should be the
primordial and paramount consideration."Bearing, this in mind, this Court must 22-DBP vs. SANTOS
reiterate that the conflict between Article 110 of the Labor Code and Articles GRNO. 78261-62, March 8, 1989
2241 to 2245 of the Civil Code must be resolved in favor of the former. A contrary
ruling would defeat the purpose for which Article 110 was intended; that is, for
the protection of the working class, pursuant to the never-ending quest for social PETITIONER: DEVELOPMENT BANK OF THE PHILIPPINES
2. WON even if the worker's lien applies in the instant case, the same and its members, JAIME ARADA, ET AL
should cover only unpaid wages excluding termination or severance-
Citing Sec. 7, Rule 1, Book VI of the Rules and Regulations Implementing the
Labor Code, petitioner contends that the claim for termination pay should not  In a case pending in LA, separation pay, wage and/or living allowance
be enforced against AMEX properties mortgaged to petitioner PNB because increases and 13th month pay were awarded to the individual
Article 110 of the Labor Code refers only to "wages due them for services complainants who comprise some of the respondents in this case. In
rendered during the period prior to bankcruptcy or liquidation." Citing serious another case, LA awarded separation pay, vacation and sick leave
financial losses as the basis for the termination of the private respondents, pay and unpaid increases in the basic wage and allowances to the
petitioner alleges that the employees are not entitled to the termination pay other private respondents herein.
which they claim.  After the judgment had become final and executory, Labor Arbiter
Dogelio issued a writ of execution directing NLRC Deputy Sheriff
AMEX failed to adduce convincing evidence to prove that the financial reverses Juanita Atienza to collect the total sum of P85,961,058.70. The Deputy
were indeed serious." It is essentially required that the alleged losses in business


Credit Transactions – Atty. Ilagan 29

Sheriff, however, failed to collect the amount so he levied upon ISSUE: WON claims of unpaid wages and other monetary benefits prior to
personal and real properties of RMC. bankruptcy enjoy first preferences in the satisfaction of credits against
 A notice of levy on execution of certain real properties was annotated company- NO
on the certificate of title filed with the Register of Deeds of Pasig, where
all the said properties are situated.
Article 110 must be read in relation to the provisions of the Civil Code concerning
 Meanwhile in the other development which led to this case, DBP
the classification, concurrence and preference of credits, which provisions find
obtained a writ of possession of all the properties of RMC after having
particular application in insolvency proceedings where the claims of all
extra-judicially foreclosed the same at public auction earlier in 1983.
creditors, prefer red or non-preferred, may be adjudicated in a binding manner.
DBP subsequently leased the said properties to Egret Trading and
Manufacturing Corporation, Rosario Textile Mills and General Textile
Mills. Article 110. Worker preference in case of bankruptcy in the event of bankruptcy
 The writ of possession prevented the scheduled auction sale of the or liquidation of an employer's business, his workers shall enjoy first preference as
RMC properties which were levied upon by the private respondents. regards wages due them for services rendered during the period prior to the
As a result, on June 19, 1985, the latter filed an incidental petition with bankruptcy or liquidation, any provision of law to the contrary notwithstanding.
the NLRC to declare their preference over the levied properties. Unpaid wages shall be paid in full before other creditors may establish any claim
 Dogelio issued an order recognizing and declaring the respondents' to a share in the assets of the employer.
first preference as regards wages and other benefits due them over
and above all earlier encumbrances on the aforesaid Article 10. Payment of wages in case of bankruptcy. Unpaid wages earned by
properties/assets of said company, particulary those being asserted by the employee before the declaration of bankruptcy or judicial liquidation of the
respondent Development Bank of the Philippines.' employer's business shall be given first preference and shall be paid in full before
 The petitioner appealed the order to the NLRC which was set aside other creditors may establish any claim to the assets of the employer.
 Meanwhile, another set of complainants filed a complaint for
separation pay, underpayment, damages, etc. This case was
subsequently consolidated with the case pending before respondent It is quite clear from the provisions that a declaration of bankruptcy or a judicial
Santos. Accordingly, the latter conducted several hearings where the liquidation must be present before the worker's preference may be enforced.
parties, particulary DBP, General Textile Mills, Inc., and Rosario Textile Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked
Mills, Inc., were given the opportunity to argue their respective theories by the respondents in this case absent a formal declaration of bankruptcy or a
of the case. Eventually, all the parties agreed that the case shall be liquidation order. Article 110 is also applicable in extra-judicial proceedings
submitted for decision after their filing of positions papers and/or would be putting the worker in a better position than the State which could only
memorandums. assert its own prior preference in case of a judicial proceeding. Therefore, as
 On March 31, 1987, public respondent Santos rendered the questioned stated earlier, Article 110 must not be viewed in isolation and must always be
decision declaring that former employees enjoy first preference as reckoned with the provisions of the Civil Code.
regards to the awards and benefits due them over and above all
earlier encumbreances on all of the assets of RMC specifically those There was no issue of judicial vis-a-vis extra-judicial proceedings in the Republic
being asserted by DPB. Hence, this petition. v. Peralta interpretation of Article 110 but the necessity of a judicial adjudication
 DBP maintains that the public respondent misinterpreted Article 110 of was pointed out when we explained the impact of Article 110 on the
the Labor Code and Section 10, Rule VIII, Book III of the Revised Rules concurrence and preference of credits provided in the Civil Code. We believe
and Regulations Implementing the Labor Code in that the said and so hold that Article 110 of the Labor Code did not sweep away the
respondent upheld the existence of the worker's preference over and overriding preference accorded under the scheme of the Civil Code to tax
above earlier encumbrances on the properties of RMC despite the claims of the government or any subdivision thereof which constitute a lien upon
absence of any bankruptcy or liquidation proceeding instituted properties of the Insolvent. ... It cannot be assumed simpliciter that the legislative
against the latter. The petitioner argues that there must be a judicial authority, by using Article 110 of the words 'first preference' and any provisions
declaration, or at the very least, a cognizance by an appropriate court of law to the contrary notwithstanding intended to disrupt the elaborate and
or administrative agency of bankruptcy or inability of the employer to symmetrical structure set up in the Civil Code. Neither can it be assumed
meet its obligations. casually that Article 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


Credit Transactions – Atty. Ilagan 30

considerations of public policy prevent us from giving to 'other creditors a  Respondents failed to redeem said parcels of land, for which reason,
linguistically unlimited scope that would embrace the universe of creditors save petitioner has executed an Affidavit of Consolidation of Ownership
only unpaid employees. which was not submitted to the Registry of Deeds in view of the fact
that possession of the aforesaid titles or owners duplicate certificates
of title remains with the RBO.
Insolvency proceedings and settlement of a decedent's estate are both
proceedings in rem which are binding against the whole world. All persons  To date, petitioner has not been able to effect the registration of said
having interest in the subject matter involved, whether they were notified or not, parcels of land in his name in view of the persistent refusal of
are equally bound. Consequently, a liquidation of similar import or 'other respondents, despite demand, to surrender RBOs copies of its owners
equivalent general liquidation must also necessarily be a proceeding in rem so certificates of title for the parcels of land
that all interested persons whether known to the parties or not may be bound by  RBO filed a motion to dismiss on the ground of res judicata alleging
such proceeding. that petitioner had earlier sought a similar relief from Br. 18 of the RTC,
which case was dismissed with finality on appeal before the CA.
 In a supplemental motion to dismiss, respondent RBO contended that
The claims of all creditors whether preferred or non-preferred, the identification it was undergoing liquidation and, pursuant to prevailing
of the preferred ones and the totality of the employer's asset should be brought jurisprudence, it is the liquidation court which has exclusive jurisdiction
into the picture, There can then be an authoritative, fair, and binding to take cognizance of petitioners claim.
adjudication instead of the piece meal settlement which would result from the  Trial court denied the motion to dismiss because it found that the
questioned decision in this case. causes of action in the previous and present cases were different
although it was silent on the jurisdictional issue. Accordingly,
Labor Arbiter Ariel C. Santos committed grave abuse of discretion in ruling that respondent RBO filed a motion for reconsideration but the same was
the private respondents may enforce their first preference in the satisfaction of similarly rejected in the order of June 11, 1991
their claims over those of the petitioner in the absence of a declaration of  RBO filed a manifestation and urgent motion for reconsideration
bankruptcy or judicial liquidation of RMC. arguing that the validity of the certificate of sale issued to petitioner
was still at issue in another case between them and therefore the
properties covered by said certificate were still part and parcel of its
23-ONG vs. CA assets.
GR No. 112830, February 1, 1996
 Still unpersuaded by respondent RBOs arguments, the trial court
denied reconsideration prompting the bank to elevate the case to
PETITIONER: JERRY ONG respondent Court of Appeals by way of a petition for certiorari and
represented by its Liquidator, GUILLERMO G. REYES, JR. and Deputy Liquidator  CA annulled the challenged order of the court a quo which sustained
ABEL ALLANIGUE the jurisdiction of the trial court as well as the order of 18 September
1991 denying reconsideration thereof. Moreover, the trial judge was
ordered to dismiss Civil Case No. Q-91-8019 without prejudice to the
 The RBO was the owner in fee simple of 2 parcels of land including the
right of petitioner to file his claim in the liquidation proceedings
improvements thereon situated in Tagaytay City. Said parcels of land
pending before Br. 73 of the RTC
were duly mortgaged by RBO in favor of petitioner to guarantee the
payment of Omnibus Finance, Inc., which is likewise now undergoing
liquidation proceedings of its money market obligations to petitioner in ISSUE: WON the civil case against RBO may proceed independently from the
the principal amount of P863,517.02 liquidation proceedings
 Omnibus Finance, Inc., not having seasonably settled its obligations to
petitioner, the latter proceeded to effect the extrajudicial foreclosure HELD: Section 29, par. 3, of R.A. 265 as amended by P. D. 1827 provides
of said mortgages. The City Sheriff of Tagaytay City issued a Certificate
of Sale in favor of petitioner which was duly registered with the Registry If the Monetary Board shall determine and confirm within (sixty days) that the
of Deeds of Tagaytay City as shown in the certified true copies of the bank x x x is insolvent or cannot resume business with safety to its depositors,
aforementioned titles creditors and the general public, it shall, if the public interest requires, order its
liquidation, indicate the manner of its liquidation and approve a liquidation
plan. The Central Bank shall, by the Solicitor General, file a petition in the Court


Credit Transactions – Atty. Ilagan 31

of First Instance[7] reciting the proceedings which have been taken and praying  After BANCO FILIPINO SAVINGS AND MORTGAGE BANK was placed
the assistance of the court in the liquidation of such institution. The court shall under receivership, and later ordered liquidated by the Monetary
have jurisdiction in the same proceedings to adjudicate disputed claims against Board of the Central Bank, FORTUNATO M. DIZON. Jr., who was then
the bank x x x and enforce individual liabilities of the stockholders and do all that holding the position of Executive Vice President and Chief Operating
is necessary to preserve the assets of such institution and to implement the Officer of the bank, received a letter from the Central Bank appointed
liquidation plan approved by the Monetary Board liquidator, MS. CARLOTA P. VALENZUELA, informing him that all
management authority in the bank had been assumed by the Central
Bank appointed liquidators and that his employment is being
Applying the aforequoted provision in Hernandez v. Rural Bank of Lucena, Inc,
this Court ruled the fact that the insolvent bank is forbidden to do business, that
 Mr. Dizon filed with the liquidator a request for the payment to him of
its assets are turned over to the Superintendent of Banks, as a receiver, for
the cash equivalent of his vacation and sick leave credits and
conversion into cash, and that its liquidation is undertaken with judicial
unexpended/unused reimbursable allowance. His claims were not
intervention means that, as far as lawful and practicable, all claims against the
paid by the liquidator upon counsel's advice that Dizon's claim should
insolvent bank should be filed in the liquidation proceeding.
be treated as a claim of a creditor and should therefore be processed
The rationale behind the provision, i.e., the judicial liquidation is intended to pursuant to the liquidation plan as approved by the Monetary Board.
prevent multiplicity of actions against the insolvent bank. It is a pragmatic  Subsequent demands for payment having been denied, Dizon filed a
arrangement designed to establish due process and orderliness in the complaint with the labor arbiter against the bank for recovery of
liquidation of the bank, to obviate the proliferation of litigations and to avoid unpaid salary, the cash equivalent of his accumulated vacation and
injustice and arbitrariness. The lawmaking body contemplated that for sick leaves, termination pay under Article 283 of the Labor Code and
convenience only one court, if possible, should pass upon the claims against the moral damages and attorney's fees.
insolvent bank and that the liquidation court should assist the Superintendent of  Representing the bank, the liquidator moved for the dismissal of the
Banks and regulate his operations. complaint refuting the legal and factual bases thereof as well as the
jurisdiction of the labor arbiter to entertain Dizon's money claims
It is not necessary that a claim be initially disputed in a court or agency before because such pertains to the RTC acting as the liquidation court.
it is filed with the liquidation court. It simply connotes that in the course of the  LA arbiter upheld her jurisdiction and promulgated a decision in favor
liquidation, contentious cases might arise wherein a full-dress hearing would be of Dizon but withheld his demand for payment of moral damages and
required and legal issues would have to be resolved. Hence, it would be attorney's fees. Both parties appealed to the NLRC which increased the
necessary injustice to all concerned that a Court of First Instance (now Regional award due Dizon and further ordered payment of actual and moral
Trial Court) x x x assist and supervise the liquidation and x x x act as umpire or damages and attorney's fees.
arbitrator in the allowance and disallowance of claims.

Petitioner must have overlooked the fact that since respondent RBO is insolvent ISSUES:
other claimants not privy to their transaction may be involved. As far as those
claimants are concerned, in the absence of certificates of title in the name of 1. WON NLRC had jurisdiction over Dizon’s money claims –YES
petitioner, subject lots still form part of the assets of the insolvent bank.

Section 29 of the Central Bank Act (Republic Act No. 265) before its amendment
24-BANCO FILIPINO VS. NLRC by Executive Order No. 289 (September, 1987,) reads, to wit:
G.R. No. 82135 August 20, 1990
Sec. 29. Proceedings upon insolvency. — ... If the Monetary Board shall
PETITIONER: BANCO FILIPINO SAVINGS AND MORTGAGE BANK (Represented by determine and confirm within the said period that the bank or non-bank
its liquidator, MS. CARLOTA P. VALENZUELA) financial intermediary performing quasi-banking functions is insolvent or cannot
RESPONDENTS: NATIONAL LABOR RELATIONS COMMISSION, Labor Arbiter resume business with safety to its depositors, creditors and the general public, it
EVANGELINE LUBATON and FORTUNATO DIZON, JR shall, if the public interest requires, order its liquidation, indicate the manner of
its liquidation and approve a liquidation plan. The Central Bank shall, by the
Solicitor General, file a petition in the Court of First Instance reciting the
proceedings which have been taken and praying the assistance of the court in
the liquidation of such institution. The court shall have jurisdiction in the same


Credit Transactions – Atty. Ilagan 32

proceedings to adjudicate disputed claims against the bank or non-bank Art. 110 of the Labor Code did not upgrade the worker's claim
financial intermediary performing quasibanking function and enforce individual as absolutely preferred credit. The provision did not alter Articles 2241 and 2242
liabilities of the stockholders. and do all that is necessary to preserve the assets of the Civil Code so much so that creditors with liens over a certain property are
of such institution and to implement the liquidation plan approved by the still given special preference over the proceeds of that property. And it is only
Monetary Board. ... The liquidator shall with all convenient speed, convert the after these specially preferred credits are satisfied may the ordinary preferred
assets of the banking institution or non-bank financial intermediary performing credits enumerated in Article 2244 of the Civil Code be paid according to their
quasi-banking functions to money or sell, assign or otherwise dispose of the same order of priority. The significance of Article 110 in the scheme of concurrence
to creditors and other parties for the purpose of paying the debts of such and preference of credit is to raise the worker's money claim into first priority
institution and he may, in the name of the bank or non-bank financial under Article 2244.
intermediary performing quasi-banking functions, institute such actions as may
be necessary in the appropriate court to collect and recover accounts and
Not being an absolutely preferred credit, as taxes are under Articles 2241 (1) and
assets of such institution.
2242 (1), Dizon's claims cannot be paid ahead of other credits and outside of the
liquidation proceeding because the "free property" or the property left after the
There is nothing in Section 29 which suggests that the jurisdiction of the creditors mentioned in Articles 2241 and 2242 are paid has not yet been
liquidation court to adjudicate claims against the insolvent bank is exclusive. determined. In other words, to execute the judgment would unduly deplete the
On the other hand, Article 217 of the Labor Code explicitly provides that labor assets of respondent bank to the obvious prejudice of other creditors.
arbiters have original and exclusive jurisdiction, over money claims of an
employee against his employer
Thus, Dizon's adjudicated claims should be submitted to the liquidators for
processing. If, of course, it is later determined that Banco Filipino's liquidation is
We do not think that this jurisdiction would be lost simply because a former improper then the NLRC'S decision may be executed under normal procedure.
employer had been placed under liquidation. The legislature deemed it wise to If the contrary is proven, however, and the bank's liquidation should proceed,
confer jurisdiction over labor disputes to a body exclusively of others and We are Dizon's established claims should be treated as an ordinary preferred credit
not prepared to divest such authority from the labor arbiter and the NLRC enjoying first preference under Art. 2244 of the Civil Code.
absent any clear provision of law to that effect.

The liquidator cites the case of Hernandez v. Rural Bank of Lucena, supra. But it
will be noted that even in such case, consideration was given of the possibility
or practicality of certain claims being adjudicated by other tribunals besides the
liquidation court.." It is not a legal aberration that certain claims against an
insolvent bank be litigated in another court where to do so would be more
practical; and more so in this case where it is not legally possible to litigate
Dizon's claims other than with the Labor Arbiter and the NLRC because of the
express provision of the Labor Code.

2. WON it was valid for the bank to resist paying the unpaid wages
because it would amount to undue preference of credit

Under normal circumstances the decision of the NLRC is immediately executory

(See Article 223, Labor Code). The bank's liquidator, however, resists immediate
payment to Dizon of his adjudicated money claims on the ground that it would
amount to undue preference of credit. Dizon countered that under Article 110
of the Labor Code unpaid wages of laborers are indeed preferred. Moreover,
Dizon reminded, this Court had temporarily enjoined the liquidation of the bank
and, therefore, there is no liquidation proceeding where his claims may be paid.